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Economic
Review
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•i;
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July 1983
Federal Reserve Bank of A t l a n t a
¡RECOVERY
Structural Problems Remain
O B R A R ?
m
»SERVICES
KSßRVEB^
Key to Future Growth?
• SOUTHEAST
BANKS
Venture Capital's Role
Banks in South Perform Well
NEW POWERS S&ls Cautious
('PENSIONS
14 «65
Finding Most Dependent Areas
Of PHILADELPHIA
Economic
Review
FEDERAL
RESERVE
BANK
OF
ATLANTA
President:
William F. Ford
Sr. V i c e President a n d
Director of Research:
Donald L. Koch
Vice President a n d
A s s o c i a t e 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
Joseph A. Whitt, Jr.
Regional Economics:
Gene D. Sullivan, Research Officer
Charlie Carter
William J. Kahley
Database M a n a g e m e n t :
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 I n f o r m a t i o n Representative:
Duane Kline
Editing:
Gary W. Tapp
Graphics:
Eddie W. Lee, Jr.
Cheryl D. Berry
T h e E c o n o m i c R e v i e w s e e k s to i n f o r m t h e p u b l i c
about Federal Reserve policies and the economic
e n v i r o n m e n t and, in particular, to n a r r o w t h e g a p
b e t w e e n s p e c i a l i s t s a n d c o n c e r n e d laymen. V i e w s
e x p r e s s e d in t h e E c o n o m i c Review aren't necessarily
t h o s e of t h i s B a n k or t h e F e d e r a l R e s e r v e S y s t e m
M a t e r i a l m a y b e r e p r i n t e d or a b s t r a c t e d il t h e R e v i e w
a n d author are credited. Please provide the Bank's
R e s e a r c h D e p a r t m e n t w i t h a c o p y of a n y p u b l i c a t i o n
c o n t a i n i n g r e p r i n t e d material. F r e e s u b s c r i p t i o n s a n d
additional copies are available from the Information
Center, F e d e r a l R e s e r v e B a n k of Atlanta, P.O. Box
1 7 3 1 , Atlanta, G a 3 0 3 0 1 ( 4 0 4 / 5 8 6 - 8 7 8 8 ) . A l s o contact the Information C e n t e r to receive S o u t h e a s t e r n
E c o n o m i c Insight a free newsletter o n e c o n o m i c
t r e n d s p u b l i s h e d by t h e A t l a n t a Fed t w i c e a m o n t h
JULY 1983 E C O N O M I C R E V I E W D V O L U M E LXVIII, N O . 7
Beyond the Current Recovery:
Facing Our Structural P r o b l e m s . . . . 4
While he is e n c o u r a g e d by the r e a w a k e n i n g
economy, Atlanta Fed President William F. Ford is
more c o n c e r n e d about the nation's underlying
"structural" problems. Speaking recently, Ford said
several of these d e e p s e a t e d problems ( i n c l u d i n g
unrealistic expectations, the c o n f u s i o n of inflated
values with real wealth, low levels of investment in
education, a n d a tendency to c h o o s e conflict over
cooperation) must be resolved if w e are to secure
a lasting recovery.
Commercial Bank Profits:
Southeastern Banks Fare Well
22
Bank profits generally declined in 1982, reflecting
the overall weakness of the U.S. economy. How
did banks in the Southeast c o m p a r e with banks
across the nation? An analysis by state and by
bank size details the recession's effects, as well
as the initial impact of deregulation.
New Investment Powers for S&Ls:
Diversification or Specialization? . . . 53
Will S&Ls, w h i c h recently received e x p a n d e d
asset and liability powers, be content to remain
specialized mortgage lenders? Or will they become
completely diversified like commercial banks,
possibly overextending themselves in the process?
Evidence from Florida and New England indicates
that financial institutions that were successful
after receiving broader powers did not rush hastily
into unfamiliar territory.
Statistical Supplement
71
Venture Capital and
Economic Growth
in the S o u t h e a s t . . .
12
Interest is increasing in private and public sources
o f v e n t u r e c a p i t a l , especially f o r d e v e l o p i n g hightech enterprise. What are the major types of venture
capital sources, and how extensive are venture
capital operations in the Southeast?
Services: Key to
Current Stability and
F u t u r e Growth
36
Research has shown that the"Sunbelt" is not a
uniformly prosperous " M a g i c Kingdom." Is the
notion that the Southeast's e c o n o m y is fueled by
a powerful service industry equally oversimplified?
Public Retirement Systems:
Crucial to the
Southeastern Economy?
63
The Southeast d e p e n d s more heavily o n p u b l i c
pension funds than d o most other regions. A
county-by-county analysis reveals a distinct geographic pattern and identifies local areas especially
d e p e n d e n t on public retirement funds.
Beyond the Current Recovery:
Facing Our Structural Problems
Many of our so-called e c o n o m i c problems, according to
William F. Ford, president of t h e Federal Reserve Bank of
Atlanta, are deeply rooted in social and political issues that
t r a n s c e n d t h e realm of fiscal a n d monetary policy. These
problems, w h i c h he e m p h a s i z e d c a n n o t be corrected by t h e
g o v e r n m e n t or its agencies, require instead a new kind of
national resolve.
Not even the gloomiest economist in our so-called "dismal profession" can deny that things are r
looking up, as we move into
summer. Hammers are ringing ,
again at homesites across the
nation. Employment which Ianguished through our prolonged
recession, has begun to grow
again. U n e m p l o y m e n t a lagging
indicator, is showing signs of improvement And, most encouraging of all, our inflation rate re- f.
mains low, for now, despite these
various signs of a reawakening
economy. The optimists among .
us hope that if our worrisome
federal deficits can be contained, /
we may experience a credible
economic recovery free of resur-"
gent inflation. The real question is,
how long can the recovery last?
But I won't dwell on the near- * ,
term outlook Instead, I'd like to
address some basic social and 1
structural problems facing our^j »
nation over a much longer span
than just the coming months or
even a year or two. These structural problems transcend even
the anguish of a deep-seated jm
national recession, as visible and
painful as that has proven to be *
Moreover, the issues I'll address
will determine whethertheaverage level of our economy's growth
will be sufficient to fulfill our
national aspirations over the remainder of this century.
Structural problems may not /
seem as immediate or as headline
grabbing as stories about today's i
unemployment or corporate bankruptcies. Unlike cyclical problems, our structural problems
won't go away — even if we , §
enjoy the economic upsurge and
the decline in joblessness that I '
am forecasting for the near term.
W e must get our structural problems under control if we are to
secure a lasting recovery that >
can endure for more than a few
quarters, and one that won't,.'
trigger another outburst of inflation
with all its attendant social tensions and problems.
JULY 1983, E C O N O M I C R E V I E W
,
4
m
Structural Problems
Won't Go Away
To get our structural problems in proper focus,
it may be helpful to begin by reviewing some
long-term trends that affect the way we normally
interpret employment trends in our economy.
First, let me say ifs not legitimate to compare
the recession our country has been experiencing
to the agony of the Great Depression. While it is
true that far too many of our people remain
"We must get our structural
problems under control if we
are to secure a lasting
recovery."
unemployed, it is important to keep the figures
in perspective. Let me emphasize that I am not
downplaying the economic hardship that many
, American families have suffered. It is real. Yet few
of today's unemployed have experienced the
kind of suffering that was commonplace in our
country during the 1930s. Unfortunately for the
Great Depression's jobless, they couldn't turn to
t the elaborate social welfare system that we
maintain today. That system helps sustain many
#
of our latest recession's unemployed men and
women, about40 percent of whom are receiving
significant benefits. Many others among the
unemployed have been protected from serious
hardship by the widespread incidence of two
and three-income families. In short, as difficult as
today's problems are, they are a far cry from those
bleak Depression years when President Roosevelt
- observed that one-third of the nation's people
were ill-housed, ill-clothed and ill-fed. Thafs just
not true today — certainly not by the "dustbowl" standards of the 1930s.
Now, let's look critically at the unemployment
numbers themselves. It is true that about 11
million of our people remain unemployed, almost
as many as were jobless atthe peak of unemployment in the 1930s. Thirteen million or more
Americans were out of work then. Yet in those
days that figure represented roughly 25 percent
of the labor force, which at around 50 million was
about half the size it is now. Today, those out of
* work represent around 10 percent of our work
force of about 110 million.
Another point about unemployment that tends
to be overlooked is that we have a much greater
FEDERAL RESERVE B A N K O F
ATLANTA
proportion of the adult population out there
looking for work today. Consider that we have
created 15 million jobs in our country during the
past 10 years. To be exact, between March of
1973 and this past March, we added 1.5 million
jobs per y e a r . . . 4,410 jobs per day. . . 1 7 1 jobs
per h o u r . . . or three jobs every minute. To put
these numbers in perspective, the 15 million
jobs we've created since 1973 roughly equals
the total number of jobs in Canada Sweden and
Switzerland combined.
How can you create that many jobs and still
have growing unemployment? One answer is
found in our changing labor force participation
rate — the percentage of the population either
working or looking for a job. It covers people
ranging from teenagers up to65-year-old seniors,
and includes those listed as unemployed. That
rate has gone up by more than 4 full percentage
points in the past decade. Specifically, in 1982
fully 64 percent of American adults either held a
job or wanted one. That1 s a sizable increase from
the 60 percent in 1972 in that it represents over
four million extra j o b seekers.
If you look at the actual percentage of adults in
our society working in March — subtracting the
unemployed job seekers — it was 56.4 percent
That actually is slightly higher than the 56 percent
who were working in 1972. In other words, we
are now seeing a larger share of America's adults
working—emerging from the deepest recession
since the Great Depression—than in what economists considered the strong year of 1972. That
means we have kept approximately the same
share of our growing adult population on the job
even as unemployment went up from 5.3 percent
in 1972 to today's 10.2 percent
This, I think, reflects some basic social trends
that are converging to place very strenuous
demands on our economy. Over a relatively
short period of time, for example, we have seen
the percentage of adultwomen in ourlaborforce
soar from about one quarter to nearly half. They
have been coming into the work force in unprecedented numbers at the same time that millions
of "baby boom" teenagers have come of age
while hundreds of thousands of foreigners have
also poured into our country's labor pool every
year. All of these groups have been hoping and
expecting that our nation, the most productive in
the world, can provide gainful employment for
them and for everybody else who wants to work.
As noted earlier, we are, in fact, absorbing a
tremendous increase in our labor force by creating an impressive number of new jobs. Yet
perhaps it is typical of our rising expectations
that we find ourselves dissatisfied with the positive
5
aspects of our economy's performance in creating
as many jobs as we have.
Another way of looking at our employment
picture is in terms of our real standard of living. By
adding 15 million jobs to our labor pool during
the last 10 years, we increased the total annual
hours worked by all Americans by about 16
percent During the same period, our per capita
income rose by 18 percent Comparing those
two trends, we can infer that most of the modest
improvement in our standard of living over the
last decade has been achieved mainly by working
harder. This is evident in the many families in
which both the husband and the wife work long
hours to meet the payments on a home, the cars
and appliances—material items which define
" t h e good life" in modern society. Had we saved
and invested more than we did during the 1960 s
and 1970s, we might have achieved more by
working"smarter" rather than harder—a subject
to which I'll return later.
Deficit Issue Deeper
Than Budget
Now let s look at budget deficits, another longterm problem we hear a lot about Everybody
knows that our government has experienced
deficits in 19 of the last 20 years. President
Reagan, who is understandably worried about
setting new records for deficit spending, didn't
plan to rewrite the record books in that area He
has tried to fight burgeoning deficits as vigorously as he can. Still, virtually everyone who
studies the projections agrees that we are going
to accumulate a deficit of about $200 billion in
this fiscal year. In fact, with two-thirds of the fiscal
year completed, the deficit had already mounted to
$162 billion at the end of May.
I won't repeat the oft-cited horror stories
about the dangers such large deficits pose —
although I believe that many of the fears are wellfounded. Yet I submit that the deficit issue goes
deeper— much deeper— than just the budgeting
problems we normally talk about By now, it is
apparent to everyone that we should get our
fiscal house in order. Unlike most commentators, I
don't even blame Congress for our budget problems. Why? Because I think we really do have a
legitimate democracy in this country, a democracy
in which our Congress truly reflects the will of the
American people and their expectations. Instead
of simply chiding Congress, I believe that we
must reassess the expectations of our voting
6
population that lie behind the actions of our
elected representatives.
What have the American people come to
expect from the government? And what are they \
getting? Well, it appears that a lot of Americans
think we can have more guns and more butter,
more defense and more social welfare spending \
— all at once. Many Americans also seem to
believe that we can enjoy all of these things and
reduce taxes at the same time! I submit that
those combined expectations defy common
sense — they just don't add up. There is no way
Americans can have much more defense... and
more social spending... while simultaneously
lowering taxes sharply. We are simply expecting
more of our economic system than it is capable
of producing under current conditions. Our huge *
budget deficits are a symptom of this—as fever is
a symptom of an underlying ailment
Over the past few years, the percentage of our
Gross National Product consumed by federal
spending has swollen ominously. Ten years ago,
the government consumed only 20.6 percent of
GNP. By 1979, that share had inched up to 21.1
percent But in the past three years it has risen to
25 percent (1982). It continues to rise today,
setting new records day by day as the deficit
grows bigger and bigger. Of even greater concern
is the likelihood that huge deficits will persist
"There is no way Americans
can have much more
defense—and more social
spending—while
simultaneously lowering taxes
sharply."
long after the recession. The administration
now projects a $190.2 billion deficit for fiscal
1984 and $184.6 for fiscal 1985. Those are years ,
when unemployment presumably will have declined, reducing the drain on government revenues.
Yet the prospect of gigantic deficits remains.
Moreover, the Federal Reserve certainly cannot
solve the basic lack of logic in our"expectations
equation." As powerful as the Fed surely is, it can
t
J U L Y 1 9 8 3 , E C O N O M I C R E V I E W,m
6
do nothing to deal with such fundamental illogic
in the American political system and the expectations of our people As our Chairman Paul Volcker
has often noted, there is no way that we can fight
inflation successfully and act to maintain low
interest rates when federal spending outruns tax
collections by such huge margins.
A lot of us are worried that the government's
appetite for credit tends to crowd out private
borrowers— especially during periods when the
private sector is expanding. America's industry
must be able to secure credit on reasonable
terms if it is to modernize and extend our
productive facilities, regain international competitiveness and create even more new jobs. Instead,
our recession-battered private sector—the real
source of our nation's wealth and productivity —
has shrunk even while the government has
burgeoned. This is a disaster for any country
predicated on free enterprise. And it of course
helps to explain why so many American households must put in a total of well over 100 hours
work per week—with two or more workers
contributing—just to keep their heads above
water financially. We must find a way to reduce
the federal share of this country's economic pie
because bureaucrats don't generate much of our
nation's wealth. They just redistribute it and, in
the process, they inevitably waste part of it
Inflated Values Are
Not Real Wealth
Another classic mistake that we have been
making in our country recently involves confusing
inflated values of old assets with additions to our
real wealth. Adam Smith, who got our economics
profession rolling back in 1776, published an
interesting book on that subject entitled The
Wealth of Nations. Contrary to the thinking of
the pro-government mercantilists who opposed
him, Smith argued that the real wealth of a nation
does not consist of the size of its gold pile or its
hoards of other precious things. In those days,
everyone was trying to beggar his neighbor with
protectionist policies — ominous echoes of which
can be seen and heard in our public debates
today. The bigger your gold pile, so the mercantilist
reasoning went, the richer you were. Everyone
tried to promote his or her exports, while curtailing
imports from others, to realize a trade surplus
redeemable in gold or other "hard assets." Unfortunately, because exports must equal imports
FEDERAL RESERVE B A N K O F
ATLANTA
on a global basis, such policies just end up
reducing the overall volume of trade and the
economic benefits of specialization that flow
from i t
Recently, I've seen alarming evidence that we
are beginning to give serious consideration to
self-defeating protectionist policies like that again.
The time has come to reaffirm that a nation's real
wealth clearly is not in its hoard of gold coins, old
carpets, foreign exchange hoards and so on.
Every year, in South Africa, Russia, South Dakota
and elsewhere—tens of thousands of gold miners
laboriously dig up mountains of dirt to extract
less than one ounce of gold per ton of dirt Many
of them are injured and die in the process. Then
we mint it into coins and bars and ship it all over
the world where we rebury it in a bank vault or
safe deposit box. Can you see the irony in all this?
No, the number of gold coins we all have buried
in some bank's vaults isn't the measure of our
wealth.
Nor can your real wealth be measured by the
changing value of your home. Neither you nor
the nation truly grows wealthier just because
inflation pushes up the paper value of our
existing homes, coins, rugs and stamps. The truth
is that many of our aging homes, for example,
need new roofs, new paint jobs and other repairs
just to keep their real value from falling Yet our
realtors encourage us to believe that our " n e t
worth" is rising as our homes are artificially
inflated in market value while they actually
deteriorate physically. Have you ever noticed
that if you stay in the same house as its " market
value" inflates, the most noticeable result is that
your property taxes and fire insurance bills rise?
And that if and when you move, the supposedly
marvelous gain in the value of your old home
seems to evaporate when you shop for a comparable home in another city?
No, as Adam Smith told us over 200 years ago,
the real wealth of a nation lies in the productivity
of its people and its factories and its shops. Its
wealth lies in its ability to produce new things
that are valuable to us as consumers — activities
that can raise our real standard of living and that
of our countrymen. We have lost sight of that
overriding objective because we have focused,
shortsightedly, on our inflated old assets and
their artificially increased values. I say we have
focused much too intently on our Oriental rugs,
our gold coins, our old houses and our vintage
sport cars. We pay too little attention to building
up our stock of new goods and equipment Most
7
importantly, we pay too little attention to our
stock of young people and their ability and will to
work at the jobs that are essential to operating
our nation's plants and offices of today—and
tomorrow. W e have paid so little attention to
these really important things that our nation may
be losing the vitality that we must have to
prepare for the next century.
Education Mismatched
with Job Skills
In Atlanta our Chamber of Commerce recently
prepared a white paper on the city's needs for
skilled workers overthe next20 years. That study
dramatized the mismatch between the jobs
most likely to be created in the future and the
skills of students currently graduating from our
schools. You don't have to read our white paper
to guess the results. Many of the jobs that will be
created in the Atlanta area are goingto be in hightechnology activities, in information processing,
in the hospitality industry and in health and
skilled trades. Many will be in communications,
computers and other components of our emerging
"information industry." Yet what percentage of
the young people in our school systems have a
computer in front of them today? The answer is
— a very small fraction. Every year we graduate
students w h o have never seen a computer,
students who are not prepared for even yesterday's
low-skill jobs, much less the high-skill, hightechnology careers of the future.
Yet Atlanta probably comes out ahead of the
nation in that regard. The Atlanta Fed is working
intensely with our commercial bankers and the
public school system to train students on up-todate banking systems, qualifying them for careers
in financial services. W e graduated nearly 60
students from Atlanta's Harper High Magnet
School last month and we plan to train more next
year. Yet those numbers pale by comparison
with the magnitude of the total problem we face
in preparing thousands of our inner city youths
for the jobs of tomorrow.
W e must invest the money and know-how to
correct this mismatch in available jobs and graduates' skills, W e must come up with a match to
train the younger people coming into the labor
force to handle a new generation of jobs. And we
must retrain millions of adults now being displaced from the blue-collar jobs that are fast
disappearing as labor-intensive industries migrate
toward the areas of the world where labor is
cheaper and more plentiful.
8
National Over-Consumption
What about our other structural problems?
Over-consumption qualifies as one. As a nation,
we are consuming much more than we can
afford if we hope to prepare for the future. We
now spend 16 times as much as w e save — of
"We must invest the money
and know-how to correct the
mismatch in available jobs
and graduates' skills"
every dollar, we spend about 94 cents and save
only six No nation in the world has long increased
its real standard of living with such a high rate of
consumption and such a low level of saving.
Our personal savings rate is the lowest among
major Western nations — and by a large margin. I
blame both our craving for consumption and the
fact that we have allowed inflation to pick the
saver's pocket The results of such trends were
clearly predictable years ago. Because we have
been generating consistently poor savings and
investment rates, w e have also found ourselves
saddled with the lowest productivity gains among
the industrial nations over the past five to ten
years. This again helps to explain why so many
American families have to work so hard, nowadays, just to maintain their real standard of living
in the face of inflation. Low savings and slow gains
in productivity go together like a hand in a glove.
Obviously we must break that pattern, too, if we
want to achieve sustained non-inflationary growth.
How can we address this problem? For starters,
we must not allow our tax system to subsidize
spendthrifts, nor to penalize productive investm e n t Consider that you can deduct interest
from your taxes when you borrow money, or
when you buy something to consume on credit
Yet if you save and earn interest on savings, you
normally can't deduct that from your tax bill. In
fact, you pay taxes on interest income! Such tax
laws clearly encourage consumption and discourage saving. Our tax mix must be sharply
revised so that we do much more to encourage
investment and savings and much less to subsidize excessive consumption. Whether we find
the answer in the approaches that have inspired
economic success in other nations or we tackle
the problem through our own innovation, we
JULY 1983, E C O N O M I C
REVIEW
have to reassess such factors as our long-term
consumption and investment patterns if we
want to solve our structural problems.
An Adversarial Society
Proceeding down toward the bottom line, I
want to review another major issue that has little
to do with economics. But it has a lot to do with
the way different elements in our society work
together — or, I should say, fail to work together.
I'm concerned that our society has become
overly contentious. Our companies, our workers
and our government have established and institutionalized adversarial relationships that have
proved to be self-destructive in the international
trade arena—in fact, in many arenas.
We can measure this polarization in many
ways. O n e way is to look at it in terms of
professional d e v e l o p m e n t Did you know that in
the United States w e count 2,400 lawyers for
every million Americans? In the United Kingdom,
which also has a lot of lawyers, they number about 900 per million—only three-eighths of our
level. West Germany, which generates a much
"Our companies, our workers,
and our government have
established adversarial
relationships that have proven
to be self-destructive."
higher savings rate and a better economic
performance than w e do, has about 500 lawyers
per million, about one fifth as many as we have. In
Japan, the number is just 100 lawyers per million.
In other words, w e have 24 times as many
lawyers per capita as they do in Japan. Did you
know there are far more lawyers just on Manhattan
Island than in all of Japan? Are we encouraging
too many of our brightest young people, our
highest achievers, t o enter law school so they can
help us sue each other? I'm not suggesting that
lawyers are responsible for either our quarrelsomeness or our economic problems; but I am
suggesting that they may be reflecting unhealthy
trends in a society that is too busy squabbling
internally to compete more effectively in the
world marketplace.
Looking at another way w e allocate our human
resources, we should also note that the Japanese
FEDERAL RESERVE B A N K O F
ATLANTA
graduated 87,000 engineers from their schools
in 1981. W e produced just 63,000 engineers
during that year. In other words, a nation w i t h
about half our population trained 38 percent
more engineers than we did in 1981! Does that
make sense to you?
Further comparisons w i t h the Japanese might
help to illustrate my p o i n t Did you know that,
over the last year, the Japanese sold us about
250,000 cars per month, on average? Do you
know how many we sold them? About 250 per
month! Of course w e are complaining that their
import policies are too restrictive, that they erect
all sorts of not-so-subtle barriers t o keep our
manufacturers from competing on an equal
footing. That may offer us some consolation, but
it doesn't provide a completely satisfactory
answer for me. I am left with many troubling
questions. Must Japanese cars outsell ours, in our
respective export markets, by 1,000 to one?
Could we do better than that by training more
engineers and fewer lawyers, perhaps? Think
about it.
Let me expand on my premise that we have
become overly contentious. I would argue that
we have structured our society, both legally and
constitutionally, so that we virtually guarantee
conflict. One example of that is called "collective
bargaining." Now, I am not anti-union, and I
definitely don't want to destroy organized labor.
I am talking about a social concept that transcends
unions and management. Our"us-against-them"
approach to labor relations clearly is out of line
with that of such nations as Japan. That nation's
success has been based on a partnership fashioned
not only between industry and labor, but
including government as well. Their partnership,
which w e have labeled "Japan Inc.," has contributed greatly to the resurgence of a nation that
came out of W o r l d War 11 — just 37 years ago —
absolutely devastated.
The major elements of Japanese society work
together against external competition. But we
seem to be engaged in self-destructive economic
civil war — waged, as often as not, before
television cameras — with high-priced attorneys
and bureaucrats on both sides. In Japan, on the
other hand, management shows much greater
concern over the security and welfare of workers,
while the workers produce more. W h y can't we
do more of this?
Many of our conflicts are magnified, of course,
in recessionary periods, when contending groups
in our society fight for their share of a shrinking
economic pie. W e have seen that recently as
9
more of our industries have clamored for protection and favorable legislation. Instead of engaging
in legislative one-upsmanship, we should be
working together more effectively to enlarge our
economic pie. Perhaps we should all be cooperating as they do at progressive American
companies such as Atlanta's Delta Air Lines —
where the workers recently pitched in to buy
their company a new jet airplane worth over $30
million. The workers presented it to their company
last December with a big red velvet ribbon
around it. It was named "The Spirit of Delta" —
reminiscent of Charles Lindbergh's "Spirit of St.
Louis."
Far too often, many of our companies seem to
be torn apart by conflicts that decrease production — conflicts with their own workers and their
own government. All that clearly impairs their
ability to use scarce resources to expand their
productivity effectively. Wouldn't it be better if
our government, our workers, and management
could learn to meet each others' needs through
cooperation rather than conflict? Think about
it.
That brings me to another dimension of
contentiousness in our society — the unseemly
ongoing battle between consumers and businesses in America. Of course there have been
cases in which American businesses have tried to
exploit consumers. It would be naive to suggest
otherwise. It is less often noted, but also
important that a small minority of consumers
also exploit the businesses that serve them, in
various ways. Shoplifting, which bleeds merchants
of an estimated $ 16 billion each year, is only the
most obvious form of this. One also wonders
how many consumers purposely take advantage
of liberal exchange policies by returning damaged
items that were actually received in good
condition? Yet these destructive patterns of
behavior shouldn't cause us to perpetuate a
continuing intramural conflict between these
two elements of our society that obviously need
each other urgently. In the end, we all bear the
costs of such contentious and selfish behavior.
Hasn't the time come to find a way to stop it?
Why do we have this kind of conflict between
consumers and manufacturers? Between workers
and labor? Between corporations and the government? Between the old and the young? Between
blacks and whites? Between males and females
in our society? Even between millions of individuals, whose personal disputes have snarled our
courts in a national morass of lawsuits and
10
countersuits? Why do we take our petty grievances ,
to court instead of solving our problems amicably 4
through cooperation? Why don't we rely on
compromise rather than such costly conflicts
as strikes and lawsuits involving billions of
dollars worth of wasted resources, and billions
of hours of wasted work?
I mentioned the conflict between young and
old, a very real element in our society. We've all
witnessed that conflict between young Americans
and their parents. Too often, social workers tell
us, American children turn their backs on their
elders as a nuisance and a burden. They soothe
their consciences with the knowledge that their
aging parents will be sustained by a Social
Security check — while living in an impersonal t
residence for the aged which the old people
derisively call "vegetable farms."
Social Security, of course, has proven to be a
problem in itself. The system's financial problems
commanded the recent attention of the Reagan
a d m i n i s t r a t i o n t h r o u g h its N a t i o n a l Commission on Social Security Reform headed by
Alan Greenspan. The commission's proposals,
which w o n the support of Congress and the
"We must stop squandering
our energies on destructive
infighting."
President, called for a combination of measures
to stave off a threatened crisis in the program.
Yet an even deeper, more personal problem is
that so many parents feel that they are being
turned out by their children — even when they
do receive their Social Security checks. They
feel rejected because they believe nobody
really cares about them, personally, not even
their own families. If you doubt this, spend a
few hours talking with old people—as I have—
and listen. You will be amazed at the depth of
the resentment many of them feel—toward
their o w n children.
Love in Short Supply
Sometimes it appears that love is in pretty
short supply in America — paradoxically, I would
JULY 1983, E C O N O M I C
REVIEW
say, in a nation that devotes a disproportionate
amount of resources to television shows, movies
and magazines on the subject. As a nation, we
don't even seem to be able and willing to live
together nowadays. The last census revealed
that more than 18 million American "households"
were composed of a single person. The census
takers didn't ask these people how they felt
about it. I'm sure that, if they had, they would
have found a lot of lonely people, old and young,
out there — wishing they could find a decent
way to live with others who would care about
them, personally.
We are driving each other out of our homes,
judging from our appalling divorce rate and the
alienation between our young people and their
elders. And when children run away from home,
when fathers desert their wives and children,
when aging parents are forced to live alone,
social welfare programs of course are expected
to solve the hardships that result. When you get
to the bottom of it, though, is the burgeoning
budget for our social welfare programs the real
solution? Or do the deficits that such programs
generate simply reflect more basic problems in
the way our institutions — such as the family and
the corporation — operate?
Yet some people like to pretend that these are
economic problems that Paul Volcker, William
Ford and the other 17 men and women who
serve on the Federal Open Market Committee
can solve by manipulating monetary variables. I
want to suggest that no small group of public
policymakers can possibly solve these basic
issues facing our nation. Our so-called "economic
troubles," I think, are deeply rooted in social and
political problems that transcend the realm of
fiscal and monetary policy. These social — and I
daresay spiritual — problems are our nation's
basic affliction. The deficits, the high interest
rates, and all the other economic problems we
talk about so much are largely symptoms. These
problems will require corrective actions on a
level that transcends the mundane and very
limited powers of the FOMC, the OMB, or even
Congress and our President
I nstead, they cry out for a new kind of national
resolve. They call for a dedication by each of us
to seek ways to be less litigious and less
confrontational — both in our personal lives and
our work lives. We must stop squandering our
energies on destructive infighting. We must
revive that old American concept of teamwork.
We must reduce conflicts between our companies,
their employees, and unions. We must pitch in to
help those who are trying to heal the contentiousness and plain old selfish behavior that seem to
dominate so much of what we see around us in
our country today.
In short, we must channel our personal
leadership and talents into mobilizing our human
and economic resources to regain a national
sense of purpose. We must inspire government,
labor and management — and all of us as
individuals — into a partnership mode that
emphasizes our common interests rather than
our differences. I believe that only through such
collaboration — in both our business and
personal lives — can we find ways to restore
America's productivity, to say nothing of our
spirit of enterprise and ingenuity.
Most important of all, I am very sure that we
would all be happier, personally, if we looked
closer to home for the solutions to many of our
problems. For more than a generation now we
have tried to solve our personal and social
problems by taking them to lawyers, and to
government agencies,. As a result we now have
armies of lawyers, gigantic government agencies, and gargantuan deficits generated in
Washington. But it seems to me that our real
problems have gotten bigger, not smaller, as a
result of those activities. Isn't it time that we
seriously reconsidered that approach to solving
our country's problems? I honestly feel that it is,
and I hope you do too.
— William F. Ford
FEDERAL RESERVE B A N K O F A T L A N T A
11
Venture Capital and
Economic Growth in the
Southeast
Will d i f f i c u l t y in o b t a i n i n g c a p i t a l c h o k e off
t h e g r o w t h of d y n a m i c y o u n g c o m p a n i e s
that g e n e r a t e m o s t of t h e n a t i o n ' s n e w
jobs? H e r e ' s a l o o k at t h e v e n t u r e c a p i t a l
f i r m s a n d g o v e r n m e n t e n t i t i e s t h a t s t e p in
t o t a k e b u s i n e s s risks t h a t c o n v e n t i o n a l
i n v e s t o r s shun.
12
American industry is in the midst of profound
changes. Heavy foreign competition in many
traditional industries, such as textiles, steel and
autos, as well as rapid technological change in
office and factory automation, have shifted
industry employment patterns dramatically.
One effect of these changes has been intensified
competition among states and among urban
areas to attract plants in the industries expected
to grow in the near future. These growing sectors
often are identified, rightly or wrongly, with hightechnology industry. Courting high-tech firms
has replaced "smokestack chasing" in most
states' approach toward industrial development
Nonetheless, for several reasons high-tech
employment alone seems unlikely to fulfill most
states' need for employment growth and economic d e v e l o p m e n t First and foremost, there
simply is too little of it to go around. According to
some forecasters, hightech industry is expected
to add only one million or fewer new jobs in the
next decade, far fewer than the number lost in
recent years in other manufacturing sectors.
The promise of technology lies more in increasing
the productivity of other industries and thus
raising living standards.
Many areas will be unable to lure technologybased enterprises because these industries are
relatively concentrated. Much of the employment
is located in relatively few states—principally
Massachusetts, N e w York, Florida, Texas, Illinois
and California. High-technology firms engage in
a large amount of research and development
and use relatively new, state-of-the-art techniques
and processes. By their nature, they require the
diverse resource base of other industries, research
universities and technical and professional personnel available in the states mentioned. M u c h
of what passes for high-tech employment outside
the major centers is mainly production employment rather than what could be construed
strictly as high technology.
Another reason high tech holds little growth
potential for many areas is that most j o b growth
is being produced not by large existing firms but
by small new enterprises. David Birch studied
the employment patterns of U. S. business
establishments and found that small firms with
20 or fewer employees created 66 percent of all
new jobs, and single-establishment firms accounted for 52 percent. 1 Two-thirds of the new
jobs are created by firms less than five years old
(young firms have a high death rate too, but the
' D a v i d Birch, T h e J o b G e n e r a t i o n P r o c e s s , MIT, 1 9 7 9 .
JULY 1983, E C O N O M I C
REVIEW
excess of births over deaths is substantial). Many
development planners are concluding that it is
wrong to focus only on large firms considering
branch plant locations; most j o b creation is
home-grown. Politically, the large relocation may
look attractive, but the real potential lies with
smaller firms.
Fostering the growth of small young enterprises
and the birth of others has confounded policymakers in recent years. What can city and state
governments d o t o promote economic growth
from this source? Two kinds of suggestions have
been put forth so fan first, improve the economic
environment by reducing the state and local tax
burden and reducing the regulatory requirements
on small business and, second, provide resources
that are in short supply for small firms, principally
trained labor and capital. The former approach,
especially tax policy by states, has been much
discussed, but many feel that changes in tax rates
would do little to help the growth of most areas.
Studies of business location decisions and the
birth of new firms generally show that differing
tax rates between alternative locations have no
measurable effect on these decisions. Recent
studies by the authors indicate that environmental
regulation is also a minor factor in most location
decisions.2
It is in the second policy area, making resources
available to small business, that attention is
increasingly focused. Job-training programs, either
of a general nature or directed towards the
needs of a particular firm, have become widespread. For the most part, however, these
programs involve relatively few workers and
therefore have a limited impact.
The other resource small businesses need is
capital, both for start-up and for expansion.
David Birch's work demonstrated that all regions
of the country have about the same business
death rate, indicating that the more rapidly
growing areas grew mainly as a result of dramatically higher birth rates. Providing capital for
promising new enterprises is an effective way to
stimulate the local economy. In addition, capital
markets seem reluctant to provide start-up
financing for entrepreneurs w h o have no assets
to back up a loan except their ideas, inventions
or business ability. Lack of capital is seen as a
barrier to the emergence of new business, which
produces most of the net growth of jobs. As a
' J o h n H e k m a n , M i k e Miles, R o g e r Pratt, " I m p a c t of E n v i r o n m e n t a l R e g u l a t i o n
o n Industrial D e v e l o p m e n t in N o r t h C a r o l i n a " C e n t e r for U r b a n a n d
Regional Studies, 1981.
FEDERAL RESERVE B A N K O F A T L A N T A
result, there is increasing interest in private
sector sources of venture capital, in providing
public funds to promote economic development
directly by providing equity financing for new
business, and in supporting the development of
new venture capital sources, often through a
public-private partnership.
Where Venture Capital Is Used
The U. S. venture capital industry provides
financing to young firms for three principal
purposes, generally described as "early stage,"
"expansion" and "acquisition or management
b u y o u t " Together they comprise a portion of the
capital market not fully served by the traditional
sources, the stock and bond markets and commercial banks. Early state activities are of t w o
kinds: seed financing, which supplies a small
amount of capital for an individual entrepreneur
to prove a concept or develop a new product;
and start-up financing, provided to a company to
begin developing and marketing an established
product
Most early stage financing comes from "informal
investors"—individuals of means, most often
friends or relatives of the firm's founder. Informal
investors may represent the largest single source
of venture capital in the country, although the
actual extent of their investments is unknown.
Professional venture capital firms are less interested in small-scale investments in start-ups,
because the risks are quite high and the amount
of oversight and management per dollar invested
are too great. As a result, most early stage
financing goes the informal route.
Venture capital firms prefer the next level of
investment, expansion financing. This is divided
into stages according to the level of development
reached by á new business. The first and second
stages refer to the initial marketing of a product,
when working capital is needed. Third-stage
financing is for a major expansion when a
business already shows promise and is generating
some cash flow and possibly making a profit.
Fourth-stage financing is for a company expecting
to go public within six months or a year. It can
also involve restructuring the positions of major
stockholders through secondary transactions, if
early investors want to reduce or liquidate their
positions. Venture capitalists participating in
such financing seek profits from an equity (and/
or debt) position that typically is liquidated in a
subsequent public offering.
Venture capital also is used for acquisition or
management buyout of a business at any stage of
13
Table 1 . The Venture Capital Pool, 1981
Type of
Firm
Investments
(Billions)
Percent
of Total
Independent
$2.320
40
SBIC
1-798
31
Corporate
1.682
5.800
29_
100
Source: "Special Report—Venture Capital Disbursements 1981: A
S t a t i s t i c a l Overview," V e n t u r e C a p i t a l J o u r n a l , J u n e 1 9 8 2 .
development. Many buyouts involve the acquisition of a closely-held or family-owned business.
The purpose often is to revitalize a stagnant or
slow-growing operation. This use of venture
capital holds less potential for producing dramatic
growth in a business, and therefore it is undertaken
mainly by private venture capital firms, while
public agencies are more concerned with funding
new businesses.
Private Sources of Venture Capital
The three major types of private sector
venture capitalists are the independent firms
(mainly venture capital partnerships), t h e
government-fostered Small Business Investment
Companies (SBICs) and the corporate subsidiaries. Table 1 presents the size of these three
sectors in 1981 in relation to the total pool of
privately-invested venture capital.
The independent firms number about 250 at
present, although only 100 or so are very active.
The first of the modern type was American
Research and Development (ARD), established
in Boston in 1946. ARD created the image of
tremendous growth potential by its success with
a small investment in Digital Equipment Corporation when DEC was just getting off the ground.
Before ARD, most venture capital came from
wealthy families such as the Rockefellers and the
Whitneys. Today these have been succeeded
largely by partnerships and corporations funded
by pensions, insurance companies, endowments,
foundations and bank trust departments as well
as wealthy individuals. The ten largest firms,
located in New York, Chicago and California,
have between $50 million and $100 million of
paid-in capital. Representing about 40 percent
of the venture capital pool, the independents
typically make equity investments of from
$250,000 t o $1 million in five t o ten projects a
year.
14
SBICs were the second important component
of the new venture capital industry t o arrive on
the scene, following the Small Business Investment
Act of 1958. As vehicles for small business
financing, SBICs enjoy certain tax advantages as
well as the ability to borrow from the government
to provide attractive financial leverage. An SBIC
is a private company owned by investors w h o
contribute at least $150,000 in equity capital.
This makes it eligible to borrow up t o three times
the amount of its capital from the Small Business
Administration; if the SBIC has over $500,000 of
capital, it can borrow up to four times its equity.
The SBIC program has created millions of jobs
and has been called an ideal combination of
public policy and private enterprise, despite
early problems.
Between 1960 and 1962 some 585 SBICs
were licensed, leading to shakeouL Many firms
suffered from inadequate capitalization, inexperience with government regulation and general
lack of ability to deal with risky ventures.
However, the SBICs (along with other venture
capital firms) rebounded strongly in the late
1970s. Today there are about 340, of which
about half make equity investments and half
make loans. These firms represent about 31
percent of the venture capital pool and typically
make about five t o ten investments per year in
the neighborhood of $100,000 to $1 million.
The MESBIC (Minority Enterprise SBIC), now
referred to as the Section 301 (d) SBIC, is similar
to the SBIC. About 120 such firms provide
financing for small businesses that are at least 51
percent owned by socially or economically
disadvantaged persons. They are eligible for SBA
purchases of their 3 percent preferred stock and
a subsidized rate on their debentures in the first
five years. They also may be organized on a nonprofit basis to obtain additional tax benefits for
themselves and their investors. This part of the
venture capital industry has grown slowly, largely
because it has not been very successful in raising
capital. As of mid-1980, the 120 firms had raised
only $84 million.
Corporate venture capital firms are mainly
subsidiaries of large companies such as Exxon
and General Electric. Most have started since the
late 1970s, when corporate liquidity was high, to
invest in the new products and technologies that
frequently come from new firms. Clearly, some
corporations have found it difficult to combine
the large corporate structure with a risk-taking
venture capital subsidiary. Problems often arise if
the subsidiary is managed by corporate personnel
JULY 1983, E C O N O M I C
REVIEW
who are not venture capital professionals, if
corporate goals do not match those of the
subsidiary and if the corporation is not patient
enough to allow for the long development
period of many of the young firms in which it has
invested.
Today most corporate venture capital firms are
subsidiaries of large financial institutions or
industrial corporations. About 50 are making
investments today, comprising 29 percent of the
venture capital pool. They range in size from $5
million to $100 million and commit about $1
million to $5 million to each project, although
individual investments have ranged as high as
$15 million. An investment often aims toward a
possible acquisition as well as earning capital
gains.
so they represent the largest potential pool of
venture capital for the future.
The other major reason for venture capital
growth is the upsurge of interest in technologyrelated ventures. Venture capital firms favor
high-technology investments almost to the exclusion of other types, judging from the pattern of
recent investments and the firms' preference in
the ventures they are willing to consider. According
to Stanley Pratt, editor of the Venture Capital
Journal:
applications of technology innovation
continued to be the main focus of
professional venture capitalists last
year. Combined investment in the
computer, communications, other
electronics-related industries and
industrial automation accounts for
more than 60 percent of the total
number of recorded investments in
1981. In addition, technology-related
aspects of genetic engineering and
medical equipment bring the total to
more than two-thirds of industry
activity. 3
The Growth of Venture Capital
Venture capital investments have expanded
rapidly in recent years, from just over $300
million in 1979 to $1.3 billion in 1981. The
accumulated pool of funds has about doubled in
the same period. Three reasons often cited for
this growth are the reduced capital gains tax rate
since 1978, the interest in emerging technologies
and the entry of large pension funds into the
market. The capital gains tax reduction helped
spur a 300 percent increase in investments
between 1978 and 1979 alone.
Does such growth pose a danger of too much
capital chasing too few opportunities? Competition
among investors has increased, increasing investor
prices (measured as a multiple of earnings). It
has also encouraged venture capitalists to look
toward start-ups in addition to traditional expansion financing, and this increases risk substantially.
Some believe that an increased supply of capital
relative to the number of qualified entrepreneurs
may hurt the risk-adjusted return performance of
venture capital funds in the coming years;
however, such a trend is not yet evident.
Increased participation by large pension funds
has fueled the growth of venture capital. Pension
funds were responsible for about 37 percent of
the funds committed to the industry in 1981.
They have been attracted by the high expected
rates of return, by the poor performance of the
stock market and, most recently, by the lower
returns earned on real estate investments.
However, even with the large increase in venture
capital investments, the pension funds have
committed less than one percent of their total
assets (currently over $800 billion) to this area,
FEDERAL RESERVE B A N K O F A T L A N T A
When energy-related projects are included, the
total rises to 80 percent of the investments and
87 percent of the dollars invested. Table 2
presents the percent distribution of venture
capital investments by industry for 1980 and
1981. The share going to each technologyrelated sector except medical and health (and
this is not exclusively high tech) increased in
1981. Many firms believe this emphasis is
justified by the higher rate of return on new
technology investments. Rate of return data for
the industry are not generally available by type of
investment, • but some venture capital firms
apparently have experienced returns of over 25
percent a year on high tech versus less than 20
percent on other investments. High tech often
holds in addition the possibility of occasional
very high returns ("upside potential" or"positive
skew"), while more mundane projects do not.
Venture Capital in the Southeast
Venture capital firms in the Southeast exhibit
the same interest in technology, as these national
figures show. Table 3 lists the venture capital
firms for eight southeastern states as of 1982.
Fully 27 of the 39, or 69 percent, are SBICS or
3
S t a n l e y Pratt, " S p e c i a l R e p o r t - V e n t u r e C a p i t a l D i s b u r s e m e n t s , 1 9 8 1 : A
S t a t i s t i c a l Overview." V e n t u r e C a p i t a l J o u r n a l , J u n e 1 9 8 2 , p. 8.
15
Table 2. Venture Capital Disbursement by Industry
Percent of Total
Number of Investments
1981
1980
Percent of
Dollar Amount
1981
1980
Communications
Computer Related
Other Electronics Related
Genetic Engineering
Medical/Health Related
Energy
Consumer Related
Industrial Automation
Industrial Products
Other
11.4%
30.0
14.5
6.2
7.0
4.9
4.9
6.2
4.4
10.5
11.5%
27.4
9.6
4.2
10.5
8.3
7.5
4.5
3.6
12.9
11.2%
34.3
13.1
11.2
5.8
5.8
1.9
5.3
3.4
8.0
10.9%
25.7
9.6
7.6
9.3
19.9
3.7
2.7
2.0
8.6
TOTAL
100.0%
100.0%
100.0%
100.0%
S o u r c e : S e e T a b l e 1.
MESBICs. Capital under management ranges
from $500,000 to $17 million. A preference for
high-tech investments was recorded as a "yes" if
the information on the firm specifically stated
that one or more of its target industries was a
high-tech field. If it listed no preferences (as in
about 30 percent of the cases) or if its target
industries were not high tech, the preference is
listed as "no." O n this basis, 18 firms, or 46
percent, are interested in high technology either
exclusively or among other interests.
Most venture capital in the Southeast seems
to be concentrated in Florida and Georgia; these
t w o states together claim 60 percent of the funds
listed in Table 3. The firms in Georgia, with one
exception, are in Atlanta, while those in Florida
are more dispersed. For the country as a whole,
venture capital is concentrated in areas with a
record of producing new (and high-technology)
industry. A large proportion of the venture funds
are based in N e w York, Boston, Chicago,
Minneapolis and California This raises a chicken
and egg problem as far as economic growth is
concerned. Is the presence of a large venture
capital pool a prerequisite for the growth of new
industry, or does industry's growth potential
attract venture firms?
Professional venture capitalists generally hold
that they are funding all of the projects that look
promising, and that investment is constrained
by profitability, not the supply of venture capital.
State officials interested in fostering growth, on
the other hand, believe that capital is the scarce
resource and that more venture capital is
needed, especially in areas without a large local
pool of venture funds.
16
In the Southeast, high-technology manufacturing is more dispersed than the supply of
venture capital. Table 4 presents the distribution
of high-tech industry by state for the region. Our
definition of high tech covers the three-and fourdigit Standard Industrial Classification codes in
Table 4; the two-digit industries are shown
because they are the more inclusive industrial
categories which in most cases are closely
related t o the smaller high-tech fields within
each. The totals at the bottom of the table show
the high-tech industries as a percent of their
larger two-digit categories are well as their size as
a percent of total manufacturing in each state.
Florida, not surprisingly, has the largest absolute
and relative amount of high-tech employment.
Florida also boasts the categories of employment
that are most unambiguously high tech. There is
always a difficult problem in defining this type of
industry from Census data, since all classifications
include a wide variety of products, components
and accessories. But Florida has the region's
largest employment in computer production
(3573), communication equipment (366) and
aerospace (376), all of which are for the most
part technically advanced types of production
processes.
Georgia ranks only sixth of the eight states in
the amount of high-tech employment, and its
employment in these fields is only 3 percent of
total manufacturing, the lowest share in the
region. It also ranks only fourth in the total
employment in the two-digit industries of machinery, electronics, instruments, rubber and plastics.
These industries are mostly concentrated in
heavily industrialized North Carolina and
JULY 1983, E C O N O M I C
REVIEW
Table 3. Private Venture Capital Firms in the Southeast 1982
State
Location
Preference
Age
Type
Capital
Alabama
Birmingham
Fayette
yes
yes
7
NA**
P*
SBIC
$1,000,000
NA
Florida
Palm Beach
Orlando
Ft Lauderdale
Sanford
Gainesville
N. Miami
Miami
Miami
Miami
Miami
Miami
Miami
no
yes
yes
no
yes
no
no
yes
no
yes
yes
no
18
12
8
8
6
3
1
20
12
1
2
NA
P
P
P
CDC
P
SBIC
MESBIC
SBIC
SBIC
MESBIC
MESBIC
MESBIC
NA
4,000,000
NA
10,000,000
NA
2,000,000
500,000
1,200,000
6,000,000
1,000,000
1,000,000
5,000,000
Georgia
Augusta
Atlanta
Atlanta
Atlanta
Atlanta
no
no
yes
no
no
17
10
7
NA
22
SBIC
P
P
P
SBIC
17,000,000
NA
NA
11,100,000
Louisiana
Shreveport
Covington
Baton Rouge
New Orleans
Baton Rouge
New Orleans
Shreveport
Lafayette
Baton Rouge
yes
yes
yes
yes
no
no
no
no
yes
1
NA
19
4
6
18
1
6
7
SBIC
SBIC
SBIC
P
SBIC
SBIC
SBIC
MESBIC
SBIC
500,000
NA
4,600,000
500,000
1,700,000
NA
1,000,000
2,000,000
5,000,000
Mississippi
Olive Branch
Jackson
no
yes
3
6
SBIC
SBIC
900,000
4,600,000
North
Carolina
Charlotte
Charlotte
Charlotte
Winston-Salem
yes
no
no
yes
19
18
1
10
SBIC
SBIC
SBIC
MESBIC
6,000,000
NA
2,000,000
4,500,000
South
Carolina
Hilton Head
Charleston
Greenville
no
no
no
3
18
7
SBIC
SBIC
P
500,000
3,000,000
NA
Tennessee
Memphis
Knoxville
no
yes
3
12
MESBIC
P
1,000,000
NA
S o u r c e : S t a n l e y P r a t t G u i d e t o S o u r c e s of V e n t u r e C a p i t a l 1 9 8 2
* P d e n o t e s a p r i v a t e v e n t u r e c a p i t a l firm.
* * N A d e n o t e s not available
FEDERAL RESERVE B A N K O F A T L A N T A
17
T a b l e 4 . H i g h T e c h n o l o g y M a n u f a c t u r i n g E m p l o y m e n t in t h e S o u t h e a s t
( I n T h o u s a n d s of W o r k e r s )
SIC
ALA
FLA
GA
LA
30
35
36
14.8
13.0
14.7
4.9
1.7
17.0
2.5*
1.7
2.5
10.8
20.9
41.9
20.4
9.9
36.7
2.5*
7.8
8.3
2.5*
16.2
15.8
2.3
0.5
30.8
2.5*
1.75
9.3
10.2
2.5*
366
367
37
372
376
38
22.1
2.5
11.9
18.3
1.75
0.4
31.3
—
—
—
4.0
1.7
0.7
69.3
59.8
—
NC
SC
TN
21.9
33.0
40.1
9.2
5.1
11.3
0.38
12.5
27.3
17.4
1.9
6.7
2.5*
0.2
0.2
4.7
21.6
29.7
38.1
2.5*
2.7
25.4
1.7
MISS
—
—
2.0
8.4
66.0
114.7
—
3.8
TOTALS
1. 2 - d i g i t
2. 3 - a n d
4-digit**
(2)/(1)
(2) a s p e r c e n t of
manufacturing
employment
62.0
118.6
64.4
118.6
16.78
0.27
56.2
0.47
15.6
0.23
7.28
0.12
8.95
0.14
36.26
0.32
25.41
0.39
23.05
0.19
0.05
0.16
0.03
0.04
0.04
0.05
0.07
0.05
U. S. Bureau of t h e Census
Standard Industrial Classifications
30
35
36
366
367
Rubber and Plastics
Machinery, Except Electrical
Electrical and Electronic Equipment
Communication Equipment
Electronic C o m p o n e n t s
37
372
376
38
Transportation Equipment
Aircraft and Parts
Aerospace Equipment
Instruments
S o u r c e : U.S. B u r e a u of t h e C e n s u s , C e n s u s of M a n u f a c t u r e r s , 1 9 7 7 .
• I n d i c a t e s t h a t e m p l o y m e n t is " o v e r 2 , 5 0 0 " .
" I n c l u d e s a n u m b e r of m i n o r c l a s s i f i c a t i o n s not s h o w n
Tennessee. Table 4 demonstrates that the high
technology industries seen as a springboard for
growth generally represent only a fraction of the
labor force. To generate a significant amount of
economic growth, new high-tech companies
must stimulate other areas of the economy, such
as other manufacturing, finance, insurance and
real estate, business services and transportation.
It is with this broad-based growth in mind that
many states are putting money into the venture
capital field.
Federal and State Venture
Capital Programs
The central debate with venture capital concerns the efficiency of capital markets. If there is
shortage of seed capital for new firms because
the capital market is not adequately serving
these needs, then public programs designed t o
make more money available presumably will
18
stimulate economic growth. If, on the other
i
hand, venture capitalists are already identifying ]
and funding the projects that are good risks, then j|
throwing more money at this area may lead to an
increase in business failures, producing economic ^
waste. The striking success of the SBIC program, )
as measured by its size and the success of the
businesses funded, suggests that public policy
can make a positive contribution to fostering
new business. On the other hand, the largest '
increase in SBIC investment has come since the
late 1970s and may have coincided with an
increase in the opportunities for new business
arising from technological developments. Many ,,
professional venture capitalists are concerned
that the dramatic increase in financings since the 1
late 1970s has already saturated the market.
They are concerned that the returns earned on 1
venture capital projects cannot be maintained at
their current level and will not justify the risks
assumed in such investment. However, many 1
JULY 1983, E C O N O M I C
REVIEW
public programs do not compete directly with
private firms because they are targeted to specific
industries, to economically depressed areas or to
firms that have government contracts.
Federal programs to stimulate small business
include several small targeted efforts and one
major program that overshadows all others, the
Business Loan Program of the Small Business
Administration. The SBA lends over $200 million
annually through direct loans and over $1.5
billion in guaranteed loans. Loans are guaranteed
up to 90 percent and interest rates run about 2.5
percent above prime. Direct loans are targeted
to small firms that have been turned down for
conventional bank loans; the maximum loan is
$500,000 and rates are slightly over prime.
The SBA is the most important source of
funding for small business, but in recent years
other programs have been initiated to foster
various public policy goals. The Small Business
Innovations Research Program, administered by
the National Science Foundation, is designed
specifically to encourage new technology. The
NSF makes around 80 small awards each from a
$2.4 million budget The Appropriate Technology
Small Grants Program administered by the
Department of Energy is similarly targeted at
small businesses with new products and processes.
With a budget of $1.5 million, it funds energyrelated projects "appropriate to local needs and
skills." The associated Energy-Related Inventions
Program considers all energy-saving technologies
under its $1.7 million annual budget.
States have taken various approaches to
fostering small business, from guaranteed loans
to equity capital and even product investment.
Many of these programs appeared first in states
that were incubators of new industries and
technologies, such as Massachusetts, Minnesota
and California. It became clear in these states
that growth was occurring in technologically
innovative fields, while older industries were
stagnant or declining. This revelation occurred
much later in the Midwest, where traditional
industries continued to grow until the late 1970s,
and in the South, where almost all industries
were growing. Today the Midwest is looking hard
for potential sources of growth and the South is
looking to the future, asking whether it can count
on continued growth from existing industry as
the rate of change in the nation's industrial
economy accelerates. States in the Midwest and
the South have recently begun to look at
programs adopted in the older industrial states
to assess their potential for economic growth.
FEDERAL RESERVE B A N K O F A T L A N T A
Several possible directions for government initiatives are suggested in the programs described
below.
Direct Loans and Equity Financing
The Massachusetts Technology Development
Corporation is a publicly funded but independently operated venture capital organization. It
was capitalized initially in 1979 by a $2 million
grant from the Economic Development Administration to establish a revolving loan fund for
business operations involving a significant amount
of technology. It was awarded an additional
grant of $1 million in 1981 by the U. S.
Commerce Department's Corporations for
Innovative Development Program, an amount
matched by the state legislature to bring total
capitalization to $4 million. M T D C provides
capital to new and expanding companies oriented
toward industrial and commercial applications
of new products and technologies. The investments are aimed not at initial development but
rather where funding is needed t o follow up
promising new technologies already developed.
M T D C makes both debt and equity investments, often combining the two, and requires
that its investment of between $75,000 and
$300,000 be accompanied by t w o to four times
that amount in private sector funds. The program
has invested approximately $2.7 million out of
the fund thus far, along with private sector
funding of about $12 million. There have been
no writeoffs to date, and M T D C estimates that
the companies it has funded have created 1,000
jobs directly and about 1,400 others indirectly.
The Massachusetts Community Development
Finance Corporation represents a different
approach to public venture capital investment.
CDFC is a public entity funded in 1975 by $10
million in general obligation revenue bonds. Its
purpose is to create employment in economically
depressed areas, working through local Community Development Corporations. The business
applying for funding must demonstrate the
potential to increase employment at 150 percent
of the m i n i m u m wage and show that it was
unable to obtain private funding. Financing can
be debt or equity, but CDFC cannot hold more
than 49 percent ownership. Beginning the 1982
fiscal year, investments ranged from $1 5,000 in a
solar panel manufacturer t o $427,000 in an
upholstered furniture firm. Most applicants are
in manufacturing, although some provide services
and one was a real estate partnership. CDFC has
19
been less successful than most venture capital
agencies because of its mandate t o assist
depressed areas, and several investments have
been terminated. For fiscal 1981 it reported a
loss on its venture funds, although it has an
overall gain because most of its $10 million still is
held in short-term, non-venture assets. The state
believes that CDFC is fulfilling its purpose of
reducing unemployment in economically troubled
areas even though its investments have had little
success.
The Minnesota Small Business Finance Agency
uses tax-exempt financing to provide capital to
young businesses. Established in 1980, MSBFA
serves firms that meet the SBA definition of a
small business, but it avoids those in financial
services, real estate, professional services and
some others. After tax-exempt bonds are issued
by the state, MSBFA must find a purchaser for the
bonds, and the financing is then accomplished
with no state expenditure other than the foregone
taxes. Five financings have been completed,
ranging from $75,000 to $265,000, for established
businesses in traditional industries such as
printing. Interest rates are at 75 percent of
prime.
Minnesota also has t w o programs targeted for
redevelopment of depressed areas. The Area
Redevelopment Administration Loan Program
since 1961 has been making loans below the
prime rate for start-ups and expansions. To date,
$3.5 million has been lent, and the program has
experienced $573,000 in non-performing loans.
Since the lending is done at subsidized rates and
no equity positions are taken by ARA, the
performance of this type of program is difficult to
compare with a private venture capital firm. The
state is seeking to increase employment, and the
economic efficiency of the businesses is not
measured against alternative uses of the funds.
The second program, the Minnesota Revolving
Loan Fund, is even further removed from the
market place. It was established in 1980 with
funds from the Economic Development Administration to provide financing below market
interest rates to new or existing manufacturers. It
targets several counties in the state with particularly depressed conditions. Only t w o loans
have been made so far and no assessment of the
program's success has been made.
A unique venture capital concept is being
pioneered in the Connecticut Product Development Corporation. CPDC was funded in 1972
through the issuance of general revenue bonds;
20
its current capitalization is $7 million. CPDC is
unique for several reasons. First, it is productoriented and, second, it does not take debt or
equity positions in its investments. Companies
with potentially marketable products approach
CPCD and they work out a business plan
together for the product. If CPDC feels the plan
has potential for success, it will invest as much as
60 percent of total development costs. If the
product is successful, CPDC collects 5 percent of
gross sales until the original investment is
recovered. After that, collections are reduced to
0.5 percent of sales for an amount of time equal
to that period when 5 percent was collected. If
the product is a failure, then the borrower's
obligation ends with no required payback.
Since 1972, CPDC has committed $5.2 million
to 38 companies for 47 commercial and industrial
products. Of these 47 products, 26 are currently
on the market. These projects have created an
estimated 214 additional jobs during the development stage and will create 1,500 more as the
market for the products expands. There have
been only seven failures in 10 years for a total
write-off of $162,000.
A more common route for a state government
to take than equity financing or product investment is loan guarantees, since these d o not
require the expenditure of state funds unless
losses are sustained. Guarantees encourage
private lenders to finance seed capital and
involve relatively small state staffs and line
budgets. The agency assumes only a contingent
liability requiring a loan loss reserve fund of
some percentage of outstanding guarantees.
Frequently the agencies are self-supporting, if
fees based on the amount of principal guaranteed
are adequate to meet loan losses and overhead
expense.
One such loan guarantee program is the
Louisiana Business Equity Corporation. LBEC
was founded in 1982 at $22 million but did not
begin operations until 1983. The funds were
deposited in 16 banks, drawing interest that
serves as the operating budget A n i n ^ m e m b e r
board appointed by the governor must approve
all investment decisions. LBEC'S purpose is to
provide partial loan guarantees for loans made to
SBICs, MESBICs and other small business lenders.
For lenders to receive LBEC guarantees, they
must qualify and pay a membership fee, which
goes into the LBEC capital pool. Louisiana hopes
the loan guarantees will stimulate SBIC financing
and help disadvantaged individuals in depressed
areas of the state.
JULY 1983, E C O N O M I C
REVIEW
The Massachusetts Industrial Finance Agency
is one of the largest state loan guarantee
programs for new ventures. It provides industrial
revenue bonds and loan guarantees for businesses
in designated urban areas and for industrial firms
anywhere in the state. M l FA is involved with
companies in high-technology areas as well as
more traditional industries such as textiles and
fish processing. Since 1977 the agency has been
involved in 55 projects with a total of $50 million
in loans and an average size of $1.25 million.
A final general type of capital-funding agency
is the non-public lending agency. One of the
oldest and largest is the Massachusetts Business
Development Corporation, founded in 1953,
which provides loans for small businesses that
cannot obtain all of their financial requirements
from conventional sources. MBDC was capitalized
through a stock sale to interested financial
institutions. The investing institutions are subject
to calls from MBDC for loans of varying amounts
with terms up to five years and rates V* percent
over prime. MBDC currently has $31 million in
available credit and has loaned over $100
million since it was founded. It maintains a loan
loss reserve of 5 percent. MBDC is considered a
model in its field and has been credited with the
creation of some 65,000 jobs in Massachusetts.
Summary and Conclusions
Economic growth that creates jobs and improves
the standard of living has long been a major goal
of public policy. Various past efforts directed at
tax relief, easing of environmental regulations,
and retraining of labor have enjoyed only limited
and often transitory success. Today many growth
efforts aim to provide capital for new businesses
that offer the largest portion of new jobs.
A rather well defined venture capital industry
in the United States is composed of private firms,
government related firms and corporate firms.
Supplementing these firms are a series of federal
and state program or agencies intended to
provide capital to attractive new businesses that
for some reason are not served by the venture
capital industry. The total volume of venture
capital has grown dramatically in recent years
and the central question today is whether more
venture capital is needed to support potentially
successful new businesses or if existing venture
capital has matched the supply of new businesses
with attractive prospects.
There is some truth in both positions. The
overall capital markets are relatively efficient at
providing funds to the venture capital industry
when the industry offers projects with risk and
return characteristics more attractive than competing uses of funds. However, new business
financing involves tremendously high information
costs that must be subtracted from prospective
returns before determining any projects prospective risk and return and thus before the capital
markets consider the project in relation to
competing uses of funds. For this reason, high
information costs can mean that attractive
projects will go unfunded and both positions
stated above will be true.
Consider all the dimensions of information
costs. First, the new business must locate a
source of venture capital. Then the venture
capital source must (1) review the prospect, (2)
structure an appropriate financial package if
review is favorable, and (3) assist in the ongoing
management of the business until the initial
public offering. This sequence involves considerable time and requires a substantial amount of
financial and general management talent. It is
particularly expensive in smaller cities where
most people in the Southeast live.
Future initiatives should involve plans to reduce the high information costs restricting the
venture capital industry's ability to provide all of
the capital that might be useful in stimulating new
business growth. Many public programs will
continue to emphasize methods of increasing
investment that require limited expenditures of
public funds, such as loan guarantees. While this
does increase the supply of capital to small
business, there is some question regarding the
creditworthiness of some firms so funded. The
alternative is to establish a capitalfundingagency
designed to be self-supporting. This type of
agency would compete directly with private
venture capitalists, and to remain viable it would
have to do the same exhaustive investigation of
the ventures before investing.
—John S. Hekman
and Mike E. Miles*
* University
of North
Carolina,
Chapel
Hill
N o t e : T h i s p a p e r w a s p r e s e n t e d at a n A t l a n t a F e d R e s e a r c h S e m i n a r
o n A p r i l 13, 1 9 8 3 .
FEDERAL RESERVE B A N K O F A T L A N T A
21
Commercial Bank Profits:
Southeastern Banks Fare Well
After underperforming the nation from 1974 through 1979, banks in
the Southeast have enjoyed higher profit measures than the rest of
the nation ever since. Banks in Georgia and Louisiana remained
highly profitable last year, while Mississippi and Tennessee banks
felt more noticeable effects from the recession.
Bank profits reflect the economic environment,
the condition of specific bank markets, the level
of market interest rates and the degree of regulation under which banks operate. This past year
the overall weakness in the U. S. economy was
reflected in bank profitability. Three key measures
of profitability—adjusted net interest margin,
return on assets and average return on e q u i t y all dropped in 1982. 1 Adjusted net interest
margin dropped from 3.86 percent to 3.76 percent return on assets dropped from 0.76 percent
to 0.72 percent, and average return on equity
dropped from 13.1 percent t o 12.2 percent The
declines, however, were not uniform across bank
size or location.
The decline in bank profits was most pronounced
among the smallest banks (with assets of $25
million or less), while those with assets between
$50 million and $100 million saw profits drop
only slightly. These smallest banks saw their
return on assets decline from 1.21 percent in
1981 to 1.04 percent in 1982 and their return on
equity drop from 12.9 percent to 10.9 percent
Banks with assets between $50 and $100 million
saw return on assets drop slightly from an average
of 1.09 percent in 1981 to 1.08 percent in 1982;
their return on equity dropped only from 13.5
percent to 13.3 percent
Banks in the six southeastern states fared
better than their national counterparts, averaging
' P l e a s e s e e t h e Appendix f o r a n explanation of the calculation of these ratios
Note especially that this analysis uses an expected tax equivalent net
interest margin that includes adjustments for taxes saved on tax exempt
securities a n d for loan loss provisions
22
T a b l e 1 . Adjusted Net Interest M a r g i n
All Insured Commercial Banks
By Size Category
Year End Assets ($ millions)
Year
All
Banks
0-25
25-50
50 - 1 0 0
100 - 5 0 0
500-1000
1000+
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
3.20
2.95
3.27
3.11
3.79
4.13
4.20
3.95
3.93
3.86
3.76
3.66
3.58
4.34
4.07
4.11
4.14
4.36
4.71
4.96
5.13
4.87
3.66
3.63
4.08
3.91
3.98
4.10
4.30
4.50
4.67
4.70
4.61
3.61
3.50
3.88
3.83
3.95
4.06
4.24
4.42
4.54
4.53
4.52
3.57
3.36
3.79
3.76
3.82
3.96
4.18
4.29
4.35
4.37
4.33
3.50
3.35
3.65
3.63
3.80
3.86
4.15
4.29
4.37
4.39
4.30
2.71
2.35
2.57
2.37
3.62
4.25
4.17
3.57
3.46
3.35
3.27
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
N o t e : P l e a s e s e e t h e A p p e n d i x f o r a n e x p l a n a t i o n of t h e s e v a r i a b l e s .
0.99 percent return on assets and 13.6 percent
return on equity in 1982. Southeastern banks
have not escaped the recent recession, however.
Their adjusted net interest margin, return on
assets and return on equity fell in 1982. Performance across the six states reflects the degree
to which various states are being affected. Banks
in relatively prosperous Georgia were far more
profitable than banks in Mississippi and Tennessee,
both hard hit by the recession.2 Somewhat surprisingly, however, Lousiana banks were not as
affected by falling oil prices as were other Louisiana
businesses in 1982.
Profitability Measures
The three profitability measures used in this
study generally tell the same story about declining
bank profits, but there are significant differences
in what they measure. The ratio adjusted net
interest margin is calculated by subtracting a
bank's interest expense from its interest revenue
net of loan losses and dividing that result by its
interest earning assets.3 That ratio measures the
spread between the bank's interest income and
its interest expense It would be roughly analogous
2
l n this article, t h e " S o u t h e a s t " refers t o t h e six s t a t e s all or partially w i t h i n t h e
Sixth F e d e r a l R e s e r v e District: A l a b a m a F l o r i d a Georgia, Louisiana,
Mississippi, a n d T e n n e s s e e S e e t h e February 1 9 8 3 issue of this E c o n o m i c
FEDERAL RESERVE B A N K O F A T L A N T A
to a business' margin. The ratio return on assets,
obtained by dividing a bank's net income by its
assets, provides a handy gauge of how well a
bank's management is using its assets. The ratio
return on equity is calculated by dividinga bank's
net income by its shareholders equity. That is
the most important figure to a bank's shareholders
because it tells them what the bank is earning on
the funds they invested in the bank.
One important difference in these measures
can be seen by comparing the ratios of the
smallest banks, those with $25 million in assets
or less, with ratios of the largest banks, those with
over $1 billion in assets. The smallest banks
generally enjoy larger spreads between their
return on funds and their cost of funds (as
measured by their adjusted net interest margins
in Table 1) and make more profitable use of their
assets (as measured by their returns on assets in
Table 5). The largest banks generally provide the
higher returns t o their stockholders as measured
by their return on equity in Table 6. They have
higher returns on equity in spite of their lower
adjusted net interest margins and lower return
on assets because they have less equity capital
per dollar of assets than the smaller banks. This
R e v i e w for a n a n a l y s i s of e c o n o m i c c o n d i t i o n s in t h e S o u t h e a s t
S e e t h e A p p e n d i x f o r a d e s c r i p t i o n of e x a c t l y h o w e a c h v a r i a b l e is
calculated.
3
23
T a b l e 2 . Tax Equivalent Interest
All Insured C o m m e r c i a l Banks
By Size Category
Year End Assets ($ millions)
Year
All
Banks
0-25
25-50
50-100
100-500
500 - 1 0 0 0
1000+
1979
11.35
9.50
9.60
9.66
9.85
10.28
12.66
1980
13.08
11.11
11.05
11.02
11.17
11.40
14.61
1981
15.53
13.25
13.09
13.03
13.31
13.59
17.22
1982
14.56
13.70
13.38
13.26
13.26
13.20
15.42
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
N o t e : P l e a s e s e e t h e A p p e n d i x f o r a n e x p l a n a t i o n of t h e s e v a r i a b l e s .
T a b l e 3 . Loan Loss Provision
All Insured Commercial Banks
By Size Category
Year End Assets ($ millions)
Year
All
Banks
0-25
25-50
50 - 100
100 - 5 0 0
500-1000
1000+
1979
.31
.30
.27
.27
.26
.30
.33
1980
.33
.33
.30
.29
.29
.35
.35
1981
.34
.37
.31
.31
.32
.32
.35
1982
.51
.52
.46
.43
.47
.48
.53
5 0 0 - 1000
1000+
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
N o t e : P l e a s e s e e t h e A p p e n d i x f o r a n e x p l a n a t i o n of t h e s e v a r i a b l e s .
T a b l e 4 . Interest E x p e n s e
All Insured Commercial Banks
By Size Category
Year End Assets ($ millions)
Year
All
Banks
0-25
25-50
50 - 100
1979
7.10
4.49
4.83
4.97
5.30
5.69
8.76
1980
8.82
5.83
6.08
6.19
6.52
6.68
10.80
100 - 5 0 0
1981
11.33
7.75
8.08
8.20
8.62
8.88
13.51
1982
10.30
8.30
8.31
8.31
8.46
8.42
11.62
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
N o t e : P l e a s e s e e t h e A p p e n d i x f o r a n e x p l a n a t i o n of t h e s e v a r i a b l e s .
24
JULY 1983, E C O N O M I C
REVIEW
f
¥
allows the large banks to use debt to leverage up
their return on equity. 4
Banks' Adjusted Net Interest Margins
Last year's drop in adjusted net interest margins
continued a long trend. Adjusted net interest
margins have been fallingeversincethey peaked
at an average of 4.20 in 1978 (Table 1). From
1972 through 1978, margins had been increasing
with the exception of dips in 1973 and 1975. The
trends in adjusted net interest margin, however,
are not uniform across the size categories. Adjusted
net interest margins for banks with less than $1
billion rose from 1975 through 1981, while
margins on the largest category of banks have
been falling since 1977. Adjusted net interest
margins also have followed a pattern across size
classes that has persisted through time. Margins
at small banks are consistently larger than those
for larger banks.
The changes in adjusted net interest margins
since 1979 can be understood best by examining
Tables 2 through 4, which contain the three
components of adjusted net interest margin: tax
equivalent interest revenue, loan-loss provisions,
and interest expense. 5 Both interest revenue and
interest expense increased for the average of all
banks from 1979 to 1981 and then decreased
last year. Yet those averages fail to tell the whole
story for 1982. While banks with assets in excess
of $100 million experienced decreasing interest
revenue and expenses, banks with assets below
$100 million had increasing interest revenue and
expenses. Loan-loss provisions, which had increased slightly f r o m 1 9 79 t o 1 9 8 1 , j u m p e d
dramatically in 1982. All six size categories experienced the increase, with the very largest
banks having the biggest jump. These increased
loan-loss provisions thus account for 1982's
general decline in margins.
Tax equivalent interest revenues and interest
expense figures reveal some important differences
between large and small banks. In 1979, banks
with assets of $100 million or less had interest
expenses that were 3.8 to 4.3 percentage
points below the expenses of banks with assets
in excess of $1 billion. The smaller banks also
earned tax equivalent revenue that is 3.0 to 3.2
percentage points below the $1 billion-plus
banks. The expense difference fell to approximately 3.3 percentage points in 1982 while the
revenue difference dropped to 1.7 to 2.2 percentage points. Small banks were paying belowmarket rates for their funds in 1979 and charging
customers below-market rates for their loans.
The deregulation of interest rates has forced up
the cost of funds at small banks since 1979, and
these banks have responded by charging more
for their loans. Indeed, while large banks' interest
revenue and expenses fell with the decrease in
market rates in 1982, the revenues and expenses
of small banks continued to rise as these banks'
customers moved their money to deregulated
accounts and the banks compensated by charging
more for loans.
Some data suggest that banks are trying to
offset loan losses partially with higher interest
revenues. The increase in loan losses exceeded
the decline in adjusted net interest margins for
all b u t t h e smallest banks. Some critics allege that
banks are keeping loan rates high deliberately to
offset their loan losses. This is an unfair criticism
to the extent that banks are merely chargingtheir
risky customers more because these customers
are more likely to default during this recession
than they were during previous years. The critics
have a valid point, however, to the extent loan
rates remain high because banks are trying to
offset losses on risky loans by charging good
customers more. W e cannot tell from these data
which customers are paying the higher rates.
Banks' Returns O n Assets and Equity
Banks' returns on assets and returns on equity
have reflected trends in the economy, with high
bank returns occurring during periods of economic strength and low returns occurring during
periods of economic weakness. Banks' returns
on assets dropped from their 1972 and 1973
average highs of 0.76 to a low in 1975 of 0.69
(Table 5). The returns then started c l i m b i n g t o a n
average high of 0.81 in 1979 and have declined
since to a low of 0.72 in 1982. Banks' returns on
equity have followed a trend similar to their
returns on assets (Table 6). Average bank return
on equity dropped from its 1973 peak of 12.8
5
11
Large b a n k s g e n e r a l l y h a v e l o w e r c a p i t a l b e c a u s e t h e y h o l d a g r e a t e r
diversity of a s s e t s a n d t h e r e f o r e m a y b e s o m e w h a t l e s s likely t o s u f f e r l a r g e
l o s s e s T h e y m a y a l s o b e m o r e e f f e c t i v e in r e s i s t i n g b a n k regulators' c a l l s
for m o r e capital.
FEDERAL RESERVE B A N K O F A T L A N T A
Tax e x e m p t i n t e r e s t r e v e n u e is a d j u s t e d by a d d i n g t h e t a x e s s a v e d to t h e
i n t e r e s t r e c e i v e d L o a n - l o s s p r o v i s i o n s a r e i n c l u d e d as a part of net i n t e r e s t
m a r g i n t o o b t a i n a n e x p e c t e d i n t e r e s t r e v e n u e . This a d j u s t m e n t r e c o g n i z e s
t h a t s o m e b a n k s m a k e h i g h e r risk loans t h a t carry a h i g h e r i n t e r e s t rate a n d
t h a t t h e s e b a n k s e x p e c t t o have h i g h e r loan losses.
25
T a b l e 5. R e t u r n on Average Assets
All Insured Commercial Banks
By Size Category
Year End Assets ($ millions)
Year
All
Banks
0 - 25
25-50
50 - 100
100-500
500-1000
1000+
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
.76
.76
.71
.69
.70
.71
.76
.81
.79
.76
.72
.94
1.06
1.05
.91
.95
.97
1.03
1.20
1.31
1.21
1.04
.95
1.01
.96
.91
.95
1.02
1.07
1.17
1.21
1.17
1.11
.90
.92
.89
.87
.92
.97
1.02
1.10
1.14
1.09
1.08
.86
.83
.80
.75
.78
.85
.94
1.00
1.00
.94
.88
.86
.85
.79
.76
.77
.78
.83
.88
.88
.86
.79
.62
.60
.57
.57
.57
.56
.61
.64
.61
.60
.57
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
N o t e : P l e a s e s e e t h e A p p e n d i x f o r a n e x p l a n a t i o n of t h e s e v a r i a b l e s .
T a b l e 6. Return on Average Equity
All Insured Commercial Banks
By Size Category
Year End Assets ($ millions)
Year
All
Banks
0-25
25-50
50 - 100
100-500
1972
12.2
11.7
13.1
12.9
12.5
12.7
11.8
13.2
12.4
500-1000
1000+
1973
12.8
13.5
13.9
13.4
13.3
1974
12.5
12.9
12.9
12.6
11.7
12.5
12.7
12.4
1975
11.8
10.9
12.1
12.0
10.7
11.6
1976
11.5
11.2
12.4
12.2
11.0
11.5
11.4
12.9
12.1
11.6
11.3
13.6
13.4
12.8
12.7
14.1
13.5
13.8
1977
1978
11.8
12.9
11.3
12.0
13.2
13.6
1979
13.9
13.6
14.5
14.3
1980
13.7
13.4
14.6
14.4
13.8
13.1
13.4
13.5
12.8
12.7
13.1
13.3
12.0
11.7
12.1
1981
1982
13.1
12.2
12.9
10.9
13.7
13.0
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
N o t e : P l e a s e s e e t h e A p p e n d i x f o r a n e x p l a n a t i o n of t h e s e v a r i a b l e s .
26
JULY 1983, E C O N O M I C
REVIEW
T a b l e 7. Adjusted Net Interest M a r g i n
All Insured Commercial Banks
In Six Southeastern States
By Size Category
Year End Assets ($ millions)
Year
All
Banks
0 - 25
25-50
50 - 100
100-500
500-1000
1000+
1972
3.85
3.94
3.88
3.99
3.75
3.55
4.05
1973
3.55
3.86
3.90
3.94
3.42
2.90
2.92
1974
3.82
4.49
4.15
3.97
3.72
3.31
2.97
1975
3.58
4.13
3.84
3.76
3.60
3.29
2.58
3.35
1976
3.82
4.27
3.98
3.92
3.72
3.50
1977
3.98
4.28
4.20
4.17
3.94
3.55
3.60
4.30
3.97
3.91
1978
4.25
4.52
4.41
4.29
1979
4.57
4.85
4.68
4.62
4.63
4.38
4.28
4.97
4.82
4.42
4.54
1980
4.78
5.11
4.87
1981
4.79
5.14
4.90
4.87
4.75
4.79
4.72
4.67
4.82
4.69
4.65
4.76
1982
4.73
4.73
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
N o t e : P l e a s e s e e t h e A p p e n d i x f o r a n e x p l a n a t i o n of t h e s e v a r i a b l e s .
percent to a 1976 low of 11.5 percent, it then
started increasing until it peaked at 13.9 percent
in 1979. Banks' returns on equity dropped from
1979 to 1982 with last year's value being 12.2
percent Averages of the various size categories
have generally followed this overall pattern.
Bank returns through time have also followed a
consistent pattern across the various size classes.
Banks' returns on assets almost always decreased
as bank size increased from 1972 through 1982.
Banks with assets between $25 million and $100
million usually had the highest returns on equity
between 1972 and 1982. Banks with assets of
less than $25 million and banks with assets
between $500 million and $1 billion generally
had the lowest return on equity during those
years.
Thus, bank profits were down for all three
measures of profitability for every size group
examined. Sharp increases in loan-loss provisions
appear to have been a major factor in the
declining profits. The drop in bank earnings does
not necessarily mean, however, that bank shareholders were worse off in 1982. The value of a
bank's stock depends not only on the bank's
earnings but the rate of return on competitive
FEDERAL RESERVE B A N K O F A T L A N T A
investments and the riskiness of banks. If the
return on other investments drops, then the
required return for banks also drops. If the
riskiness of banks goes up, then their required
return goes up. Interest rates dropped in 1982,
offsetting at least some of the decline in bank
profits. Bank loan losses went up, however,
which may indicate that banks are more risky.6
Profitability of Banks in the Southeast
In general, southeastern banks have been
more profitable than banks across the nation in
recent years (Tables 7-12). In sharp constrast to
the national trend discussed above, adjusted net
interest margins in the region have tended to go
up throughout the period 1972 through 1982.
The region's banks started the period averaging
3.85 percent, and saw the average drop in 1973
to 3.55 percent and again in 1975 to 3.58
percent Yet is has been rising almost continuously
since. The ratio peaked at 4.79 in 1981, but
6
T h e i n c r e a s e in loan losses m e a n s that i n d i v i d u a l s w h o invest o n l y in b a n k
s t o c k s f a c e g r e a t e r risks, but it is not o b v i o u s w h a t t h e e f f e c t of t h e losses
a r e o n i n v e s t o r s w h o o w n a d i v e r s i f i e d p o r t f o l i o of s t o c k s
27
T a b l e 8. Net Interest Margin
All Insured Commercial Banks
In Six S o u t h e a s t e r n States
By Size Category
Year End Assets ($ millions)
Year
All
Banks
1979
10.14
9.78
9.76
9.80
1980
11.63
11.41
11.29
11.26
1981
13.81
13.34
13.37
13.27
13.40
13.90
14.97
1982
13.56
13.66
13.46
13.45
13.20
13.60
14.05
0-25
25-50
50-100
100-500
500 - 1 0 0 0
1000+
9.95
10.58
11.05
11.44
11.63
12.62
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
N o t e : P l e a s e s e e t h e A p p e n d i x f o r a n e x p l a n a t i o n of t h e s e v a r i a b l e a
T a b l e 9. Loan Loss Provision
All Insured C o m m e r c i a l Banks
In Six S o u t h e a s t e r n S t a t e s
By Size Category
Size Category ($ millions)
Year
All
Banks
0-25
25-50
1979
.39
.43
1980
.41
.45
1981
.39
1982
.48
50 - 100
100 - 5 0 0
500-1000
1000+
.36
.41
.32
.43
.50
.39
.33
.35
.44
.52
.48
.41
.35
.35
.31
.45
.66
.53
.47
.43
.53
.46
500 - 1 0 0 0
1000+
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
N o t e : P l e a s e s e e t h e A p p e n d i x f o r a n e x p l a n a t i o n of t h e s e v a r i a b l e s .
T a b l e 1 0 . Interest E x p e n s e
All Insured Commercial Banks
In Six Southeastern States
By Size Category
Year End Assets ($ millions)
Year
All
Banks
0 - 25
25-50
50 - 100
100 - 5 0 0
1979
5.19
4.50
4.72
4.84
5.00
5.77
6.26
1980
6.45
5.86
6.02
5.97
6.27
6.77
7.55
1981
8.64
7.73
8.05
8.06
8.42
8.80
9.80
1982
8.36
8.27
8.27
8.17
8.09
8.32
8.84
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
N o t e : P l e a s e s e e t h e A p p e n d i x f o r a n e x p l a n a t i o n of t h e s e v a r i a b l e s .
28
JULY 1983, E C O N O M I C
REVIEW
•
3
4
T a b l e 1 1 . Return on Assets
All Insured Commercial Banks
In Six Southeastern States
By Size Category
i
)
I
1
Year End Assets ($ millions)
Year
All
Banks
0-25
25-50
50 - 100
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
.97
.97
.81
.68
.73
.79
.88
1.04
1.09
1.02
.99
1.04
1.14
1.02
.78
.82
.84
.94
1.12
1.19
1.16
.93
1.02
1.10
.95
.80
.83
.94
1.03
1.16
1.23
1.18
1.10
1.08
1.12
.92
.76
.78
.92
.99
1.13
1.26
1.19
1.16
100 - 5 0 0
.92
.89
.79
.65
.71
.77
.90
1.06
1.11
1.00
1.01
500-1000
1000+
.90
.73
.68
.67
.75
.70
.76
.88
.93
.96
.90
.82
.74
.45
.44
.52
.58
.69
.91
.89
.85
.90
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
N o t e : P l e a s e s e e t h e A p p e n d i x for a n e x p l a n a t i o n of t h e s e v a r i a b l e s .
)|
*s
J
M
decreased only slightly to 4.73 in 1982. The
margins for the individual size categories followed
the same basic pattern as the regional averages,
but there were some significant discrepancies.
Particularly noticeable are the relatively large
declines between 1981 and 1982 in the adjusted
net interest margins of the t w o small bank
categories. This drop can be explained by looking
at the components of adjusted net interest
margins for southeastern banks in Tables 8 through
10. Interest revenue increased only slightly at
these banks, while their loan-loss provisions and
interest expense both increased sharply.
One contrast between the nation and the
region is the t i m e trends in the adjusted net
interest margins of those banks with over $1
billion. The national average for these banks
peaked in 1977 and has been falling every year
since then. The southeastern states' average
bottomed out in 1975 and has been rising ever
since. In addition, banks across the country had
lower adjusted net interest margins in 1982 as
their size increased, while banks in the Southeast
experienced relatively little change in their margins
as their size increased. Another difference is in
the loan-loss provisions of banks w i t h assets in
excess of $1 billion. While banks across the
nation and in the Southeast reported sharply
higher loan losses in 1982, the largest banks in
FEDERAL RESERVE B A N K O F A T L A N T A
*
«
the Southeast reported only slightly higher loan
losses.
Southeastern banks' overall average return on
assets (Table 11) and return on equity (Table 12)
followed the same pattern as the national trend.
The trends are common to all six size categories
for almost every year from 1972 to 1982. Two
interesting exceptions are the upturns between
1981 and 1982 in both ratios for banks in the
$100 million to $500 million category and in the
$1 billion and larger category. W i t h these t w o
exceptions, bank profitability dropped from 1981
to 1982, with the smallest banks suffering the
largest drops.
A comparison of profitability of southeastern
banks versus banks across the nation reveals
significant differences across the six size categories. Southeastern banks with assets of less
than $50 million generally had larger adjusted
net interest margins than their peers across the
nation, but their return on assets and return on
equity were usually below their peers since
1974. Southeastern banks in the four size categories from $50 million to more than $1 billion all
followed the same basic pattern. All three measures
of profitability for these banks dropped below
national averages between approximately 1974
and 1978 but have been above the national
averages from 1979 to 1982.
29
T a b l e 1 2 . Return on Equity
All Insured Commercial Banks
In Six Southeastern States
By Size Category
Year End Assets ($ millions)
Year
All
Banks
0 - 25
25-50
50 - 1 0 0
100-500
5 0 0 - 1000
1000+
1972
13.5
12.7
14.3
15.4
13.4
12.4
12.8
1973
12.8
13.5
13.9
13.4
12.3
13.2
12.4
1974
11.3
11.9
12.8
12.3
11.3
12.3
7.4
1975
9.1
8.6
10.5
9.8
9.1
11.7
7.0
1976
9.6
9.0
10.5
9.9
9.5
12.2
7.9
1977
10.5
9.3
11.8
11.7
10.5
11.0
9.1
1978
12.0
10.6
12.8
12.9
12.3
11.9
11.4
1979
14.1
12.4
14.2
14.5
14.5
13.2
14.5
1980
14.5
12.8
14.4
15.7
15.1
13.6
14.2
1981
13.7
12.3
13.6
14.6
13.5
13.7
13.9
1982
13.6
9.9
12.6
14.1
13.8
12.9
14.9
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
N o t e : P l e a s e s e e t h e A p p e n d i x f o r a n e x p l a n a t i o n of t h e s e v a r i a b l e s .
T a b l e 1 3 . A d j u s t e d Net Interest Margin
All Insured Commercial Banks
In Six Southeastern States
By State
States
All
Banks
Alabama
Florida
Georgia
Louisiana
Mississippi
Tennessee
1972
3.85
3.84
3.73
4.58
4.54
4.11
3.53
1973
3.55
3.72
3.68
3.85
3.14
3.77
3.13
1974
3.82
4.21
3.81
4.09
3.77
4.23
3.19
1975
3.58
3.99
3.48
3.70
3.75
4.20
2.94
1976
3.82
4.01
3.65
4.18
3.85
4.16
3.50
1977
3.98
3.98
3.88
4.30
3.99
4.10
3.79
1978
4.25
4.07
4.36
4.63
4.23
4.07
3.90
1979
4.57
4.27
4.83
5.10
4.58
4.08
4.03
1980
4.78
4.25
5.16
5.50
4.83
4.07
4.06
1981
4.79
4.29
5.07
5.58
5.04
3.90
3.99
1982
4.73
4.21
5.16
5.09
5.03
3.71
4.06
Year
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
N o t e : P l e a s e s e e t h e A p p e n d i x f o r a n e x p l a n a t i o n of t h e s e v a r i a b l e s .
30
JULY 1983, E C O N O M I C
REVIEW
Table 1 4 . Tax Equivalent Interest
All Insured C o m m e r c i a l Banks
In Six S o u t h e a s t e r n States
By State
States
Year
All
Banks
Alabama
Florida
Georgia
Louisiana
1979
10.14
10.41
9.84
10.78
11.50
11.41
12.08
1980
11.63
1981
13.81
13.70
13.54
1982
13.56
13.38
13.50
Mississippi
Tennessee
10.33
9.72
10.12
11.90
11.10
11.73
14.06
14.23
13.22
14.00
13.38
13.84
13.16
13.93
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
Note: P l e a s e s e e t h e A p p e n d i x f o r a n e x p l a n a t i o n of t h e s e v a r i a b l e s .
The Southeast also differed from the national
pattern in the components of adjusted net interest
margin. Tax equivalent revenue at southeastern
banks usually exceeded that of the rest of the
nation in every size category except the $1
billion and larger banks. This higher revenue is
explained at least partially by their higher loan
losses. The southeastern banks had higher loan
losses in every year in each of the six size
categories with only three exceptions. They also
had lower interest expenses than their counterparts, with the exception of banks with less than
$25 million in assets and those with $500 million
to $1 billion in assets.
These figures show that southeastern banks
have been more profitable than banks across the
nation in the past few years. The Southeast has
not been immune, however, to the effects of the
recession. Banks in the region generally have
reported lower profits recently, with increased
loan-loss provisions an important factor behind
the decline.
Profitability of Southeastern
Banks by State
The profitablity of banks in the various southeastern states varies widely. Florida, Georgia and
Louisiana banks have all had adjusted net interest
margins in excess of 5 percent for the last two
years, while Alabama, Mississippi and Tennessee
have had margins below4.3 percent (Table 13).
Mississippi banks, in particular, appear to be
suffering much more in 1981 and 1982 than they
did in 1974 and 1975. Louisiana's string of
increasing adjusted net interest margins from
FEDERAL RESERVE B A N K O F A T L A N T A
1973 to 1981 probably reflected the state's
increasing oil income.
The individual components of adjusted net
interest margin in the six states reveal the importance of minimizing loan-loss provisions and
interest expense (Tables 14-16). The t w o states
whose banks enjoyed the highest tax equivalent
interest revenue in 1982 were Louisiana and
Tennessee, with revenue of 13.8 and 13.9 percent respectively; the state with the lowest
adjusted revenue was Mississippi, with 13.2
percent Mississippi also experienced the highest
loan losses in 1982, while Florida had the lowest
losses. Of the three states with a high 1982 net
interest margin (Florida, Georgia and Lousiana),
only Louisiana also had unusually high interest
revenue, but these three states had the lowest
loan losses and lowest interest expenses of the
six states.
The District states' returns on assets and returns
on equity tell a similar story (Tables 1 7 and 18).
In the past few years Georgia and Louisiana
banks have been the most profitable, Mississippi
and Tennessee the least profitable and Alabama
and Florida somewhere in between. Alabama
banks' returns on assets and equity in recent
years have been somewhat better than their
adjusted net interest margins would suggest,
while Florida and Tennessee banks' returns were
somewhat worse than one would expect given
their adjusted net interest margins.
Florida and Tennessee banks' figures are especially interesting Florida had better net interest
margins than Georgia and Louisana in 1982, yet it
had significantly lower returns on assets and
31
T a b l e 1 5 . Loan Loss Provision
All Insured Commercial Banks
In Six Southeastern States
By State
States
Year
All
Banks
Alabama
Florida
Georgia
Louisiana
Mississippi
Tennessee
1979
.39
.51
.30
.55
.34
.32
.39
1980
.41
.62
.30
.46
.39
.36
.44
1981
.39
.46
.30
.41
.39
.45
.45
1982
.48
.54
.34
.40
.52
.72
.61
Mississippi
Tennessee
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
N o t e : P l e a s e s e e t h e A p p e n d i x f o r a n e x p l a n a t i o n of t h e s e v a r i a b l e s
T a b l e 1 6 . Taxable Interest E x p e n s e
All Insured Commercial Banks
In Six Southeastern States
By State
States
Year
All
Banks
Alabama
Florida
Georgia
Louisiana
1979
5.19
5.36
4.72
5.13
5.40
5.33
5.69
1980
6.45
6.63
5.94
6.13
6.68
6.69
7.24
1981
8.64
8.95
8.19
8.07
8.80
8.87
9.56
1982
8.36
8.62
7.99
7.90
8.29
8.74
9.27
Mississippi
Tennessee
1.07
1.06
1.03
.97
1.02
.99
1.01
1.05
1.10
1.01
.84
.88
.79
.56
.45
.64
.75
.76
.85
.88
.78
.75
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
N o t e : P l e a s e s e e t h e A p p e n d i x f o r a n e x p l a n a t i o n of t h e s e v a r i a b l e s .
T a b l e 1 7 . Return on Assets
All Insured Commercial Banks
In Six Southeastern States
By State
States
Year
All
Banks
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
.97
.97
.81
.68
.73
.79
.88
1.04
1.09
1.02
.99
Alabama
1.04
1.09
1.05
.95
.99
1.03
1.00
1.09
1.10
1.05
1.04
Florida
.99
1.04
.83
.56
.54
.67
.85
1.01
1.09
.90
.95
Georgia
1.00
.98
.74
.66
.73
.70
.83
1.16
1.18
1.24
1.11
Louisiana
.92
.87
.84
.86
.90
.91
.97
1.14
1.18
1.25
1.22
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
N o t e : P l e a s e s e e t h e A p p e n d i x f o r a n e x p l a n a t i o n of t h e s e v a r i a b l e s .
32
JULY 1 9 8 3 , E C O N O M I C
REVIEW
Table 1 8 . Return o n Equity
All Insured Commercial Banks
In Six S o u t h e a s t e r n States
By State
States
Year
All
Banks
Alabama
Florida
Georgia
Louisiana
Mississippi
Tennessee
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
13.5
12.8
11.3
9.1
9.6
10.5
12.0
14.1
14.5
13.7
13.6
13.5
14.5
13.9
12.5
12.8
13.4
13.1
13.9
13.5
12.6
12.7
14.4
15.1
11.4
7.1
6.7
8.6
11.3
13.5
14.8
12.5
13.7
13.4
13.8
10.4
9.1
9.5
9.2
11.5
15.5
15.5
16.8
15.3
12.1
11.9
11.8
12.1
12.2
12.3
13.3
15.4
15.7
16.5
15.8
14.7
14.9
14.0
12.7
13.3
13.3
13.9
14.6
14.8
13.5
11.3
12.5
11.9
8.3
6.5
9.1
10.7
10.9
12.1
12.4
10.9
10.8
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
Note: P l e a s e s e e t h e A p p e n d i x f o r a n e x p l a n a t i o n of t h e s e v a r i a b l e s .
equity. While Tennessee was the least profitable
state for banking between 1972 and 1982, its
adjusted net interest margins did climb above
those of Mississippi in 1981 and 1982. Tennessee
remained significantly below Mississippi, however, in the other two measures of profitability
for those t w o years.
Are Bank Profits Starting to Plunge?
In 1981 one consulting firm said that annual
bank profits could drop by as much as $40 billion
in the 1980s. 7 (The firm noted, for comparison
purposes, that bank profits in 1980 were approximately $20 billion.) This consultant emphasized
thatthe estimate of a$40 billion drop in earnings
was a "projection of an'unmanaged outcome'"
and not a prediction. The projection was based
on t w o assumptions: banks were going to lose
the interest subsidy that cheap deposits were
providing and banks were going to continue
experiencing high operating costs. Bank deposits
' M c K i n s e y and Company, "Building a More Effective Commercial Banking
S y s t e m — W i t h o u t F i n a n c i a l C h a o s " J u n e 1981. T h e s e f i n d i n g s w e r e
subject to the criticism that bank operating expenses were going up
because banks w e r e providing customers with additional free services to
offset t h e l o w i n t e r e s t r a t e s p a i d o n c e r t a i n a c c o u n t s . T h e r e f o r e , c r i t i c s
n o t e d b a n k s s h o u l d b e a b l e t o r e d u c e t h e free s e r v i c e s a s t h e y i n c r e a s e t h e
interest rate t h e y p a y o n c u s t o m e r s ' a c c o u n t s
FEDERAL RESERVE B A N K O F A T L A N T A
paid low interest rates because a government
regulation called Regulation Q limited the rates
banks could pay on checking and savings accounts.
Banks faced higher rates for these accounts as
Regulation Q was abolished.
The findings in our study do not prove the
consulting firm w r o n g but they certainly do not
support its worst case (or "unmanaged") projections. Its concerns about the phaseout of
Regulation Q do not seem to have been borne
out, even though the interest subsidy that Regulation Q provides to banks was reduced in 1982,
for three reasons: new accounts that pay higher
rates of interest were authorized by regulators
(most notably the money market deposit account
last December), depositors have shifted more
funds to deregulated accounts and the difference
between market rates and the Regulation Q
interest ceilings decreased throughout 1982 due
to decreasing market rates. If the consultant's
study was right about the loss of cheap deposits,
then bank adjusted net interest margins should
have dropped in 1982. Margins did decline, but
primarily because of recession-induced loan loss
increases. The effects of deregulation of bank
interest rates certainly were felt by banks, especially small institutions, but banks were able to
offset the higher cost of funds with higher interest
earnings.
33
Conclusions
The profitability of banks across the nation and
in the Southeast appears to be sensitive to the
economic climate and the trends in regulation.
The continuing recession reduced banks' 1982
profitability below 1981 levels with increased
loan loss provisions playing a significant role in
the decline. The effects of deregulation were
particularly noticeable for small banks last year.
These banks had increased interest earnings and
increased interest expense even though market
interest rates were falling in 1982. Banks in the
Southeast generally underperformed the nation
during the period from 1974 through 1979, but
they have outperformed the rest of the nation
ever since. Southeastern banks again outperformed
the nation in 1982, but their performances were
also generally below their 1981 levels. While
banks in Georgia and Lousiana remained highly
profitable last year, banks in Mississippi and
Tennessee were clearly feeling the effects of the
recession.
— Larry D. Wall
APPENDIX
The Appendix describes the data source, explains the
the items change slightly through time. The most sigcalculation of the three ratios and lists the number of
nificant change is that reporting forms filed through
banks in each category. The data in this article are taken
December 1975 contained a section, abolished in
from the Reports of Condition and Income that insured
1976, called "Reserves on Loans and Securities" This
commercial banks file with the Federal Reserve System.
section contained three separate items: reserves for
Data from the Reports of Condition have been modified
bad debt losses on loans (set up to comply with IRS
at the Board of Governors to reflect bank mergers The
rulings), other reserves on loans, and reserves on
modifications attempt to match each bank's income
securities The reserves for bad debt losses on loans
with the assets used to produce that income. The
are approximately equivalent to the reserve for possible
pooling method of accounting combines the merged
loan losses item in the post-1975 form. The reserve for
banks' income from the beginning of the year, whereas
possible loan losses category on the post-1975 forms is
the purchase method combines their income as of the
deducted from gross loans to obtain net loans and net
date of the merger. Therefore, for those mergers that
loans are used to calculate total assets rather than
were accounted for using the pooling method the
gross loans Therefore, for 1972 through 1975 the
balance sheet data are combined as of the beginning of
reserves for bad debt losses on loans are subtracted
the year. For those mergers using the purchase method
from interest earning assets and total assets The other
balance sheets are merged as of the beginning of the
two categories—other reserves on loans and reserves
year if the merger took place during the first quarter of
on securities—represent a portion of undivided profits
the year, and June balance sheets are merged if the
that has been allocated to cover potential future losses
merger took place during any of the first three quarters
This allocation had no economic significance and after
of the year.
1975 all undivided profits were reported as one figure.
Therefore these two reserve categories are added to
The three profitability measures used in this study are
stockholders equity for the figures from 1972 through
defined as follows:
1975.
Adjusted Net Interest Margin =
Another significant change is the treatment of leases.
Expected Interest Rev.-lnterest Exp.
Lease income is similar in nature to interest from loans
Average Interest Earning Assets
Income from leases was included, however, in "other
_ ,
„
Net Income
operating income" until 1976. Therefore lease income
Return on Assets =
was excluded from expected interest income and leases
Average Assets
Net
were excluded from interest earning assets prior to
_ t
Income
Return on Equity =
1976, but are included thereafter. Leases represented
Average Stockholder Equity
less than 2 percent of interest earning assets in 1976.
Table 1 A gives the n u m b e r of banks used to estimate
Average interest earning assets average assets and
average stockholders' equity are the average of the
the various ratios for all banks in selected years The
beginning, middle and end of the year balance sheet
changes in the number of banks in the various size
figures The expected interest income component to
categories in the Southeast followed approximately the
net interest margin has two significant adjustments
same pattern. To be included in the calculations a bank
from ordinary interest income. One adjustment is that
had to exist at the end of the prior year and had to be in
revenue from state and local securities that is exempt
existence for the entire current year. Thaf s because the
from federal income taxes is grossed up by the bank's
balance sheet figures used to calculate the ratios are
marginal tax rate. This prevents banks from being
the average of the end of the prior year, and the middle
penalized because they hold substantial portfolios of
and end of the current year figures Therefore the
state and local securities to reduce their tax burden.
number of banks listed in the tables does not equal the
The other adjustment is that loan losses are subtracted
number in operation at the end of any year. One
from interest income. This is done so that banks that
important trend to note in these tables is the falling
make low-risk loans at low interest rates are placed on a
number of banks in the under $25 million category and
more equal footing with those that make high-risk loans
the increasing number in the other five categories a
involving high interest income.
trend due in large part to inflation. The GN P deflator(the
broadest measure of price changes) increased 107
Due to changes in the reporting form used for the
percent from 1972 to 1982.
Reports of Condition and Income, exact definitions of
T a b l e 1 A. N u m b e r of Banks
In The N a t i o n w i d e S a m p l e s
By Size Category
Year End Assets ($ millions)
Year
All
Banks
0 - 25
25-50
50 - 1 0 0
100-500
500-1000
1000+
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
13486
13634
13852
14126
14240
14243
14231
14143
14219
14206
14123
10102
9832
9718
9534
9199
8546
8017
7482
7023
6518
5967
1742
1954
2136
2387
2640
2976
3211
3366
3538
3648
3718
860
967
1053
1187
1305
1482
1612
1763
1967
2185
2395
594
683
739
808
866
977
1094
1212
1347
1468
1641
98
96
93
97
104
118
134
147
154
183
173
90
102
113
113
126
144
163
173
190
204
229
S o u r c e : R e p o r t s of C o n d i t i o n a n d I n c o m e
N o t e : P l e a s e s e e t h e A p p e n d i x f o r a n e x p l a n a t i o n of t h e s e v a r i a b l e s .
F E D E R A L R E S E R V E B A N K O F A T L A N T A 35
Services: Key to
Current Stability and
Future Growth
The Southeast's strong services industry
should continue growing both in terms of
jobs and profits, according to this analysis.
Yet enthusiasts may be expecting too
much in anticipating that the industry can
take up the slack left by cutbacks in
manufacturing.
Duringthe recent recession the terms"Sunbelt"
and "services" often appeared together t o describe the comparatively moderate impact of
the e c o n o m i c d o w n t u r n in certain areas of the
country, such as central Florida, Atlanta and
parts of Texas. Yet such conditions weren't
enjoyed equally throughout the Southeast, as
clearly shown in a recent issue of this publication. 1 The Sunbelt is a popular abstraction
w i t h connotations of rapid growth, prosperity
and new jobs. It bears little relevance to many
rural and industrial areas in Mississippi, Alabama
Tennessee and parts of Georgia. Is the concept
of a service-based southeastern economy equally
diffuse? Is itsimilarly devoid of m e a n i n g e x c e p t
in certain pockets of prosperity in this region?
Services' Share of
the Southeastern Economy
In terms of jobs the largest service industries
(see box) are trade, miscellaneous services
and government; the smallest are finance, insurance and real estate (hereafter termed finance)
and transportation, c o m m u n i c a t i o n and public
utilities (subsequently t e r m e d transportation
and utilities). Chart 1 illustrates the distribution of
jobs a m o n g t h e major services in the Southeast
and in the United States. The Southeast accounts
for 12.7 percent of the nation's jobs but 12.8
percent of U. S. service e m p l o y m e n t Although
the Southeast's total share of service employment is slightly greater than t h e national
average—73.8 versus 73.4 percent—the distribution of services differs in several important
ways. For example, government accounts for a
relatively greater share of e m p l o y m e n t in the
Southeast than in the nation—18.8 percent
versus 17.6 percent finance and miscellaneous
services account for proportionately smaller
shares—5.7 and 19.5 percent, respectively,
than in the nation, where they comprise 6 and
21.2 p e r c e n t
Moreover, these differences appear even
more extreme if w e exclude Florida, which
skews the region's average because of its large
population and unique economic characteristics.
Florida boasts almost one-third of the nonfarm
jobs in the Southeast, and its distribution of
' " T h e S o u t h e a s t in 1 9 8 3 , S p e c i a l Issue," E c o n o m i c Review, F e b r u a r y
1 9 8 3 . U n l e s s o t h e r w i s e specified, t h e " S o u t h e a s t " in t h i s a r t i c l e refers t o
t h e six s t a t e s all o r p a r t l y w i t h i n t h e S i x t h F e d e r a l R e s e r v e D i s t r i c t
A l a b a m a , Florida, G e o r g i a , Louisiana, M i s s i s s i p p i a n d T e n n e s s e e .
36
JULY 1983, E C O N O M I C
REVIEW
What Makes Up T h e Service Sector?
In economic terms, sen/ices are distinct from goodsproducing activities, such as mining, farming, manufacturing, and construction, in that what is exchanged
is usually intangible and often cannot be stored or
reused. Transportation illustrates this distinction. A
round-trip airline ticket entitles the bearer to be
transported from Nashville to Mobile and back, and
no more. A small jet enables its owner to fly many
times and still retain a depreciated portion of the
dollar amount originally paid. According to the U. S.
government's standard industrial classification (or
SIC), c o d e s as revised in 1972, the service sector
includes high-asset capital-intensive operations such
as airline, telephone and power companies as well as
personal and consumer services offered by individuals
or households such as "mom-and-pop" grocery stores
The services sector includes five broad categories:
(1) wholesale and retail trade; (2) transportation, communication, and public utilities; (3) finance, insurance
and real estate; (4) miscellaneous services; and (5)
government. The components of each category are
fairly obvious although it may not be readily apparent
that transportation encompasses transportation of oil
and natural gas through pipelines
Miscellaneous services is the most heterogeneous
category. It encompasses personal services, such as
cleaning, gardening, and repairs; consumer services
such as recreation and health care, and business
services such as engineering accounting, advertising
and law. This category also includes profit-based
social services such as day-care centers and private,
non-profit organizations
Although government includes the majority of educational services private education is classified under
miscellaneous services Certain states have slightly
different taxonomic s c h e m e s For example, in Tennessee local utilities tend to be public rather than
privately owned and publicly regulated Consequently,
workers who in most states would be classified as
transportation, communication and public utilities
' S e e , e. g V i c t o r R. Fuchs, " E c o n o m i c G r o w t h a n d t h e Rise of S e r v i c e
E m p l o y m e n t " W o r k i n g Paper N o 4 8 6 , N a t i o n a l B u r e a u of E c o n o m i c
Research, J u n e 1 9 8 0 . F u c h s c o n t e n d s t h a t t h e i n c l u s i o n of this s e c t o r
w o u l d h a v e m a d e o n l y a s l i g h t d i f f e r e n c e in his f i n d i n g s
" T h o m a s M. S t a n b a c k , Jr., U n d e r s t a n d i n g t h e S e r v i c e E c o n o m y .
E m p l o y m e n t , Productivity, a n d L o c a t i o n ( B a l t i m o r e : J o h n s H o p k i n s
University Press, 1979) a n d S t a n b a c k el al. Sen/ices: T h e N e w E c o n o m y
( T o t o w a N. J.: A l l a n h e l d , O s m u n , a n d Co., 1 9 8 1 ) ; in t h e latter S t a n b a c k
in the region. For example, Florida's financial
sector is larger than those of other southeastern states. Last year this industry accounted
for 7.5 percent of Florida's jobs but only 5.3
percent of Georgia's employment and less than
5 percent in Alabama, Louisiana, Mississippi
and Tennessee. Miscellaneous services provide almost one-fourth of Florida's jobs but
only 15.4 percent of Mississippi's nonfarm
e m p l o y m e n t and less than the national norm
(about one-fifth) of e m p l o y m e n t in the other
southeastern states. Conversely, Florida's relatively small government sector understates the
importance of public employment in the region.
Government provides only 16.7 percent of Florida's
FEDERAL RESERVE B A N K O F A T L A N T A
employees are counted as government workers in
Tennessee. SIC codes also do not discriminate according to the type of work done by individual employees: accountants employed by steel producers
are classified as manufacturing workers The Tennessee
Valley Authority's large construction work force is
included under the rubric of government rather than
construction employment
Many scholars studying the apparent structural
economic shift from goods to services modify this
broad definition of services in order to understand
better the dynamics of this change. Hudson Institute
futurist Herman Kahn distinguishes two broad service
categories the tertiary—transportation, finance, trade
and miscellaneous business services closely tied to
production and the quarternary—consumer, nonprofit
and government services; these are consumed for
their own sake or to support other services. He
believes that this quarternary sector is likely to command the largest portion of the labor market in the
1980s and may act as a drag on the primary and
secondary sectors Victor Fuchs omits transportation,
communication and public utilities from his research
on services because of the close relationship between
this category and the goods sector* By reorganizing
the above SIC codes according to their final output
Thomas Stanback has developed a three-part classification—consumer, producer, and public services
He predicts that future services growth will be strongest
in producer services** Sociologist Joachim Singelmann,+ in his investigation of seven industrial economies since 1920, maintains that the sectoral shift also
entails secular decline of distributive and personal
services that have been waning in importance while
social and producer services have been r i s i n g + + Some
futurists identify "information" as the fourth sector of
advanced economies. This growing sector is distinct
from other services, such as many g o v e r n m e n t a l
functions personal, and even some consumer services
in which rapid growth may have already passed its
peak
a n d his c o l l e a g u e s a l s o u s e a c l a s s i f i c a t i o n s c h e m e similar t o Singelmann's.
+ J o a c h i m SingelmanaAgriculture to Sen/ices: T h e Transformation
of I n d u s t r i a l E m p l o y m e n t ( B e v e r l y Hills, C a l i f o r n i a S a g e P u b l i c a t i o n s ,
1978).
+ + S e e H e r m a n K a h n a n d B Bruce-Briggs, T h i n g s to C o m e : T h i n k i n g
a b o u t t h e 7 0 s a n d 8 0 s ( N e w York: M a c m i l l a n , 1972), pp. 2 6 , 2 2 4 - 5 .
j o b s b u t 2 2 . 1 percent of Alabama's, 19.8 percent
of Georgia's, 19 percent of Louisiana's and 22.7
percent of Mississippi's.
Trade is relatively more important in the
Southeast than in the U n i t e d States but only in
Florida and Georgia; in the remaining southeastern states it accounts for less than the
national average of 22.9 percent of jobs. Transp o r t a t i o n — t h e other category in w h i c h the
Southeast outranks the United States in relative
share—is distributed more evenly t h r o u g h o u t
the Southeast, yet it t o o is concentrated in
three states—- Florida, Georgia, and Louisiana.
Atlanta's and Miami's importance as transportation hubs and Louisiana's pipelines account
37
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Payments in the Financial Services
Industry of the 1980s
S p e a k e r s Include:
Retail P a y m e n t s
• How can the Usefulness and Appeal of ATMs be
Extended?
• How Fast Will Debit Cards Take Hold, and
Why?
• How Can We Offer a Full Range of Retail
Financial Services?
Business Payments
• What C h a n g e s Can We Expect in Bank Cash
Management Services?
• How Fast Will Smaller Businesses be Able to
Take Advantage of Sophisticated Collection,
Disbursement and M a n a g e m e n t Techniques?
• Who Will be the Winners and Losers in the
Competition for Corporate Financial Services?
Networks
• Can Competing Financial Institutions Successfully Cooperate With Their Card and ACH
Networks?
• How Will Domestic Payment Systems Interact
With International Ones?
• What is the Outlook for Nonbank Network
Services?
• What Role Will the Federal Reserve System
Play Among the Networks?
O b s t a c l e s and Risks
• Will Adequate Electronic S t a n d a r d s Emerge?
• Which Services Will Consumers E m b r a c e and
Reject?
• Will Regulations Inhibit the Transition
Electronic Payments?
to
Future Payments Technology
• Will the Technology be Adequate?
• Are There Cutting-Edge Technologies With
Payments System Implications?
• Will Current Technology be Rendered Obsolete?
George Benston
University of Rochester
M. Alan B i s h o p
DBA Systems, Inc
Edwin B. C o x
Arthur D. Little, Inc.
J o h n C. Elliott
Automated Data Processing, Inc.
William F. F o r d
Federal Reserve Bank of Atlanta
Paul M. Horvitz
University of Houston
J a c k M. Meckler
Wachovia Bank & Trust Company, N.A
Peter Merrill
Peter Merrill Associates
R o b e r t W. P r i c e
Trans Data Corp.
W i l l i a m M. R a n d l e
Florida I n t e r c h a n g e G r o u p
Bernell K. S t o n e
Mills B. L a n e Professor.
Georgia Tech.
Fred A. Tarpley, Jr.
Advanced Technology Development Center
Georgia Tech.
David L. Van T a y l o r
Bank Administration Institute
Dimitri Vittas
C o m m i t t e e of L o n d o n
Clearing B a n k e r s
G e o r g e Warfel, Jr.
SRI International
G e o r g e C. White
White Papers, Inc.
Linda Fenner Z i m m e r
P a y m e n t s Services C o r r e s p o n d e n t
Chart 1.
1982
D i s t r i b u t i o n of
By another measure—the number of large
service companies' headquarters—this pattern
of concentration in certain states is repeated.
Of Fortune magazine's 500 largest service corporations, the Southeast in 1982 claimed 8
percent, up from 3.3 percent of the t o p 300
counted by Fortune 10 years earlier. The region's
share of service companies is higher than its
share of t o p manufacturing firms: only a b o u t 4
percent of the Fortune 500 are located in the
Southeast. These large service corporations
t e n d t o concentrate in Florida and Georgia,
w h i c h together had almost two-thirds of the
regional total yet slightly more than half the
e m p l o y m e n t 2 The location of large corporation
headquarters is important t o the service sector
because they t e n d t o include many service
functions and to attract i n d e p e n d e n t service
companies.
Employment
Southeast
Trade
Other
26.2%
United
Finance 6.0%
Services
22.9%
21.2%
States
T r a d e
2 3
0 %
Transportation
Government
5.6%
17.6%
Other 26.6%
for the relatively large percentage of transportation jobs in these states: 6.1 percent in
Florida, 6.6 percent in Georgia, and 8 percent
in Louisiana
Concentration ratios measure the degree of
geographic over- or underrepresentation. Simply
stated, these ratios, also t e r m e d " l o c a t i o n quotients," compare a region's share of some
e c o n o m i c variable, such as service jobs, w i t h
the share of that variable in another, usually
larger, area. Concentration ratios of less than
one indicate underrepresentation; those of more
than one, overrepresentation. For example, if
Florida has 40.5 percent of the Southeast's
miscellaneous service jobs but only one-third
of its total nonfarm employment, we can determine its degree of d e p e n d e n c e on this sector
by dividing 40.5 by 32.6. The result, 1.24,
indicates that Florida has about 24 percent
more miscellaneous service jobs than one would
expect if the Southeast were perfectly homogeneous in its e m p l o y m e n t composition. Table
1 illustrates the extent t o w h i c h southeastern
states except Florida are underrepresented in
most service jobs except government and transportation.
40
Service Jobs Remain
Concentrated in Large Cities
Service jobs are d i s t r i b u t e d unevenly in
another way: they t e n d t o be clustered around
cities. As Tables 2 and 3 demonstrate, the
standard metropolitan statistical areas (SMSAs)
of the Southeast claim a disproportionate share
of service jobs relative to their respective shares
of state e m p l o y m e n t It should be no surprise
that cities such as Tallahassee and Gainesville,
Florida and Baton Rouge, Louisiana enjoy high
levels of government e m p l o y m e n t since they
are state capitols or seats of large state universities. Similarly, w e w o u l d expect seaports
and d i s t r i b u t i o n centers such as M e m p h i s ,
Mobile, Savannah and N e w Orleans t o have
relatively high concentration ratios in transportation and trade. However, as Table 3 indicates,
urban concentration of service e m p l o y m e n t
extends b e y o n d the particular specialization
of certain cities.
Traditionally, services have been marketed
at the local level. A shoe manufacturer can ship
his products across the nation and even around
the w o r l d if d e m a n d is sufficient But a bootblack is restricted t o the market he can reach
physically. Not only personal but also most
business services, such as those offered by
service industries differs from most other states
' C o m p u t e d by t h e F e d e r a l R e s e r v e B a n k of A t l a n t a f r o m d a t a in Fortune,
J u n e 13, 1 9 8 3 , pp. 1 5 2 - 1 7 5 ; M a y 2, 1 9 8 3 ; pp. 2 2 6 - 2 5 4 ; J u l y 1 9 7 3 , p p
120-135.
JULY 1 9 8 3 , E C O N O M I C
REVIEW
T a b l e 1 . Employment Concentration Ratios by State and Major Service Sector
Ala.
Fla
Trade
.86
1.33
Transportation
.86
Ga
La.
Misa
Tena
.99
.97
.86
.92
1.01
1.98
1.32
.81
.77
.85
.72
.81
Finance
.80
1.13
.95
Service
.87
1.24
.88
.94
.82
.92
1.16
.88
1.06
1.02
1.21
.94
Government
S o u r c e : C a l c u l a t e d f r o m d a t a r e l e a s e d by s o u t h e a s t e r n S t a t e D e p a r t m e n t s of L a b o r o r E m p l o y m e n t S e c u r i t y
lawyers, architects and merchants, historically
have served a market d e f i n e d primarily by the
size of the surrounding community. Even the
largest airlines concentrate their operations in
hub cities: Delta in Atlanta, American in Dallas,
United in Chicago. Each carrier schedules most
of its origination, destination, or transfer flights
along w i t h ancillary facilities and staff, such as
hangars and mechanics, at one major airport.
Export-base theory is the c o m m o n e c o n o m i c
explanation of the urban concentration of services. Simply stated, it holds that cities are not
economically self-sufficient. They cannot raise
enough food locally to support their populations,
n o r d o most cities have the natural resourcesto
sustain their local economies. Consequently,
they must export to pay for the goods they
cannot p r o d u c e locally. M a n u f a c t u r e d goods
are one source of exports; services marketed to
the surrounding region are another. 3
A second explanation is designated by the
term "agglomeration." Certain large cities, like
New York, attract services because of their
already high concentration of related economic
activities. Stanback, for example, found a concentration ratio of 1.4 for producer services in
17 SMSAs w i t h a population of t w o million or
more. Daniels found a similar pattern in most
3
J o h n M. L. G r u e n s t e i n a n d Sally G u e r r a " C a n S e r v i c e s S u s t a i n a R e g i o n a l
Economy?", B u s i n e s s R e v i e w ( F e d e r a l R e s e r v e B a n k of Philadelphia),
July-August 1 9 8 1 , p p 15-24. T h e y a r g u e t h a t a s e r v i c e - b a s e d u r b a n
e c o n o m y is c o n g r u e n t w i t h e x p o r t - b a s e t h e o r y b e c a u s e s o m e services,
such as t h o s e p r o v i d e d by higher e d u c a t i o n a l institutions of t h e N o r t h e a s t
are e x p o r t e d
"Peter Daniels, S e r v i c e I n d u s t r i e s : G r o w t h a n d L o c a t i o n ( C a m b r i d g e :
C a m b r i d g e U n i v e r s i t y Press, 1982), pp. 3 7 - 4 2 .
5
l n 1981, t h e s h a r e of j o b s in N e w Y o r k C i t y a c c o u n t e d for by f i n a n c e w a s
FEDERAL RESERVE B A N K O F A T L A N T A
cities of Europe and Great Britain.4 This concept
might explain why corporate headquarters, including research and development as well as
finance, remain densely concentrated around
N e w York City. 5 The high degree of linkage
among certain services, particularly law, accounting
banking and insurance, accounts for the historical
tendency of such services to cluster in central
business districts and in central cities, such as
London, New York and Paris.
Finance is the most heavily concentrated
service sector in the Southeast (Table 2); its
concentration ratio is 1.21. Transportation and
miscellaneous services also are urbanized disproportionately. W i t h a concentration ratio of
0.97, government is underrepresented in the
region's SMSAs. The probable explanation for
this pattern is both demographic and political.
M u c h government employment is in public
elementary and secondary education, and teachers are distributed on the basis of school age
population, not overall employment. The population of many southeastern states, particularly
Mississippi, is younger and more rural than the
national norm.6 Only one-fourth of Mississippi's
residents live in cities of 50,000 or more; the
share in other southeastern states ranges from
45.3 in Alabama t o 52.3 in Louisiana 7 This
13.3 p e r c e n t n e a r l y a s l a r g e a s t h e 15.5 p e r c e n t s h a r e c o n t r i b u t e d by
m a n u f a c t u r i n g C o m p u t e d f r o m E m p l o y m e n t a n d Earnings, U. S. Deartm e n t of Labor, B u r e a u of L a b o r S t a t i s t i c s ( M a y 1982), p. 112.
P o p u l a t i o n E s t i m a t e s a n d Projections," S e r i e s P-25, No. 9 1 3 , U. S.
D e p a r t m e n t of C o m m e r c e , B u r e a u of t h e C e n s u s , ( M a y 1982), p. 2
7
" P o p u l a t i o n Profile of t h e U n i t e d States: 1981," P o p u l a t i o n Characteristics,
S e r i e s P-20, No. 3 7 4 , U. S D e p a r t m e n t of C o m m e r c e , B u r e a u of t h e
C e n s u s , S e p t e m b e r 1 9 8 2 , p. 12.
41
T a b l e 2. S M S A Employment C o n c e n t a t i o n Ratios by Major Service Industry
SMSAs
Transportation
Trade
Finance
Services
Government
Southeast
1.13
1.10
1.21
1.14
0.97
Alabama
1.18
1.11
1.23
1.19
0.97
Florida
1.03
1.01
1.01
1.02
0.97
Georgia
1.20
1.09
1.21
1.19
0.95
Louisiana
0.99
1.06
1.20
1.13
0.95
Mississippi
1.37
1.19
1.89
1.38
1.02
Tennessee
1.19
1.10
1.29
1.11
1.06
S o u r c e : C a l c u l a t e d f r o m d a t a in E m p l o y m e n t a n d E a r n i n g s , U. S. D e p a r t m e n t of L a b o r , B u r e a u of L a b o r S t a t i s t i c s ! M a y 1 9 8 2 ) , p p 1 0 6 - 1 1 7 .
distribution creates a larger demand for teachers
in rural areas and boosts the importance of
government employment outside cities.
Second, the South plays host to a disproportionate share of military bases, most of
which are located outside SMSAs. (After the
Civil War and Reconstruction, the Republican
Party garnered virtually no support in the South
and the region became solidly Democratic As a
result, southern Senators and Congressmen
experienced less interparty turnover than their
northern counterparts. The seniority system
made it easier for them to become chairmen of
important congressional committees. As such,
they were positioned to influence decisions
regarding the location of military bases as well
as public works projects. Furthermore, the
executive branch since the 1930s supported
policies designed to eliminate the dramatic
income differences between the South and
other sections of the country.)
cities that size. Since Mississippi is one of the
nation's most rural states and Florida is much
more urban than its neighbors, one can speculate
that, as the region develops economically and
becomes more urbanized, southeastern cities'
disproportionate share of service jobs will
diminish.
Recent technological developments increase
the probability of this sort of structural change
because many service jobs now involve the
exchange of information. Insurance companies
no longer need to house records at a central
location; computers and communications make it
feasible to operate such facilities from remote
locations away from high-rent central business
districts. Although labor-intensive jobs still must
be performed near population centers, suburbs
and smaller cities near SMSAs have already
drawn many service businesses as evidenced by
the growth of commercial office space in the
suburbs of Atlanta and other southeastern cities.8
Table 2 shows that Mississippi's metropolitan
areas are most overrepresented in their share of
service employment, while Florida's are most
nearly proportional. More than three-quarters
of all Floridians live in cities of 50,000 or more,
whereas only 61.4 percent of Americans live in
The Growth Record of Services
" P e t e r Daniels, op. cit., m a i n t a i n s t h a t in m o s t w e s t e r n e c o n o m i e s
c o n s u m e r services, particularly retail trade, f o l l o w p o p u l a t i o n s h i f t s t o t h e
s u b u r b s : c o s t p r e s s u r e s a n d t e c h n o l o g i c a l a d v a n c e s in c o m m u n i c a t i o n
s t i m u l a t e p r o d u c e r s e r v i c e s t o m o v e o u t of c e n t r a l b u s i n e s s districts, but
i n t e g r a t i o n c o n s t r a i n s t h e d i s t a n c e of r e l o c a t i o a p a r t i c u l a r l y a m o n g law,
a c c o u n t i n g i n s u r a n c e , a n d banks.
42
Over the last decade, finance and transportation have constituted the fastest growing
service industries; yet, because of their large
bases, trade and miscellaneous services have
JULY 1983, E C O N O M I C
REVIEW
T a b l e 3 . Concentration Ratios of Service Employment in Southeastern SMSAs
Alabama
Birmingham
Huntsville
Mobile
Montgomery
Tuscaloosa
1.10
1.11
1.00
1.08
1.18
1.11
Georgia
Albany
Atlanta
Augusta
Columbus
Macon
Savannah
1.09
0.96
1.13
0.93
0.96
1.11
1.06
Florida
Bradenton
Daytona Beach
Fort Lauderdale
Fort Myers
Gainesville
Jacksonville
Lakeland
Melbourne
Miami
Orlando
Panama City
Pensacola
Sarasota
Tallahassee
Tampa
West Palm Beach
1.01
0.94
1.04
1.01
1.03
1.11
1.04
0.86
0.90
1.02
1.01
1.04
1.01
1.02
1.15
0.99
0.98
Louisiana
Alexandria
Baton Rouge
Lafayette
Lake Charles
Monroe
New Orleans
Shreveport
1.05
1.15
1.03
0.94
0.87
1.06
1.11
0.97
Mississippi
Jackson
1.23
Tennessee
Chattanooga
Knoxville
Memphis
Nashville
1.11
1.01
1.05
1.20
1.10
Source: C a l c u l a t e d f r o m d a t a in E m p l o y m e n t a n d E a r n i n g s , U.S. D e p a r t m e n t of Labor, B u r e a u of L a b o r S t a t i s t i c s ( M a y 1982), pp. 1 0 6 - 1 1 7 .
created more new jobs (Table 4). The southeastern j o b growth in most service industries is
higher than the corresponding national rate.
Moreover, w i t h the exceptions of finance and
social and professional services, this pattern
prevails in all District states, not just Florida,
Georgia or Louisiana In the last few years,
though, growth has slowed in most of the
services (see Chart 2). In 1982 southeastern
government e m p l o y m e n t declined slightly. Although services remain less vulnerable t o economic downturns than manufacturing and construction, their rate of growth slows. Urquhart
found that in the seven postwar recessions
service e m p l o y m e n t slowed to an average 2.1
percent growth rate. 9
Within this category, restaurants, food stores,
health care, social services (including day-care
centers) and various business services, including
legal and other professional services, have
enjoyed the highest and most consistent rates
of job growth; personal services and general
merchandise stores have had the poorest record
(see Table4). Health care and restaurants have
created the most new jobs over the period. In
terms of relative growth, miscellaneous services
"•Michael U r q u h a r t "The Services Industry: Is It Recession-Proof?" M o n t h l y
Labor Review, 1 0 4 , 10 ( O c t o b e r 1981). pp. 15.
FEDERAL RESERVE B A N K O F A T L A N T A
enjoyed the largest increase in share, from 16 to
19 percent in the Southeast (see Table 5).
Is Job Growth Matched by Other
Measures of Economic Performance?
Although service industries have proven an
important source of jobs during the last decade,
their e c o n o m i c performance is less impressive
when measured in terms of output and income.
Services accounted for a b o u t two-thirds of
gross national product (GNP) but almost threequarters of jobs in 1 982. Since service markets
are more local, it may be appropriate to exclude
o u t p u t generated by international trade and
consider only gross domestic p r o d u c t (GDP).
However, services constitute only 68.5 percent of
GDP. C o u n t i n g construction but not transportation, c o m m u n i c a t i o n and public utilities, the
postwar growth record of services is less rapid
in terms of GNP share than of e m p l o y m e n t :
from 1 948 t o 1 978 the service sectors share of
GNP rose from 53.6 percent t o 57.1 percent,
whereas its share of e m p l o y m e n t rose from 48
percent to 62.7 percent. 1 0 Moreover, in terms
,0
L o r a S Collins, " T h e S e r v i c e E c o n o m y , " A c r o s s t h e B o a r d N o v e m b e r
1 9 8 0 , pp. 17-22.
43
Chart 2. Southeast Service Employment
Annual Percent Change, 1973-1982
T a b l e 4. Average Annual Percent C h a n g e a n d Net Increase
in S e r v i c e E m p l o y m e n t 1 9 7 3 - 8 0 *
Industry
of Gross Domestic Product, there has been
little change in the distribution of goods and
services since 1950. 11 A similar disparity pertains
to profits, national income and personal income
(see Chart 3). In general, transportation and
finance account for a much larger share of the
nation's output, profits and income than of
jobs; miscellaneous services, trade, and government contribute a noticeably smaller share
(see Chart 3).
Most of these measures are unavailable at
the state or regional level because of sampling
problems. (It w o u l d be costly to collect data
from samples large enough to be valid at the
state level.) The economic census reports
receipts by state every five years, but it does
not cover all the service sectors under study
here. Furthermore, the most recent data are
from 1 977; data for the 1982 census are only
now being collected. State sales tax receipts
are subject to similar problems of comparability.
Even growth is difficult to trace.
Available comparable data on personal income
computed from the shares of personal income
contributed by each service sector to the southeastern economy make it apparent that the
national pattern is equally applicable to the
Southeast miscellaneous services, government
and trade contribute a larger share of jobs than
of personal income, even when transfer payments and other non-wage forms of income are
"Fuchs, op
cit
44
Total N o n f a r m Employment
T r a n s p o r t a t i o n & Utilities
Communications
Electricity and Gas
Other (primarily trans)
Wholesale Trade
Retail Trade
General Merchandise
Food Stores
Apparel Stores
Restaurants
Total Trade
F i n a n c e , lnsur.,R E
Insurance Carriers
Insurance Agents
R e a l Estate
Other
Services
Hotels
Personal
Business
Auto Repair
Misc. R e p a i r s
Amusements
Health
Legal
Education
Social Services
Nonprofit O r g s
Misc Professional
Government
S E
2.8
2.5
1.1
1.1
2.0
2.3
2.7
-1.5
4.0
1.6
7.5
2.6
4.0
4.3
5.4
1.7
5.6
5.7
4.3
-0.2
6.0
4.6
5.9
5.2
3.9
7.5
2.8
9.0
5.0
6.9
3.9
U.S
2.1
2.4
1.9
3.1
2.5
2.6
2.8
-0.3
3.3
1.2
6.4
2.8
3.8
2.7
4.8
2.9
4.8
5.4
2.9
-0.1
6.4
4.5
5.3
5.2
6.0
7.4
4.8
10.1
3.4
7.8
1.6
N e t G a i n in
S E 1973-80
1,516,416
89,041
10,606
10,939
60,942
90,768
310,722
-30,328
68,679
1 2.439
211,351
401,490
137,649
31,967
17,219
12,325
89,078
608,467
31,649
-2.594
102.570
18,805
14,645
31,947
257,251
22.800
17,873
43,924
35,895
31,844
534,600
$
S o u r c e : C o m p u t e d f r o m d a t a in a n n u a l e d i t i o n s of C o u n t y B u s i n e s s
P a t t e r n s U . S D e p a r t m e n t of C o m m e r c e B u r e a u of C e n s u s , 1 9 7 3 - 8 0 ;
g o v e r n m e n t e m p l o y m e n t is c o m p u t e d f r o m r e l e a s e s of S t a t e a n d U . S L a b o r
Departments
»
>
excluded (see Table 6). SMSA concentration
ratios for service receipts follow a pattern
much like that of service e m p l o y m e n t Mississippi's metropolitan areas and Louisiana's are
overrepresented more than other southeastern
cities (see Table 7). Florida's (and Louisiana's)
SMSAs are least overrepresented although not
in educational and social services.
O n e partial measure can be made by comparing the Southeast's leading service companies with other Fortune 500 service companies. As illustrated in Table 8, large southeastern service companies tend to perform
below the Fortune average for their respective
industry. Two exceptions are transportation
firms' operating revenues and diversified services' net income, which are above average.
One reason sales and net income are less than
>
I
)
>
>
J U L Y 1 9 8 3 , E C O N O M I C R E V I E W,m
*
'
f
T a b l e 5 . Relative C h a n g e in Service-Employment, 1 9 7 3 - 8 2
(percent)
Southeast
1973
1982
6.3
6.2
Transportation
Trade
Percent
Change
United States
1973
1982
-0.1
6.1
5.6
Percent
Change
(-0.5)
22.6
23.6
1.0
21.6
22.9
1.3
Finance
5.2
5.7
0.5
5.3
6.0
0.7
Services
16.2
19.6
3.4
16.7
21.2
4.5
Government
18.3
18.8
0.5
17.9
17.6
Total Services
68.6
73.8
5.3
67.7
73.3
the Fortune mean is that a few giants skew the
average. Southeastern companies' profit margin
ranks above average except in transportation
and utilities. Another positive sign is that the
majority of southeastern firms ranked above
the median in the ten year growth rate in
earnings per share. Judging by these indicators,
large service companies in the Southeast appear to be growing rapidly and providing a
return ( o n revenues) that compares favorably
with their counterparts elsewhere.
What Factors Underlie
This Record of Performance?
Explanations for the growth of services industries come from a variety of disciplines and
professions, ranging from economics and sociology t o geography and journalism. 1 2 O n e early
and straightforward e c o n o m i c explanation is
based on Christian Engel's law of income elasticity: as household income increases, the proportionate amount spent on necessities such
as f o o d diminishes. In the 1930s and 1940s
Colin Clark and Allen G. B. Fisher, working
independently, applied this nineteenth century
microeconomic principle to the e c o n o m y in
aggregate t o explain the e c o n o m i c shift from
" S o c i o l o g i s t D a n i e l Bell w a s o n e of t h e first t o b r i n g a t t e n t i o n t o t h i s
s t r u c t u r a l m a c r o e c o n o m i c c h a n g e . S e e Bell, T h e C o m i n g of PostIndustrial S o c i e t y : A V e n t u r e in S o c i a l F o r e c a s t i n g ( N e w Y o r k B a s i c
Books, 1973), pp. 1 2 3 - 1 6 4 . S o c i a l critic Alvin T o f f l e r has e x t e n d e d p u b l i c
FEDERAL RESERVE B A N K O F A T L A N T A
(-0.3)
5.7
agriculture and extraction (the primary sector)
t o manufacturing (the secondary sector). To
some extent the more recent shift to services
(the tertiary sector) is attributable to similar
p h e n o m e n a As family income rises, a larger
share of expenditures is allocated for services:
not only personal services such as dry cleaning
but a variety of consumer services—restaurants,
travel, recreation, education, and health care.
This explanation can be applied as well to
the increase in public services. Some social
scientists maintain that rising and widespread
affluence has effected a shift from material t o
nonmaterial values; we increasingly prefer higher
education, a cleaner o u t d o o r environment, a
less hazardous work-place and safer products
over increases in individual material wealth;
w e also want a more egalitarian distribution of
material values for women, blacks and ethnic
minorities. Thus, insurance and pension services
grew in importance t h r o u g h o u t the postwar
period as employees sought benefits to increase
their security in sickness and during retirement,
and d e m a n d for recreational services grew in
response to increased leisure time that workers
soughtas a s u p p l e m e n t t o wage increases. This
value shift also engendered rapid growth in
public services, including regulation to achieve
a healthier work and o u t d o o r environment,
a w a r e n e s s of t h i s e c o n o m i c c h a n g e a s w e l l a s r e l a t e d political, e d u c a t i o n a l
a n d s o c i a l c h a n g e s S e e e. g„ h i s e x c e r p t in G r o w t h I n d u s t r i e s in t h e
1 9 8 0 s ; P r o c e e d i n g s of a C o n f e r e n c e S p o n s o r e d b y t h e F e d e r a l Reserve
B a n k of A t l a n t a W e s t p o r t , C o n n e c t i c u t : G r e e n w o o d Press, ( f o r t h c o m i n g ) .
45
Chart 3 . Services Industries' Share of GNP, National
I n c o m e a n d Profits
Table 6. 1982
and
S e r v i c e s S h a r e of P e r s o n a l
of
P e r c e n t of
Earnings
Jobs
Percent
Nonfarm
Sector
S.E.
U.S.
S.E-
US.
18.1
16.6
23.6
22.9
8.9
5.7
7.9
6.2
5.6
6.0
5.7
6.0
17.8
18.5
19.5
21.2
Government
17.9
16.6
18.8
17.6
Total
68.4
65.6
73.8
73.4
Trade
Transportation
Finance
Services
Transportation
Trade
Finance
Service
Government
Income
Employment
Services
S o u r c e : C o m p u t e d f r o m d a t a r e l e a s e d q u a r t e r l y by B u r e a u of E c o n o m i c
A n a l y s i s , U. S. D e p a r t m e n t of C o m m e r c e a n d S u r v e y o f C u r r e n t
B u s i n e s s , ( A u g u s t 1 9 8 2 ) pp. 6 2 - 7 1 .
S o u r c e : C o m p u t e d f r o m d a t a in S u r v e y of C u r r e n t B u s i n e s s , U. S
D e p a r t m e n t of C o m m e r c e , B u r e a u of E c o n o m i c A n a l y s i s
(July 1982), pp. 78, 7 9 , 9 3 .
and in related business and professional services,
such as health care and law.
However, other factors have also contributed to the growth of the service sector.
Demographic patterns account for some of the
rise in public sector employment, particularly
education. The postwar "baby boom" created a
bulge in the population distribution. As this age
group passed through elementary and secondary
school, the demand for teachers grew. Moreover,
in the last two to three decades the marketplace
for American products has grown from national
to worldwide proportions. Increasing market
size has rendered larger firms more practical.
Economies of scale entail more specialization
and division of labor but also more coordination.
Consequently, accounting, finance, advertising,
and other business services have grown rapidly
both inside and outside companies. 13 In the
goods sector the proportion of service jobs has
risen from 19 percent in 1942 to 32 percent in
1982. 14
Fuchs denies that the Clark-Fisher hypothesis
accounts for the shift from manufacturing to
services.15 He argues that increases in the
female participation rate may account for onefourth of the annual rate of increase in services
since 1950. 16 As more w o m e n work, activities
such as laundry and food preparation that
13
S t a n b a c k , et al, 1 9 8 1 , p p 1 2 - 1 3 .
"•Alfred Malabre, Jr., " S e n / i c e J o b s K e e p E x p a n d i n g in R e c e s s i o n , M a k e
U p Ever L a r g e r S h a r e of W o r k Force," W a l l S t r e e t J o u r n a l , J a n u a r y 15,
46
traditionally have been provided within the
household are purchased in the marketplace.
Using Bureau of Labor Statistics (BLS) data on
consumer expenditures, Fuchs found that when
wives work, the share of the household budget
allotted to services rose by 10 percent and the
share allotted t o goods fell by 3-4 percent
Moreover, services represent a primary source
of jobs for female entrants into the labor force.
W o m e n comprise a larger percentage of employees in almost all service industries except
transportation and utilities.
Fuchs also addresses the apparent anomaly
between the growth of services in terms of
employment and in other measures such as
output and income. More units of labor are
required to produce an additional dollar's worth
of services than of manufactured products or
foodstuffs. Consequently, service industries
add jobs faster than they add revenues, profits
or wages. Several factors explain the productivity
lag of services. Substituting capital for labor,
the primary method of increasing productivity,
is not feasible in many personal services. Eating
at a restaurant cannot be automated beyond
certain limits without undermining the very
reasons consumers choose to dine out rather
than cook a meal, or eat a ready-made one, at
home. Many services, ranging from haircuts to
concerts, require a fairly fixed period of time.
1982, p 44.
15
Fuchs, o r c / i , p. 16.
' 6 l b i d , pp. 2 0 - 2 5 .
JULY 1 9 8 3 , E C O N O M I C
REVIEW
T a b l e 7. S M S A Receipts C o n c e n t r a t i o n Ratios by State and S e l e c t e d Services
State
S e l e c t e d Services
Alabama
1.19
Hotels
1.28
Dental
1.27
Florida
1.17
Personal Services
1.15
Business Services
1.32
Georgia
1.22
Auto Repairs
1.23
Legal
1.32
Louisiana
1.08
M i s c e l l a n e o u s Repairs
1.17
Engineering
1.38
Mississippi
2.53
Recreation
1.36
Education
1.28
Tennessee
1.26
Health
1.22
Social Services
1.09
S o u r c e s : C o m p u t e d f r o m r e c e i p t s d a t a in 1 9 7 7 C e n s u s of S e r v i c e I n d u s t r i e s , G e o g r a p h i e s A r e a S e r i e s , U. S. D e p a r t m e n t of C o m m e r c e ,
B u r e a u of C e n s u s a n d f r o m S M S A e m p l o y m e n t in S u p p l e m e n t t o E m p l o y m e n t a n d E a r n i n g s , S t a t e s a n d A r e a s D a t a f o r
1 9 7 7 - 8 1 , U. S. D e p a r t m e n t of L a b o r , B u r e a u of L a b o r S t a t i s t i c s , S e p t e m b e r 1 9 8 2 .
Some observers contest this view. 17 They
maintain that eventually technological changes
can be applied to services. Until fairly recently,
for example, the demand for e n t e r t a i n m e n t theater and music—was satisfied through the
services sector by attending plays and concerts.
Since each play could reach only local audiences,
aggregate demand for this type of recreation
could support a relatively large force of actors
and related workers. The advent of phonographs,
movies and television satisfied demand for this
type of entertainment through the manufacturing
sector. By purchasing stereos, movie tickets
and TVs the modern consumer satisfies his
demand for entertainment; this demand supports an occupational mix more heavily weighted
toward producers of equipment Those actually
providing the entertainment service constitute
a relatively smaller portion of this segment of
the labor force.
Another explanation for lagging productivity
in services pertains to measurement The BLS
measures productivity for 16 service industries
that account for about one-third of all service
e m p l o y m e n t These 16 are drawn from transportation, communication, public utilities, retail
trade, lodgings and laundry. More specifically,
these measures account for about three-fifths
of transportation jobs, four-fifths of communi-
g., J o n a t h a n G e r s h u n y , A f t e r I n d u s t r i a l Society? T h e E m e r g i n g SelfS e r v i c e E c o n o m y (Atlantic H i g h l a n d s , N. J,: H u m a n i t i e s P r e s s 1978).
F E D E R A L RESERVE B A N K O F A T L A N T A
cation jobs, but only 13 percent of business
and professional services. The BLS is developing
measures for banking, insurance, and hospitals.
However, the Bureau expects work on medical
and educational services to proceed slowly
because of conceptual problems. The intrinsic
problem is exemplified most clearly in the case
of government. Because most government services are not "sold," there is no independent
measure of output against which to measure
change in labor input. 1 8
Among those service industries for which
productivity measures exist, some exhibit high
growth rates. Not surprisingly, t w o capitalintensive services, telephones and air transportation, boast the best records. From 1973-1980
their productivity increases averaged 7 percent
and 4.3 percent respectively, well above average
productivity changes in this period. The next
highest was gasoline service stations, with an
annual average growth rate of 3.1 percent
Computers may provide the basis for expanded
productivity growth in other service industries,
particularly business services. For example, in
engineering and architecture, computer-aided
design renders it economically feasible to create,
test, and alter a much larger number of designs
and plans because computers can perform
such tasks as drawing and calculating stress
' « J e r o m e A M a r k , " M e a s u r i n g P r o d u c t i v i t y in t h e Services," M o n t h l y L a b o r
Review. ( J u n e 1982), p p 3-8.
47
T a b l e 8. Largest S o u t h e a s t e r n Service C o m p a n i e s
Company
Sales
$ mil.
Net Income
$ mil.
Profit M a r g i n
Net I n c o m e / S a l e s %
Earnings Per Share
Compound Annual
Avg. G r o w t h Rate
1972-82*
25.62
Diversified Services
Hospital Corp. of America,
Nashville
2,976.9
171.9
5.8
Malone & Hyde, Memphis
2,192.9
27.8
1.3
12.75
Ryder System,Miami
2,075.9
82.6
4.0
12.89
G e n u i n e Parts, Atlanta
1,936.5
100.2
5.2
13.96
Holiday Inns, M e m p h i s
Ocean Drilling & Exploration,
1,755.3
76.0
4.3
3.46
979.6
191.9
19.6
27.38
769.3
12.4
1.6
14.22
46.0
8.7
13.02
New Orleans
Blount, M o n t g o m e r y
Rollins, Atlanta
526.5
S o u t h e a s t e r n Average
1,651.4
89.3
5.4
Average of Top 1 0 0
1,905.4
61.5
3.2
Winn-Dixie Stores, Jacksonville
6,764.5
103.5
1.5
Publix Super Markets, L a k e l a n d
2,506.9
46.8
1.9
Retail T r a d e
10.87
*
Jack Eckerd, Clearwater
2,080.2
70.7
3.4
10.04
Service Merchandise, Nashville
1,195.3
31.6
2.6
34.93
S o u t h e a s t e r n Average
3,136.7
4,923.2
63.1
2.0
88.7
1.8
Eastern Air Lines, Miami
3,769.2
(74.9)
Delta Air Lines, Atlanta
3,617.5
20.8
0.6
803.9
78.4
9.8
466.3
71.5
Average of Top 5 0
Transportation**
Federal Express, M e m p h i s
Tidewater, N e w Orleans
—
15.3
Southeast Average
2,164.3
23.9
Average of Top 5 0
1,556.8
46.0
*
(7.22)
*
21.87
Utilities***
S o u t h e r n Company, Atlanta
12,301.2
472.3
13.5
2.39
Middle South Utilities
N e w Orleans
10,364.7
310.6
12.5
1.64
Florida Power & Light, M i a m i
6,850.6
301.1
13.6
7.39
C o n t i n e n t a l Telecom, Atlanta,
3,864.6
150.5
14.1
3.79
Sonat, B i r m i n g h a m
3,139.5
204.6
18.0
15.65
S o u t h e a s t e r n Average
7,304.1
287.8
3.9
Average of Top 5 0
8,964.0
404.5
4.5
48
J U L Y1 9 8 3 , E C O N O M I C
REVIEW
Company
Sales
$ mil.
Net Income
$ mil.
Profit Margin
Net Income/Sales'
Earnings Per Share
Compound Annual
Avg. Growth Rate
1972-82*
C o m m e r c i a l Banking***
Southeast Banking Corp., Miami
7,274.3
52.6
12.2
5.76
6,932.1
56.8
14.6
9.71
6,004.6
50.0
34.2
15.1
11.2
4.46
5,004.
4,510.6
52.5
20.6
15.33
14.8
12.42
7.9
5.78
12.9
7.25
13.2
9.69
Barnett Banks of Florida,
Jacksonville
Citizens & Southern Georgia
Corp., Atlanta
Sun Banks of Florida, Orlando
Trust Company of Georgia,
Atlanta
First Atlanta Corp., Atlanta
Florida National Banks of
4.480.0
3,498.5
Florida, Jacksonville
First Tennessee National Corp.,
Memphis
AmSouth Bancorp., Birmingham
Southeastern Average
3.392.1
3,255.5
4,928.0
13,558.9
American Family, Columbus
21.3
26.8
31.9
40.5
13.6
12.0
74.6
Average of Top 100
Diversified Finance***
Freedom Savings & Loan
Association, Tampa
Citizens Savings Financial,
Miami
38.4
5.90
1,320.4
(7.4)
1,302.7
1.6
5.6
1,104.1
24.7
11.7
8.96
First City Federal Savings &
Loan Association, Bradenton
Naples Federal Savings & Loan
Association, Naples
Gulf United, Jacksonville
Torchmark, Birmingham
American Savings & Loan
Association of Florida, Miami
Southeastern Average
Average of Top 100
795.3
(3.9)
783.7
1.7
3.4
3,248.4
101.0
15.8
6.04
3,036.9
79.4
12.3
17.83
2,305.6
(13.2)
1,737.1
23.0
5,513.4
52.6
3,147.6
243.2
10.8
10.0
Insurance***
National Life& A c c i d e n t
Nashville
Liberty National, Birmingham
1,752.6
90.3
Southeast Average
2,450.1
166.7
Average of Top 50
8,736.9
600.0
• N o t c o m p u t e d if l o s s o c c u r r e d in 1 9 7 2 o r 1 9 8 2
• • R a n k e d b y o p e r a t i n g r e v e n u e s ; m a r g i n m e a s u r e d by n e t i n c o m e a s p e r c e n t of o p e r a t i n g r e v e n u e s
* * * R a n k e d by assets, m a r g i n for utilities, banks, a n d d i v e r s i f i e d f i n a n c e m e a s u r e d by net i n c o m e a s p e r c e n t of e q u i t y
S o u r c e : F o r t u n e ( J u n e 13, 1 9 8 3 ) , pp. 1 5 2 - 1 7 3 .
FEDERAL RESERVE B A N K O F A T L A N T A
49
factors much more quickly than a staff of
artists, draftsmen and clerks.
Application of scale economies and modern
management techniques provides another
potential source of productivity growth in the
services sector. In health care, for instance,
soaring costs have given rise to hospital management corporations, such as Hospital Corporation
of America and Humana. These "for-profit"
companies attempt to operate hospitals in a
cost-efficient and hence more profitable manner.
Although only 1,000 of the nation's 7,000
hospitals now operate for profit investor-owned
hospitals represent the fastest growing sector
of the health care industry. 19 These are concentrated in the South. In the Northeast, attitudes toward health care are influenced by a
tradition of philanthropy. In the South, population expansion and economic growth have
combined with a popular attitude more favorable
toward profit-based health care t o foster rapid
growth of such institutions. 2 0 W h a t e v e r the
reason, this segment of the health care industry
is growing rapidly.
What Are the Implications
for the Southeast?
The services' relatively poor performance in
regard to GNP and other output measures of
the service sector augurs poorly for the future of
areas dependent on these industries. Many service
businesses generate too low a level of profits t o
finance their own future growth; even their
borrowing capacity is constrained by low profitability. Because the Southeast traditionally has
been considered a capital importer, it finds the
problem of funding economic expansion of
particular concern. However, the Southeast's
edge in transportation and Florida's strength in
finance are promising exceptions since both of
these industries have strong records of profitability and income, notwithstanding current
financial problems in the airline industry.
Second, the service sector is too concentrated
in cities and in certain states to absorb, without
some dislocation, the slack in labor markets
occurring as a result of foreign competition in
textiles and apparel. The mills closing permanently are often in rural counties of Tennessee,
,9
Georgia and Mississippi, not near serviceoriented cities, like Atlanta, or urbanized states,
like Florida
The service industry least concentrated in urbar,
areas is government, and j o b growth in the
public sector is regarded widely as entering a
period of secular decline. It is difficult to
determine whether values have actually begun
t o reverse from the 1970s, but reducing the
federal government's role has been a recurring
presidential theme for almost a decade under
both Republican and Democratic administrations. Furthermore, it is likely that rapid
growth in government probably is over for the
foreseeable future if for no other reason than
saturation: both benefits and regulations have
been implemented about as broadly as possible.
The related level of government employment
may not decline dramatically, but it is unlikely
t o increase substantially until another major
change in political values occurs. Recent increases in federal defense spending have done
little to alter personnel levels at military installations; their effect in the Southeast has been
felt primarily in manufacturing, especially in
high-technology electronics production.
Third, even if displaced workers relocate, the
service industries they are most likely t o enter
are characterized by low-skilled, low-paying,
part-time jobs—restaurants, hotels, grocery
stores and other retail trade establishments. In
1982, hourly earnings averaged $6.22 in trade
and $6.91 in services c o m p a r e d w i t h $8.50 in
manufacturing and $7.67 in the private sector
generally. Because a relatively large portion of
workers in textile and apparel mills are women,
and since w o m e n are overrepresented in the
many service industries, such a transition is
more likely than one leading into more maled o m i n a t e d service industries. Although figures
are not available at the state level, nationally
w o m e n are overrepresented in the service
sector.Women held 43.5 percent of all jobs in
1982 but 50.5 percent of all retail trade jobs,
59.4 percent of service j o b s ' a n d 47.9 percent
of government jobs. The only exceptions to
this pattern are in transportation and utilities,
wholesale trade retail food stores, repairs, recreation, and business and professional services,
20
U . S. D e p a r t m e n t of C o m m e r c e , B u r e a u of I n d u s t r i a l E c o n o m i c s , 1 9 8 3
U. S. I n d u s t r i a l Outlook, J a n u a r y 1 9 8 3 , p. 5 2 - 7 .
50
T h o m a s W. M a d e r " H e a l t h S e r v i c e Markets," R e s e a r c h R e p o r t 6 4 7 , S R I
International, F e b r u a r y 1 9 8 1 , p. 10.
JULY 1983, E C O N O M I C
REVIEW
in which the proportion of w o m e n is less than
or equal to their proportion of total employment
The faster growing, higher wage service industries, such as transportation, accounting, and
engineering require more advanced educational
training and higher skill levels than textile and
apparel production workers typically possess,
and they have not absorbed w o m e n entrants
to the labor force as quickly as other service
industries. Such a structural change in the
composition of southeastern e m p l o y m e n t will
do little to narrow the gap in personal income
between this region and the nation. Except in
more prosperous Florida, per capita personal
income in southeastern states ranges from 71
percent of the United States norm in Mississippi
to 91 percent in Louisiana. 21
Fourth, there is at least theoretical reason to
believe services grow in tandem with expansion
of goods production. Since most services cannot
be exported, their prosperity cannot be sustained
without strength in the local economy's goods
sector. 22 Thus, areas w i t h declining or weak
industrial sectors cannot simply substitute service jobs for manufacturing jobs. Employment
trends in Tennessee support this argument.
The past t w o recessions have affected that
highly industrial state severely because Tennessee's industries are oriented toward housing
and autos and hence quite credit sensitive. In
this economic environment trade e m p l o y m e n t
has actually declined, while it has c o n t i n u e d to
grow or at least hold steady in other regions. A
similar pattern obtains in Tennessee's finance
industry, w h i c h elsewhere is a rapidly growing
j o b sector.
extensive meeting exhibition and lodging facilities have created a c o n v e n t i o n industry that
attracts a n a t i o n w i d e market and provides
employment for an estimated 81,000 people. 24
O n e indication of its e c o n o m i c impact is that
the five major d o w n t o w n hotels and the t w o
trade marts accounted for 14 percent of the
total property tax collected in Atlanta in 1981. 25
Of course, tourism cannot be d e v e l o p e d out of
nothing, but other areas of the Southeast, such
as Tennessee, have learned t o market their
natural attractions or t o develop commercial
attractions to benefit from the large v o l u m e of
pass-through traffic destined for Florida The
stateof Mississippi has a p p r o p r i a t e d $4 million
to enable its tourist industry t o take advantage
of the 1984 W o r l d Exposition in neighboring
Louisiana 2 6
Yet problems of excess supply threaten t o
d a m p e n the area's convention growth. Many
cities, such as Washington, D. C. and Knoxville,
Tennessee, have enlarged their convention
facilities or o p e n e d new ones. Established
southeastern convention centers, such as Miami
Beach, Atlanta and New Orleans, face increasing
competition. The n u m b e r of hotel rooms in
Atlanta, O r l a n d o and other cities has been
growing rapidly and should nearly d o u b l e in
some markets in the next three years. The
result is likely to be lower occupancy rates
during the adjustment period despite improved
economic conditions.
Fortunately for the Southeast, some services
can be exported. M i a m i has emerged as an
important center of international finance and
trade. Tourism provides not only as much as 1 7
percent of Florida's jobs but more than $18
billion in expenditures and almost $1 billion in
tax revenues derived largely from nonresident
visitors. 23 In Atlanta a modern airport and
In the longer term, technological changes
should increase the likelihood of greater dispersion of services, especially those based on
exchange of information and thus amenable t o
c o m p u t e r applications. Still, the rapid growth
of commercial office space alongthe perimeter of
Atlanta and other large cities indicates that
suburbs, not remote rural counties, are taking
the lead in attracting such operations. Moreover,
these same technological changes may accelerate the substitution of capital for labor and
hence diminish employment growth in services.
^ C a l c u l a t e d f r o m d a t a in Survey of C u r r e n t Business, ( A u g u s t 1982). pp.
5 5 a n d 57.
" E x p o n e n t s of t h i s v i e w include: W i l l i a m H. M i e r n y k , " T h e C h a n g i n g
S t r u c t u r e of t h e S o u t h e r n E c o n o m y , " T h e E c o n o m i c s of S o u t h e r n
G r o w t h e d i t e d by E B l a i n e L i n e r a n d L a w r e n c e K L y n c h ( R e s e a r c h
Triangle, N. C.: S o u t h e r n G r o w t h P o l i c i e s B o a r d 1977), pp. 3 5 - 6 3 ;
L a w r e n c e Falk a n d A d a m Broner, " S p e c i a l i z a t i o n in S e r v i c e I n d u s t r y
E m p l o y m e n t as a S t a t e Policy," G r o w t h a n d C h a n g e , 1 1 , 4 ( O c t o b e r
1980), pp. 1 8 - 2 3 ; a n d S t a n b a c K op. cit., 1 9 7 9 , pp. 8 8 ff. Falk a n d B r o n e r
c o n t e n d that s e r v i c e e m p l o y m e n t in t h e S o u t h g r e w m o r e rapidly t h a n
e l s w h e r e b e c a u s e of rapid g r o w t h in t h e w o r k i n g a g e p o p u l a t i o n ,
e s p e c i a l l y t h r o u g h m i g r a t i o n ; c o n s e q u e n t l y , if t h i s g r o w t h r e a c h e s a
plateau, g r o w t h in s e r v i c e j o b s s h o u l d a l s o taper. M i e r n y k f o u n d a
w e a k e n e d relationship between personal income and employment
c o m p o s i t i o n b e t w e e n 1 9 4 0 a n d 1 9 7 5 a n d c o n c l u d e d t h a t a s a t u r a t i o n is
o c c u r r i n g in t h e shift f r o m p r i m a r y t o s e c o n d a r y a n d t e r t i a r y s e c t o r s
" F i g u r e s c a l c u l a t e d f r o m F l o r i d a Visitor S t u d i e s , 1 9 8 1 , F l o r i d a Division of
Tourism, D e p a r t m e n t of C o m m e r c e a n n u a l r e p o r t
" A t l a n t a C o n v e n t i o n a n d V i s i t o r s Bureau.
" R e s e a r c h Atlanta, " T h e C o n v e n t i o n I n d u s t r y in Atlanta," S e p t e m b e r 16,
1 9 8 2 , p 13.
" T e l e p h o n e c o n v e r s a t i o n w i t h M i s s i s s i p p i O f f i c e of Tourism.
FEDERAL RESERVE B A N K O F A T L A N T A
51
Automated tellers may reduce the need for
staff and for branch offices in banks, for instance.
Electronic coding and advances in cable television and other forms of telecommunications
may eliminate jobs in retail trade.
The Outlook
for Southeastern Services
Which areas and sectors are likely to enjoy
the most growth? In addition to transportation
and tourism, discussed above, consumer services— particularly restaurants, food stores and
health care—and producer services, including
business and professional services and transportation, seem likely to grow the fastest.
Because of the large size of the trade sector,
even a low employment growth rate will produce
a comparatively large absolute increase in jobs.
Demographics favor growth on the output
side: the baby-boom generation is now in its
mid-30s and at a peak period of spending for its
own children, housing and entertainment.
However, families are smaller, and the current
disinflationary e n v i r o n m e n t may encourage
savings more than spending, at least for nonfood items. The Commerce Department predicts o n l y a 2 percent compound annual rateof
growth in consumer sales versus a 2.3 percent
yearly increase in real disposable income over
the next five years. Southeastern states with
high inmigration rates, such as Florida, should
do better because population growth, especially
migration-related growth, is closely tied to
increasing retail sales. Certain types of retail
outlets should also do better, though. For
example in 1983, the Commerce Department
expects a 9 percent increase in current dollar
sales of eating and drinking establishments
over 1982 levels. Since trade is "overrepresented" in the Southeast, this projection is of
particular regional significance. 27
Aside from retail trade, health care may
provide the greatest number of new jobs.
Future increases in health care appear less
likely to come through extension of coverage
of third-party and government-financed insurance than through aging of the population.
This trend is significant to the Southeast for
several reasons.
27
U. S. D e p a r t m e n t of C o m m e r c e , B u r e a u of I n d u s t r i a l E c o n o m i c s , 1 9 8 3
U. S. I n d u s t r i a l Outlook, J a n u a r y 1 9 8 3 , p p 4 8 - 3 a n d 4 8 - 9 .
28
A c c o r d i n g t o Mader, o p cit., p 4, t h e o l d e s t q u a r t i l e of t h e p o p u l a t i o n
c o n s u m e s a l m o s t half of t h e h e a l t h care.
52
The region's attractiveness to retirees should
give certain states, particularly Florida, a disproportionate share of this age group.28 Second,
the South's concentration of for-profit hospitals
bodes well for the health care industry's future
in the region. If health care costs continue to
rise more rapidly than the rate of inflation,
pressure to control costs should increase. Consequently, this sector is likely to enjoy relative
growth even as public and non-profit health
care facilities wane. 29 Such companies hold the
potential for higher profits than most service
businesses and hence for financing more economic growth. Of the nation's50 leading diversified service companies, Fortune rated southernbased Humana—which ranked 32nd in terms
of sales—the fastest-growing (44 percent annual
average rate since 1971) in terms of earnings
per share. 30
Summing up, the outlook for services is tied
closely to developments in high technology,
particularly in changes relating to computers
and communications. Although employment
growth may slow, greater productivity that high
technology promises to bring to many services
should raise income and profits in this sector,
which in turn should generate a higher level of
growth. Moreover, growth of high technology
in the Southeast will stimulate demand for
business services to manage the fast growing
revenues of such firms, consumer services
which high-paid engineers and technicians will
seek, and public services, particularly education
to upgrade local labor force skills and transportation.
Despite arguments that services cannot prosper independently of growth in the goods
sector, the outlook for services in the Southeast
seems positive both in terms of jobs and
profits. Enough economic growth should be
generated by population expansion especially
through migration, and b y a n u m b e r o f stronger
manufacturing and services industries to increase income at both the household and
regional level and to foster continuing growth in
services in most southeastern states.
— Bobbie H. M c C r a c k i n
29
30
M a d e r op. cit., p. 6, p r o j e c t s a 16.6 p e r c e n t a n n u a l a v e r a g e g r o w t h r a t e in
d e m a n d for p r o f i t - b a s e d h e a l t h s e r v i c e s
M a r y G r e e n e b a u m , " W i n n e r s A m o n g t h e S e r v i c e - C o m p a n y Stocks,"
Fortune, J u l y 1 2, 1 9 8 2 , p p 149, 152.
JULY 1 9 8 3 , E C O N O M I C
REVIEW
New Investment Powers for S&Ls:
Diversification or Specialization?
Fears that S&Ls will overextend themselves
in offering new services and prices seem
unfounded. While the new powers may be
important to S&Ls' long-term viability, basic
management expertise is likely to be the
real key for all financial institutions.
Will the broader powers granted to savings and
loan associations in 1980 and 1982 be the
answer to S&Ls' recent earnings problems? Or
will those new powers entice S&L managers to
rush into unfamiliar territory too soon? Is diversification necessarily an advantage for any financial
institution? Or might there be good reasons to
remain specialized? As deregulation broadens
the powers of more and more financial institutions,
research on how financial institutions behave in
such situations takes on important implications.
As far back as the 1971 Hunt Commission
Report and its successor, the FINE study, financial
experts have argued persuasively that the longrun viability of S&Ls hinged on their ability to
expand their powers. They saw diversification on
the asset side of the balance sheet as the key to
unlocking restrictions on deposit rate ceilings
and to bringing severe imbalances under control.
FEDERAL RESERVE B A N K O F A T L A N T A
Despite this foresight, however, it was not until
passage of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DI DMCA)
that a significant break occurred. This act expanded
the array of services S&Ls could provide to
consumers and provided for the phase-out of
deposit rate ceilings by 1986. Unfortunately for
many S&Ls, however, the damage caused by
inflation and high interest rates, binding rate
ceilings and limited asset portfolio flexibility
already had created a crisis for the industry—a
crisis that could be resolved at reasonable cost
only through a drop in interest rates.
In this atmosphere it was widely recognized
that even further portfolio diversification permitting S&Ls to provide services to commercial
entities, while necessary to deal with thrifts longrun problems, was unlikely to offer much immediate help to those with severely eroded net
53
worth and large earnings losses. Nevertheless,
significant portfolio diversification proved to be
a prominent feature of Congress's response to
the thrift crisis in the compromise Garn-St Germain
Depository Institutions Act of 1982.
Interestingly, however, what initially appeared
to be an inadequate response to the thrift
problem may take on a different light if interest
rates remain at the lower levels prevailing recently.
If interest rates remain low, then the short-run
earnings pressure on thrifts should abate, enabling
them once again to show positive earnings. If this
happens, the strategic question facing S&Ls is
how to adapt to liberalized asset and liability
powers, including the newly authorized accounts
designed to let them compete with money
market mutual funds. More specifically, the question for an S& L is whether to become completely
diversified like a commercial bank or to remain a
specialized mortgage lender.
This article will review the performance of
state-chartered thrifts with broadened asset and
liability powers and will discuss recent research
on the performance of a sample of commercial
banks that chose to specialize in real estate
lending The study suggests that fears that S& Ls will
rush out and overextend themselves in offering
new services and in their pricing policies seem
unfounded. More importantly, it implies that
S&Ls can continue to be profitable without
b e c o m i n g indistinguishable from commercial
banks. As f o r t h e real estate-oriented commercial
banks, the evidence suggests that their profit
performance is associated with the more favorable
costs of funds rather than with their ability to
diversify. The article concludes with some observations on how S& Ls might take advantage of
their broader powers.
Recent Legislative Changes
Under DIDMCA, federal S& Ls received authority in 1980 to offer transaction accounts to
individuals in the form of N O W accounts (Table
1). The 1982 Garn-St Germain Act granted federal
S&Ls the authority to offer demand deposits not
only to individuals but also, for the first time, to
corporations in connection with loan arrangements. S&Ls also were permitted to provide
N O W accounts to governmental units.
Under the 1980 act, asset diversification was
limited both in terms of the range of permissible
investments and also by the impositions of
54
quantitative limits. For example, commercial real
estate lending was restricted to 20 percent of
assets, as were the combined aggregate holdings
of consumer loans, commercial paper and debt
securities. ( M a n y forms of consumer credit
authorized by the 1980 act were not subject to
quantitative limits. These included credit card
debt and overdraft and line of credit incident to
N O W accounts. Other forms of consumer credit,
such as home improvement loans, also were free
from the 30 percent limitation.) 1
The 1982 act relaxed the quantitative restrictions from 20 percent to40 percent and broadened
the array of permissible investments to include
time and savings deposits of other associations,
and, most importantly, commercial loans. This
latter provision, together with the granting of
commercial demand deposit powers (in connection with loan relationships), permits S&Ls to
expand for the first time into the corporate
segment of the financial service industry. It thus
adds a whole new dimension to S& L diversification
strategy. However, the 1982 act restricts corporate lending to 5 percent of S&L assets until
1983 and to 10 percent thereafter.
Most importantly, however, neither the 1980
Dl DMCA nor the 1982 Garn-St Germain legislation
comes to grips directly with a most important
disincentive to S&L diversification. That is the
provision in federal tax laws allowing S& Ls to add
up to 40 percent of taxable income to bad debt
reserves tax free if u p t o 8 2 percentof theirassets
are held in qualifying form. 2 W i t h over two-thirds
of S& Ls experiencing losses, this feature has been
unimportant recently. However, should S&Ls
return to a positive earning position, the net pretax return on non-qualifying assets w o u l d have to
be more than 52 percent greater than on qualifying
assets b e f o r e an S&L w o u l d be encouraged
to diversify from real estate lending (i.e maintaining qualifying assets at 82 percent) into other,
non-qualifying assets.3 Clearly, such differentials
have been rare (at least for acceptable risks) and
become even less likely if interest rates should
continue to fall and then stabilize at lower levels.
' I a m i n d e b t e d t o M a r s h a l l K a p l a n for p o i n t i n g o u t s e v e r a l misinterpret a t i o n s of t h e 1 9 8 0 a n d 1 9 8 2 a c t s in a n earlier draft of this paper. Gillian
G a r c i a a l s o p o i n t e d o u t s o m e of t h e s e s a m e p r o b l e m s
2
T h e 4 0 p e r c e n t d e d u c t i o n is r e d u c e d by 3 / 4 of a p e r c e n t a g e p o i n t for e a c h
p e r c e n t a g e p o i n t t h a t q u a l i f y i n g a s s e t s fall b e l o w 8 2 p e r c e n t f o r S & L s (72
p e r c e n t for MSBs). N o d e d u c t i o n is p e r m i t t e d b e l o w 6 0 p e r c e n t
3
T r e a s u r y D e p a r t m e n t (1980). T h e r e p o r t n o t e s t h a t d e p e n d i n g u p o n c o s t s
and market conditions, gross returns may need to be only 5 percent greater
t o g e n e r a t e a net r e t u r n 5 2 p e r c e n t greater. T h e r e q u i r e d return, h o w e v e r ,
i n c r e a s e s for e a c h p e r c e n t a g e p o i n t q u a l i f i e d a s s e t s fall b e l o w 8 2 p e r c e n t
JULY 1983, E C O N O M I C
REVIEW
Table 1. Changes in S&L Assets and Liability Powers Resulting from Recent Legislative Actions
Liability Powers
1. Nationwide NOW Accounts for
a individuals and not-for-profit organizations
b. governmental units
DIDMCA-1980
Garn-St Germain 1982
2. Federal S&Ls may offer demand deposits to persons or organizations
that have established a " b u s i n e s s corporate, commercial or agricultural loan relationship with the association"
Garn-St Germain 1982
3. Authorizes new accounts to compete with money market mutal funds
Garn-St Germain 1982
Garn-St Germain (11 / 1 5 / 8 2 ) indicated that effective 1 2 / 1 4 / 8 2
one account would have a $ 2 5 0 0 minimum balance, no interest
rate ceiling, an option to guarantee a fixed rate for one month,
limited check writing facilities and deposit insurance.
A second account was authorized effective 1 / 5 / 8 3 identical to
the 1 2 / 1 4 / 8 2 account but with unlimited transaction facilities
The account was subject to the reserve requirements on
transaction a c c o u n t s
DIDMCA-1 9 8 0
4. Authorizes establishment of Remote Service Units
Asset Powers
1. Expands 20% limit of DIDMCA to 4 0 % of assets that may be invested
in c o m m e r c i a l real estate loans
Garn-St Germain 1982
2. Up to 20% limit of assets may be invested in combination of
commercial paper debt securities, and consumer loans
DIDMCA-1980
3. Expands limit in DIDMCA o n consumer loans (including inventory
and floor plan loans) from 20% to 30% of assets
Garn-St Germain 1 9 8 0
4. May issue credit cards
DIDMCA-1980
5. May offer overdraft loans on any transaction account
Garn-St Germain 1982
6. Permits investment in time and savings deposits of other associations
Garn-St Germain 1 9 8 2
7. Limited investment in state and local obligations of any one issuer to
10% of associations's capital and surplus Total investment in general
obligations is not limited.
8. May make commercial loans up to 5% of assets until December 31,
1983 and up to 10% thereafter. May be direct loans or participations
9. May invest in tangible personal property up to 10% of assets
Garn-St Germain 1982
Garn-St Germain 1 9 8 2
Garn-St Germain 1 9 8 2
10. May make educational loans up to 5% of assets
Garn-St Germain 1 9 8 2
11. May make loans to Small Business Investment Corporations up to
1 % of assets
Garn-St Germain 1982
It also should be noted that the 1982 act
reflects what is undoubtedly Congress's fear
that, if all restrictions and incentives were
removed for S&Ls, they would diversify from
being specialized housing lenders and would
FEDERAL RESERVE B A N K O F A T L A N T A
become essentially indistinguishable from commercial banks. This fear is revealed in DI DMCA's
provisions that (1) limit interstate branching
activities by S&Ls that diversify to the point they
no longer meet the 1RS qualifying test and (2)
55
Table
2.
Share of C o m m e r c i a l
Loans
at
Banks
Maine Commercial
Mutual Savings
MSB's
CB's
<r
a>
Year
(Millions)
and
Banks
Percent
(Millions)
Percent
99.1
June 1975
Dec. 1 9 7 5
3.7
.9
414.7
4.7
1.1
409.5
98.9
June
5.1
1.2
421.5
98.8
1976
Dec.
1976
5.6
1.3
440.3
98.7
June
1977
6.4
1.3
503.8
98.7
Dec.
1977
9.6
1.9
510.7
98.1
Source: McCall a n d Peterson (1980), Table 5
subject single S&L holding companies to the
more stringent restrictions applicable t o multiS&L holding companies if their S&L subsidiaries
fail to meet that tesL
Despite the limitations contained in the 1980
and 1982 acts and Congress's failure to address
needed tax-law modifications that would allow
S&Ls to exploit fully the benefits of asset and
liability diversification, the question remains: will
S&Ls take advantage of their new powers and, if
so, how fast?4 More important is the question of
whether, if the tax obstacle and other disincentives
to diversification were removed, S&Ls would be
better off becoming full-service competitors to
commercial banks or to remain specialized
mortgage lenders. The next t w o sections will
explore these issues.
Use of New Powers
One argument against granting S&Ls new
powers is that their lack of expertise, especially
in the commercial lending area, might lead to too
rapid an expansion, over-extensions and unduly
risky loans. Unanticipated increases in costs and
potentially large losses would only exacerbate
thrift earnings problem further. Four recent
studies—by McCall and Peterson (1980), Dunham
(1982), Baker (1982), and Crockett and King
(1982)—all suggest these fears may be exaggerated. Left to their own devices, thrift managers
do not seem to have this self-destruct tendency.
Rather, they appear to have pursued a moderate
approach in adjusting to newly authorized powers,
especially on the asset side of the balance sheet
" O n e of t h e d i f f i c u l t i e s is t h a t t h e b a n k i n g c o m m i t t e e s in C o n g r e s s don't
h a v e t h e a u t h o r i t y t o initiate t a x l e g i s l a t i o n Thus, t h e W a y s a n d M e a n s
C o m m i t t e e in t h e House, for e x a m p l e , w o u l d h a v e t o b e e d u c a t e d t o t h e
n e e d for t h i s tax l a w c h a n g e .
56
McCall and Peterson (1980) attempted to
assess DIDMCA's likely impact on federally
chartered thrifts by tracking the experience of
state-chartered mutual savings banks (MSBs)
and S&Ls in Maine that had been granted
extended powers in 1975 when state banking
statutes were revised significantly. State-chartered
S&Ls and MSBs were granted a wide array of
powers, including the authority to offer personal
checking accounts, credit cards and consumer
loans. In addition, Maine thrifts were authorized
to make commercial loans up to 10 percent or
more of assets if authorized by the state's
superintendent of banking. 5
It appears that Maine MSBs and S&Ls did not
overreach themselves or expand too rapidly into
areas where they lacked expertise. In particular,
while they sought to take advantage of many of
their new powers, most did not move into the
credit card area nor did they offer overdraft lines
of credit. On the liability side, while they moved
quickly to offer N O W accounts, most were
relatively cautious initially in offering either
telephone transfer services or IRA accounts. This
was also the case for MSBs making use of their
commercial loan powers. MSBs made only $3.7
million in commercial loans in 1975, less than .5
percent of all MSB loans (Table 2). MSBs
accounted for less than 1 percent of the
commercial loans made by MSBs and commercial
banks combined. By year end 1977, MSBs had
increased their commercial loans t o $9.6 million.
But this still amounted to less than 2 percent of
the commercial loans made by MSBs and
commercial banks combined and less than 3/4
of 1 percent of all MSB loans. Undoubtedly, the
inability to offer corporate checking accounts
probably hindered Maine MSBs in making
commercial loans. But the fact remains that the
MSBs did not rush to offer below-market rates
nor did they increase their portfolios via
participation.
MSBs and S&Ls did move more aggressively
than commercial banks in pricing and in advertising
and other nonprice forms of competition for the
new services that they offered. The exception
was in the area of N O W accounts, where MSBs
and commercial banks adopted similar pricing
schedules but S&Ls were more aggressive in their
pricing.
5
These powers were broader than those given to S&Ls under the 1980 Act
I n f a c t t h e p o w e r s g r a n t e d t o f e d e r a l M S B s by t h e 1 9 8 0 a c t are m o r e similar
to those granted federal S&Ls under the 1982 a c t
JULY 1 9 8 3 , E C O N O M I C
REVIEW
T a b l e 3 . A v e r a g e M a r k e t P o r t f o l i o C o m p o s i t i o n f o r M S B ' s a s of D e c e m b e r
% of A s s e t s
Number
STATE
Massachusetts
Connecticut
Maine
New Hampshire
Vermont
Rhode Island
Time and
of
Markets
Demand
Deposits
13
.03
1.11
.88
6
8
13
9
2
Aggregate of all
New England
1980
Savings
Deposits
98.02
96.40
96.19
.13
1.41
96.87
92.98
.03
97.45
96.4
.40
NOW
Accounts
Total
Deposits
Residential
Mortgages
Commercial
Mortgages
Commercial
Loans
4.37
.62
98.16
97.72
51.8
6.32
2.53
4.64
97.26
58.7
54.7
7.25
7.74
97.11
94.80
55.6
47.1
97.75
97.1
57.8
.73
.35
3.2
54.7
.15
Loans To
Individuals
4.5
Total
Loans
64.6
.63
.44
5.7
7.1
74.0
8.69
.84
7.25
1.73
8.6
6.4
76.1
59.4
7.40
8.2
1.50
4.9
.6
5.5
73.6
70.8
70.9
MSB's
Source: D u n h a m ( 1 9 8 2 ) T a b l e 2 A p p e n d i x
McCall and Peterson concluded that thrifts
would respond to the 1980 legislation rapidly to
take advantage of many newly authorized asset
and liability powers, especially to provide services
to consumers. If their evidence from Maine
provides a useful guide, there is not likely to be a
safety and soundness problem or radical shift in
relative market shares of total deposits.
A more recent study of N e w England mutual
savings banks by Dunham (1982) helps shed
some light on how likely thrifts might be to
exploit new powers. Dunham presents relative
market shares and aggregate asset and liability
compositions for MSBs in 51 N e w England
metropolitan markets as of December 1980,
several months after D I D M C A went into effect.
Dunham's findings tended to reaffirm the general
conclusions of McCall and Peterson. Mutual
savings banks did take advantage of their new
liability powers, but demand deposits and N O W
accounts still accounted for only a small proportion
of their liabilities (.4 percent and 3.2 percent,
respectively as shown in Table 3). In only four of
the 51 markets investigated did demand deposits
account for more than 2 percent of MSB liabilities,
and in only one market did N O W accounts
exceed 7 percent 6 In fact, New England commercial banks on average had a higher proportion
of N O W accounts (5.9 percent) than did MSBs
(3.2 percent).
On the asset side, MSB commercial loans
represented less than 1 percent of assets in
1980, and loans to individuals still accounted for
6
This w a s in M a s s a c h u s e t t s w h e r e M S B s h a v e o f f e r e d N O W a c c o u n t s for
several y e a r s Interestingly, in n o n e of t h e N e w H a m p s h i r e markets, w h e r e
N O W a c c o u n t s b e g a n in 1 9 7 2 , d i d t h e y e x c e e d 7 p e r c e n t of M S B l i a b i l i t i e s
FEDERAL RESERVE B A N K O F A T L A N T A
only 5.5 percent. In only four of the 51 markets
did commercial loans exceed 2 percent of
assets. There were, however, five markets in
which loans to individuals exceeded 10 percent
of assets.
The third and more relevant study of S&Ls' use
of new powers is that of Baker (1982). Baker
examines state-chartered S&Ls in Florida that
have operated since July 1, 1980 under a
liberalized statute permitting them many of the
powers contained in the Gam-St Germain A c t
Most important are provisions enabling statechartered S&Ls t o offer transaction accounts to
corporations (non-interest bearing N O W accounts), to make secured and unsecured loans
for any purpose including commercial loans and
to invest in obligations of state and local
government provided at least 60 percent of
assets (not including liquid assets) are invested
in loans related to real estate. Again, the results
suggest that S&Ls were cautious in taking advantage of their new powers. Baker indicates that
the portfolio compositions of state and federal
S&Ls differed only slightly. For example, as of
June 1981, state S&Ls had 3.15 percent of their
assets in non-liquid investments, compared with
1.33 percent for federal institutions. State S&Ls
also had 2.53 percent of their assets in consumer
loans, compared with 1.62 percent for federals.
Lastly state S&Ls had only 0.7 percent of their
assets in loans t o businesses (as compared to
0.03 percent for federals). O n the liability side,
state S&Ls had only .1 percent of their deposits in
non-interest bearing N O W s (NINOWs), presumably to corporations.
Clearly, high interest rates and poor earnings
performance in 1980-81, restrictions (in certain
57
states) on making commercial loans and taking
commercial deposits, and tax disincentives all
impacted thrift institutions' ability to exploit new
powers granted by various states. Newly chartered
S&Ls, however, were not burdened by lowyielding mortgage portfolios. Hence, they were
not as limited by earning difficulties in what they
might d o as were the more established firms.
Baker, in his Florida study, isolated S&Ls
chartered since 1979 to examine whether they
utilized their powers differently than established
firms. The portfolio comparisons suggest that the
key differences were in liquidity and in the
proportion of assets held as loans. New S&Ls had
only 44.97 percent of their assets in loans
compared with 83.98 percent for more established state-chartered S&Ls. These newer S&Ls
made a smaller proportion of consumer loans
than did the older firms and held a slightly higher
proportion of assets in non-liquid investments.
They continued, however, to hold loan portfolios
heavily concentrated in mortgages. Newer S&Ls
held 95.6 percent of their loans in mortgages,
compared with 96.2 percent for older S&Ls. The
principal area of diversification was into liquid
investments (obviously of shorter maturity than
mortgages) rather than into other permissible
types of loans or investments. Liquid assets at
these new S&Ls were significantly higher at 37.3
percent of assets, compared with 6.5 percent for
more mature S&Ls.
Most interesting is the earnings performance
of these new Florida S&Ls. In 1981 they actually
showed a positive net income as a percent of
assets of .29 percent compared with only .02
percent for older state-chartered S&Ls and a net
loss (.09 percent) for federal S&Ls in the state.
It is unlikely that this earnings performance of
new S&Ls was due to lower cost of funds
resulting from their new power to offer noninterest bearing deposit accounts; the proportions
of deposits earning more than the passbook rate
were fairly comparable for both new and established S&Ls. New S&Ls had 78.33 percent of their
deposits earning more than the passbook rate,
compared with 79.24 percent for federal S&Ls
and 80.41 for older state-chartered S&Ls. It is
more likely that the higher proportions of shorter
7
K o p c k e ( 1 9 8 1 ) T a b l e s 1 a n d 3. Of course, t h i s d o e s not a l l o w for t h e i m p l i e d
c a p i t a l loss d u e t o d e p r e c i a t i o n in t h e m a r k e t v a l u e of m o r t g a g e p o r t f o l i o s
" K o p c k e ( 1 9 8 1 ) c o m p a r e d t h e p e r f o r m a n c e of M a s s a c h u s e t t s M S B s w i t h
t h a t of C a l i f o r n i a S&Ls, w h i c h h e l d 8 3 p e r c e n t of t h e i r a s s e t s in m o r t g a g e
l o a n s a n d only 9 p e r c e n t in s e c u r i t i e s a n d c a s h in 1 9 8 0 a n d 8 1 p e r c e n t a n d
8
p e r c e n t d u r i n g t h e first half of 1 9 8 1 , respectively. C a l i f o r n i a
58
S&Ls
term, more liquid and interest-sensitive assets in
the new S&Ls' portfolios contributed to their
somewhat better earnings performance.
W
This inference is supported by fragmentary
evidence on the performance of Massachusetts
MSBs reported by Kopcke (1981). These institutions also held a lower proportion of mortgages
as a proportion of assets (66 percent) and a
higher proportion of securities and cash (26
percent) than S&Ls, and these MSBs reported a
.17 percent return on assets in 1980 and .14
percent in the first half of 19817P
Finally, Crockett and King studied the performance of state-chartered stock and mutual S&Ls in
Texas that had been permitted broader asset
powers. These powers exceed those given
federal S&Ls in the Garn-St Germain Act and
include (1) a wide range of consumer lending
powers such as automobile loans and credit
cards, (2) commercial lending and (3) real estate
development.
1
i
%
|
^
>
Like thrift institutions studied elsewhere,
these S&Ls have made very little use of their
powers to date. Over 77 percent of the assets of
state-chartered institutions (93 percent of loans)
and over 80 percent of the assets for mutual S& Ls
(92 percent of loans) remain in mortgages. Only
about 3 percent of the state S&Ls' assets and 2.6
percent of mutuals' assets were in loans to
consumers and an insignificant amount was in
commercial loans (less than .25 percent). 9
Unlike the new Florida S&Ls studied by Baker,
the Texas S&Ls held only a small proportion of
assets in liquid form; less than 10 percent of the
assets of state S&Ls and 9 percent for mutuals
were in cash and investment accounts.
Because Texas S&Ls have made little use of
their broadened powers, Crockett and King
(1982) conclude that these new assets have had
little impact on profitability. Net income to
assets was slightly higher for state institutions
than for federals over the 1977-81 period
examined, but all returns were usually within
one basis point of each other. Moreover, losses
were reported for all three categories of S&Ls in
1981, whereas Baker reported slight positive
earnings for state-chartered Florida S&Ls.
|
J
;
r e t u r n e d . 2 9 p e r c e n t o n a s s e t s in 1 9 8 0 but lost .38 p e r c e n t in t h e first half of
1981.
« C r o c k e t t a n d K i n g ( 1 9 8 2 ) d o i n d i c a t e ( s e e t h e i r T a b l e 7) t h a t t h e large
i n s t i t u t i o n s t e n d e d to m a k e g r e a t e r u s e of e x p a n d e d a s s e t p o w e r s t h a n
s m a l l e r S & L s A b o u t 2 5 p e r c e n t of most S & L s s m a l l e r t h a n $ 5 0 million, for
example, m a d e business l o a n s
JULY 1983, E C O N O M I C
REVIEW
I
Unlike the other researchers, Crockett and
King also attempted, using statistical cost regressions, to make inferences about the new assets'
potential contribution to overall profitability. In
general, they conclude that the new assets have
net yields in excess of those on conventional
mortgages. They estimate that these pretax net
yields are close to those in mortgage-backed
securities, ranging between 12 and 16 percent
Voluntary Specialization
Table 4 . Profitability Comparisons
(Average Percent per Year)
All sample institutions
(D
Year
Return on Assets 1
CB
REB
S&L
(2)
Return on Equity 2
CB
REB
S&L
1971
.8
.9*
.6
10.0
10.2
9.8
1972
.8
.8*
.7
9.8
10.0
11.1
1973
.9+
1.0*
.7
10.9+
11.7*
12.4
1974
.9+
1.0*
.6
10.2+
11.0*
9.4
1975
.8
.8*
.5
9.1
1976
.8+
.9*
.6
10.2+
11.3
1977
.9+
1.0*
.7
10.7+
11.9*
13.0
1978
.9+
1.0*
.7
11.1 + 12.2*
13.4
1.1*
.6
12.5
12.1
It is true that the analysis period of these
studies was limited and that the S&Ls and
mutuals examined did not, in some cases, have
fully diversified powers. In Maine, for example,
MSBs were able to make commercial loans but
could not accept commercial demand deposits.
Their inability to offer a package of deposit and
loan services t o business would significantly
hamper the thrifts' competitiveness. Moreover,
federal tax laws provided potential penalties for
asset diversification below levels where they
would meet IRS qualifying tests. 10 Lastly, over
the period studied, relatively high consumer
loan and other interest rates and t w o recessions
probably dampened demand for credit and thus
limited diversification opportunities for thrifts in
non-mortgage areas. All of these factors make it
difficult to inferences from past thrift experience
about the benefits of portfolio diversification.
A1982 study by Eisenbeis and Kwast, however,
may offer a clearer indication of the possible
benefits t o S&Ls of continuing t o specialize in
mortgage lending as opposed to diversifying into
full-service competitors t o commercial banks.
They examined the performance of 254 commercial banks that voluntarily chose to specialize
in mortgage and real estate lending over the
1970s. These firms held at least 65 percent of
their loans in real estate loans for at least seven of
the ten years between 1970 and 1979. These
real estate banks (REBs) were very similar to the
population of commercial banks at large with
respect to size, geographical distribution, and
urban-rural distribution. Fewer REBs were located
in unit banking states and fewer were affiliated
with bank holding companies than were other
commercial banks. In general, however, except
for their portfolios, these REBs did not appear to
be atypical. The researchers felt that these
banks' performance could serve as a reasonable
proxy for how S&Ls with diversified powers
might have performed over this same period; the
authors also could compare the performance of
these specialized real estate banks with that of
regular commercial banks and w i t h S&Ls as a
whole. Thus, the comparisons permitted a more
reliable test of the potential benefits of expanding
thrift asset and liability powers.
That study's results are relevant to whether
thrifts might be better off diversifying broadly or
sticking t o areas where they have developed
special expertise. For example, as is shown in
Table 4, in each of the 10 years Eisenbeis and
Kwast studied, the REBs' net return on assets
equaled or exceeded the control sample of
commercial banks, 11 and REB returns exceeded
that of S& Ls by 30 basis points (or by an average
of 50 percent). 12 Thus, it appears that the REBs'
decision to specialize in real estate lending over
the period was both rational and profitable.
'°The e v i d e n c e d o e s not s u g g e s t t h a t e i t h e r t h e tax l a w s o r t h e p e r c e n t a g e of
asset r e s t r i c t i o n s w e r e i m p o r t a n t c o n s t r a i n t s for m o s t t h r i f t s over t h e
period
" R E B net i n c o m e t o a s s e t s e q u a l e d t h a t of t h e s a m p l e of c o m m e r c i a l b a n k s
in 1 9 7 5 a n d e x c e e d e d t h e r a t i o in t h e r e m a i n i n g n i n e y e a r s
12
R e t u r n o n e q u i t y for t h e R E B s e x c e e d e d t h a t f o r t h e s a m p l e of c o m m e r c i a l
b a n k s in all t e n y e a r s
FEDERAL RESERVE B A N K O F A T L A N T A
1979
'Net
1.0
9.5*
12.7
i n c o m e d e f i n e d a s a f t e r taxes, s e c u r i t i e s g a i n s
and
7.9
11.2
losses,
o p e r a t i n g e x p e n s e s a n d e x t r a o r d i n a r y items.
' E q u i t y defined as net worth.
R E B is r e a l e s t a t e s p e c i a l i z i n g bank.
C B is s a m p l e of c o m m e r i c a l banks.
+ S i g n i f i c a n t l y d i f f e r e n t f r o m t h e R E B m e a n at t h e 5 p e r c e n t level.
• S i g n i f i c a n t l y d i f f e r e n t f r o m t h e S & L m e a n at t h e 5 p e r c e n t level.
S o u r c e : T a b l e 1A f r o m E i s e n b e i s a n d K w a s t ( 1 9 8 2 ) .
59
Table 5. Asset Composition Comparisons: All Sample Institutions
Other Assets
Liquid Assets
Year
Total Loans
Consumer Loans
REB
S&L
CB
REB
S&L
CB
REB
S&L
2.1 +
1.6*
2.6
47.5
48.2*
85.7
13.8+
8.3*
0.3
2.1 +
1.6*
2.4
48.0
48.1*
87.7
14.0+
8.2*
0.6
2.4+
1.7*
2.4
49.2
50.4*
88.7
14.5+
8.3*
0.7
9.8
2.8+
1.8*
2.5
49.8
51.2*
88.4
14.2+
8.0*
0.7
10.6
3.1 +
1.9*
2.4
49.4
50.6*
87.5
14.4+
8.0*
0.6
10.4
3.0+
1.9*
2.3
52.6
51.6*
87.7
14.8+
8.2*
0.6
44.4*
9.8
2.9+
2.0*
2.2
54.2
53.7*
88.7
15.6+
8.8*
0.6
40.9
40.8*
9.6
3.1 +
2.1
2.1
56.0
57.1*
88.8
16.4+
9.7*
0.5
41.4
40.6*
9.8
3.2+
2.3
2.2
57.1
57.1*
88.6
15.6+
9.9*
0.5
CB
REB
S&L
CB
1971
50.4
50.2*
12.0
1972
49.9
50.3*
10.7
1973
48.4
47.9*
9.7
1974
47.4
47.0*
1975
47.5
47.4*
1976
44.4
46.4*
1977
42.9
1978
1979
+ S i g n i f i c a n t l y d i f f e r e n t f r o m t h e R E B m e a n a t t h e 5 p e r c e n t level.
' S i g n i f i c a n t l y d i f f e r e n t f r o m t h e S & L m e a n at t h e 5 p e r c e n t level.
Source: Table 4 A from Eisenbeis and Kwast (1982)
Interestingly, as Table 5 illustrates, this earnings
performance was achieved with a portfolio balance
of consumer loans, commercial loans and investments that lay within the limits permitted to
federal S&Ls in 1982 under Garn-St Germain. For
example, consumer loans of the REBs were less
than 10 percent of assets, as were commercial
and industrial loans, investments in state and
local municipal securities and commercial real
estate loans.
Freed from the tax penalty for diversifying out
of mortgages and other qualifying assets, the real
estate banks held a significantly smaller proportion
of assets in loans than did S&Ls— but not a
significantly different proportion in either loans
or liquid assets than regular commercial banks.
Real estate banks held an average of 4% times
the proportion of liquid assets as S&Ls over the
study period and 60 percent of the loans. Interestingly, the REBs' asset portfolio composition differed
little from portfolios of the new state-chartered
Florida S&Ls studied by Baker (1982). The new
S&Ls held about the same proportion of liquid
assets and real estate loans as the REBs but a
lower proportion of total loans to assets due to
smaller relative holdings of consumer and"other"
loans.
Examining operating expenses and the components of expenses w o u l d provide some interesting and useful information to S& Ls if they are
to take advantage of their new powers fully and
to operate profitably as either specialized or
diversified lenders. For example, S&L total operating
expenses as a proportion of revenues averaged
about 8.4 percent higher than the REBs even
though S&L interest expenses to revenues exceeded the REBs by an average of 39 percent
S&Ls compensated for their higher interest expenses with lower " o t h e r operating expenses"
relative to revenues—averaging about 55 percent
below the REBs—and with substantially lower
provisions for loan losses. The REBs' ratio of total
operating expenses to revenues also averaged 4
percent lower than the commercial banks.13
Given the lower proportion of transactions balances, REB interest expense averaged about 20
percent higher than that of regular commercial
banks. But this was more than offset by REBs'
lower "other operating expenses," "other interest
expense" and provisions for loan losses. Presumably the operating cost savings and lower loan
loss provisions reflect one cost advantage of
specialization.
While differences in asset portfolio compositions probably help explain the REBs' earnings
performance, S& L gross revenues as a percent of
assets exceeded that of the REBs by an average
of 11 percent and exceeded the sample of
commercial banks by 7 percent This suggests
that expenses may be more important than
revenues in explaining relative profitability.
Implications for S&L Diversification
These studies detailing how thrifts have used
their new powers and the performance of diversified versus specialized lenders hold several important implications for policy and for S& L strategy.
,3
T o t a l o p e r a t i n g e x p e n s e s as a p e r c e n t of r e v e n u e s f o r S & L s a l s o e x c e e d e d
t h a t of c o m m e r c i a l b a n k s by a n a v e r a g e of 4 . 5 p e r c e n t
I
60
JULY 1983, E C O N O M I C
REVIEW
Table 5 . C o n t i n u e d
i
CB
|
f
1
r
Total Real
Estate L o a n s
Other L o a n s
REB
S&L
CB
REB
S&L
1 - 4 Family
Real E s t a t e L o a n s
CB
Land
Development L o a n s
REB
S&L
CB
REB
S&L
O t h e r Real
Estate L o a n s
CB
REB
S&L
19.9+
6.6*
0.8
13.7+
33.3*
84.2
7.9+
23.4*
71.8
NA
NA
0.2
5.8+
9.8*
12.2
19.3+
6.1*
0.8
14.7+
33.8*
85.6
8.4+
23.8*
71.0
NA
NA
0.2
6.2+
10.0*
14.4
19.6+
5.9*
0.8
15.1 + 36.1*
86.4
8.5+
25.6*
71.2
NA
NA
0.3
6.6+
10.6*
15.0
20.0+
5.9*
0.9
15.6+
37.3*
86.1
9.0+
26.6*
70.6
NA
NA
0.3
6.6+
10.7*
15.2
19.6+
5.8*
0.9
15.3+
36.9*
85.4
8.9+
26.4*
69.0
NA
NA
0.3
6.4+
10.4*
16.1
20.8+
6.0*
0.9
17.0+
37.5*
85.7
9.4+
26.2*
69.2
1.0
1.0*
0.3
6.6+
10.2*
16.1
20.7+
6.0*
1.0
17.9+
38.8*
86.5
10.1 + 27.5*
70.1
1.2
1.3*
0.3
6.5+
10.0*
16.1
20.1 +
6.4*
1.0
19.5+
41.0*
86.8
11.2+
29.4*
70.8
1.5
1.5*
0.3
6.8+
10.1*
15.7
20.9+
6.6*
1.5
18.9+
40.6*
86.1
11.0+
29.6*
70.4
1.5
1.3*
0.3
6.5+
9.7*
15.3
t
2
|
Like most studies, some of their implications are
» comforting, while others are cause for concern.
For example, fears that S&Ls will rush out and
I
over-extend themselves in offering new services
I
and in their pricing policies seem unfounded. In
both New England and Florida, thrifts moved
cautiously in offering new services, especially
when diversifying outside their traditional areas
y of expertise or into market segments they had
not traditionally served. Moreover, no evidence
has been offered t o date that too rapid or too
aggressive expansion has played an important
role in causing thrift failures or in creating problem
institutions. In fact, one might even criticize the
N S&Ls for taking too little advantage of the opportunities available.
To be sure, this past experience may not be
I
completely relevant since regulations constrained
I
the thrifts from becoming full-service suppliers
> of services to commercial customers. In addition,
I
thrifts were in better financial condition over the
'
study period than they are presently. These
* cautions are counterbalanced by the many disincentives that continue t o impede rapid use of
/ new thrift powers. For example, the tax disini
centives are still in place, and the expanded
powers in the Garn-St Germain Act are available
J only to federally chartered thrifts. 14 More than
half of the nation's S& Ls and all but a dozen or so
3 mutual savings banks are state chartered. Thus,
•
thrifts must go through a conversion process or
individual states w i l l have t o change their
1
i
li
' 4 Mere c o n v e r s i o n f r o m S& L t o s a v i n g s b a n k status, m o r e o v e r , w o u l d r e d u c e
the p e r c e n t a g e of a s s e t s t h a t m u s t be h e l d in q u a l i f y i n g f o r m f r o m 8 2 t o 7 2
p e r c e n t I n d e e d m a n y S & L s a r e n o w b e g i n n i n g t o e x p l o r e t h e feasibility of
such c o n v e r s i o n s B a e r ( 1 9 8 3 ) a l s o m a k e s t h i s p o i n t
FEDERAL R E S E R V E B A N K O F A T L A N T A
statutes—both of w h i c h take time—before most
thrifts can avail themselves of the new powers.
(It should be noted, however, that many states
already have laws granting state institutions
powers parallel to those of federal institutions,
and conversion is an inexpensive process.)
Finally, the S&Ls' lack of expertise plus the costs
of starting up new financial service activities
should serve as short-run constraints to thrifts'
rapid expansion.
Examining both the expense of the new S&Ls
in Florida and the specialized real estate banks, it
is hard to attribute their improved earnings
performance t o the ability to diversify into higher
yielding assets. I nstead the profit performance of
the REBs appears t o be associated with more
favorable costs of funds. Unfortunately, diversification of S&L liabilities seems unlikely to generate
the same benefits as has been the case for
commercial banks and the REBs. Clearly, some
of the apparent advantages enjoyed by REBs and
banks over S&Ls in terms of costs of funds are
offset by higher non-interest operating costs,
some of which represent substitutes for explicit
interest payments. The relaxation of deposit rate
ceilings and increased competition for funds will
tend to raise the cost of funds t o banks and REBs
and limit the earnings benefit S&Ls can achieve
by offering transaction accounts to individuals
and corporations.
In this respect, the recent studies only reinforce
what many have contended all along. That is,
while expansion of powers may be necessary to
ensure the long-term viability of S&Ls, it probably
does little to deal with short-run earning problems
61
resulting from a large negative gap between their
earnings on long-term assets and their costs of
short-term funds. Surely, the drop in interest
rates that began in the summer of 1982 occurred
at a most opportune time and, if it persists, may
provide S&Ls the flexibility to adapt to their
expanded powers.
Short-Run Strategies
The results also suggest some short-run strategies for S&Ls to follow in order to make the best
use of their diversified new powers. To achieve
even the kind of diversification associated with
the REBs, which are still specialized housing
lenders, certain strategies are likely to be more
effective than others.
For example, one common characteristic of
the REBs, commercial banks and new Florida
S&Ls is their substantial liquidity and low loan-toasset ratios. With lower interest rates, the sale of
assets and creation of mortgage backed securities
becomes more feasible than before (when large
capital losses had to be realized) to reduce the
dependency on mortgage loans. Channeling
some of the proceeds into seasoned tax-free
municipal securities with shorter maturities than
the mortgages sold could help offset the tax
disincentives to diversification and lower the
effective maturity of S&L assets relative to
liabilities. Baer (1983) explores in some detail
the circumstances under which investments in
tax-free instruments would facilitate further
diversification as well. He concludes that the
importance of the tax disincentives may have
been somewhat overstated.
Similarly, rather than incurring the high startup costs of creating a commercial financial
service activity, an S&L could engage in commercial loan participations with commercial
banks or other S&Ls.
Indeed, there is already evidence that major
S&Ls are joining together in syndicates and are
providing innovative kinds of financing to corporations.15 Savers Capital—a syndicate of several
large S&Ls, for example, has begun to provide
long term, secured, variable rate loans to major
corporations. Not only do these loans provide
financing on a participated basis, but also the
lending agreements contain provisions which,
under certain circumstances, may give the
lenders equity interests in the form of stock
warrants.16 Such joint venture activities serve to
reduce pressure on non-interest operating costs
while achieving the benefits of asset diversification.
It may be cost-effective in the short-run to incur a
large increase in operating costs in order to
attract lower-cost corporate deposits if increases
in operating costs are more than offset by the
benefits of lower costs of funds.
Conclusions
This survey indicates that the passage of
Dl DMCA in 1980 and Garn-St Germain in 1982
did little to deal with S&Ls' short-run earnings
problems. On the other hand, the study also
suggests that if interest rates remain at lower
levels, then these acts may go a long way to
restoring full viability of thrifts. Most importantly,
the results suggest that S&Ls may not have to
become clones of commercial banks in order to
operate successfully. In fact, they may even
continue to exploit their existing expertise as
specialized mortgage lenders with the expectation
of being as profitable as more diversified
lenders.
Robert A. Eisenbeis
,5
Hill (1983) describes two such S&L syndicates
' 6 S l a t e r ( 1 9 8 3 ) i n d i c a t e s t h a t S a v e r s C a p i t a l has a l r e a d y m a d e s u c h a loan to
A l l e g h e n y B e v e r a g e Corp.
* A n earlier v e r s i o n of t h i s p a p e r w a s p r e s e n t e d at t h e e i g h t h a n n u a l
c o n f e r e n c e of t h e F e d e r a l H o m e L o a n B a n k of S a n Francisco, D e c e m b e r 9
a n d 10, 1 9 8 2 .
This v e r s i o n w a s p r e s e n t e d at a n A t l a n t a Fed R e s e a r c h s e m i n a r o n J u n e 2,
1983.
REFERENCES
Baer, H e r b e r t " T a x B a r r i e r s t o D i v e r s i f i c a t i o n by S a v i n g s a n d L o a n
A s s o c i a t i o n s , " F e d e r a l R e s e r v e B a n k of C h i c a g o , 1 9 8 3 .
Hill, G Christian. " S & L G r o u p P l a n s t o O f f e r L o a n s t o C o r p o r a t i o n s , " W a l l
S t r e e t J o u r n a l , M a r c h 9, 1 9 8 3 .
Baker, R o b e r t " F l o r i d a S&Ls' U s e of E x p a n d e d Powers,"
Review, F e d e r a l R e s e r v e B a n k of Atlanta, J u l y 1 9 8 2 .
K o p c k e , R i c h a r d W. " T h e C o n d i t i o n of M a s s a c h u s e t t s S a v i n g s B a n k s
a n d C a l i f o r n i a S a v i n g s a n d L o a n A s s o c i a t i o n s , " in P r o c e e d i n g s of a
C o n f e r e n c e o n T h e F u t u r e of t h e T h r i f t Industry, C o n f e r e n c e S e r i e s
No. 24, F e d e r a l R e s e r v e B a n k of Boston, O c t o b e r 1981.
Economic
C r o c k e t t J o h n a n d A T h o m a s K i n g " T h e C o n t r i b u t i o n of N e w A s s e t
P o w e r s t o S& L Earnings: A C o m p a r i s i o n of F e d e r a l a n d S t a t e C h a r t e r e d
A s s o c i a t i o n s in Texas," R e s e a r c h Paper No. 110, O f f i c e of Policy a n d
E c o n o m i c R e s e a r c h , F e d e r a l H o m e L o a n B a n k Board, J u l y 1982.
McCall, A l a n S a n d M a n f r e d O. Peterson. " C h a n g i n g R e g u l a t i o n in Retail
B a n k i n g S e r v i c e s T h e Evidence from Maine," J o u r n a l of Retail B a n k i n g
Vol II N o 3, S e p t e m b e r 1 9 8 0 .
D u n h a m , C o n s t a n c e " M u t u a l S a v i n g s B a n k s Are T h e y N o w or Will T h e y
Ever B e C o m m e r c i a l Banks?" N e w E n g l a n d E c o n o m i c Review. Federal
R e s e r v e B a n k of Boston, M a y / J u n e , 1 9 8 2 .
Slater, Karen. " T h r i f t G r o u p S i g n s First Borrower," A m e r i c a n Banker.
M a y 11, 1 9 8 3 .
E i s e n b e i s , R o b e r t A a n d M y r o n L K w a s t " T h e I m p l i c a t i o n s of E x p a n d e d
P o r t f o l i o P o w e r s in S&L I n s t i t u t i o n P e r f o r m a n c e , " p r e s e n t e d at t h e
W e s t e r n Economic Association Meetings, San Francisco, 1982.
T r e a s u r y D e p a r t m e n t "Thrifts' S t r u c t u r e a n d Tax I n c e n t i v e s for Savings,"
R e p o r t of t h e I n t e r a g e n c y T a s k F o r c e o n T h r i f t Institutions, J u n e 3 0 ,
1980.
Public Retirement Systems:
Crucial to the
Southeastern Economy?
Congress' approval of a $165 billion Social Security
rescue package this spring has heightened interest
regarding the importance of retirement programs
to people in the Southeast
About 10 percent of the region's disposable
personal income comes from public pension
payments of various sorts.
Older p e o p l e - ( 6 5 and
over) now make up 12
percent of the region's
population. Furthermore,
both proportions have
been growing rapidly in
recent years. Census projects this trend t o continue both because of the
flow of new arrivals from
other areas of the country
and because of the aging
local population. Given
those tends, it is understandable that changes
in retirement systems are
of intense interest not
only t o o l d e r residents in the region b u t t o large
segments of the area's economy.
While the current and future costs of public
retirement plans have attracted extensive research,
little research has focused on the geographic
distribution of public pensions. Yet it is widely
recognized that some regions and states have a
greater concentration of older Americans and
therefore more reliance on public retirement
funds than others. So it would be logical to find
that Florida's economy is more dependent on
public retirement pensions than other states.
Second, since workers in the Southeast states
have incomes lower than the national average,
the southeastern economy, in general, depends
more on the Social Security system than higher
income regions do. Moreover, as Social Security
payments replace a larger
proportion of lower wage
workers' pre-retirement
income,retirement is encouraged more in lower
wage regions like t h e
Southeast
In assessing the impact
of such payments on the
Southeast, w e looked at
unpublished Commerce
D e p a r t m e n t data covering retirement benefits
by regions u n d e r five
major systems: Old Age and Survivors Insurance
(OASI) and Disability Insurance (Dl), the largest
programs under Social Security; Federal Railroad
Retirement; Federal Civil Service; state and
local government pensions, and military retirement pensions. The statistics w e reviewed extend from 1959 through 1980, the latest year for
which data were available.
A large and g r o w i n g portion of t h e Southeast's disposable i n c o m e
c o m e s from public pension payments. In particular, c o u n t i e s c l u s t e r e d
around military bases a n d universities a n d in mountain areas d e p e n d
substantially on t h e public pension system.
FEDERAL RESERVE B A N K O F A T L A N T A
63
Table A. The Region's Residents Are Getting Older
Over 65 Population
Population
1970
1980
Percent
Change
1970
1980
Percent
Change
Alabama
3,444,165
3,893,888
13.1
325,961
440,003
35.0
Florida
6,789,443
9,746,324
43.6
989,366
1,687,112
70.5
Georgia
4,589,575
5,463,105
19.0
367,458
518,164
41.0
Louisiana
3,641,306
4,205,900
15.5
306,707
403,187
31.5
222,320
288,742
29.9
Mississippi
2,216,912
2,520,638
13.7
Tennessee
3,923,687
4,591,120
17.0
383,925
517,572
34.8
District States
24,605,088
30,420,975
23.6
2,595,737
3,856,780
48.6
United States
203,211,926
226,545,805
11.5
20,065,502
25,542,863
27.3
Source: U. S. Department of C o m m e r c e , Bureau of t h e Census, G e n e r a l P o p u l a t i o n C h a r a c t e r i s t i c , selected states, 1 9 8 0 .
Growth of Pension Plans
In 1959, public retirement plans dispensed
$13.8 billion to some 15 million beneficiaries
nationwide. These payments accounted for 4.1
percent of the nation's disposable income. By
1980, these programs had grown more than
tenfold. They distributed $166 billion in annual
pensions to some 45 million Americans, or 9.3
percent of national disposable income. Even if
the federal government establishes no new programs to aid the elderly, the aging of our population
and the programs already in place could exert
further pressures on the Social Security Trust
Fund after 2010.
In the eight-state Southeast region (the states
of the Sixth Federal Reserve District plus North
and South Carolina), the growth and relative
importance of public pensions over the last two
decades have proven even more dramatic than
in the nation. In 1959, the five public pension
systems dispensed $1.6 billion in benefits or just
under 4 percent of disposable personal income
in the region. By 1980, these plans had expanded
to $28.4 billion, or approximately 10 percent of
all disposable income in the eight-state Southeast
Thus, the relative importance of public pensions
to the region has grown from about even with the
national norm in 1959 to above the national
average of 9.3 percent in 1980.
Although the rapid growth in funds disbursed
through pensions is common in all eight southeastern states, the level and relative importance
64
differ markedly. Not surprisingly, Florida leads
the region in both the magnitude and the relative
importance of public pension income. For each
$1,000 of disposable income in the state in
1980, $130 came from public pensions. That is
128.4 percent more than the $57 per $1,000 of
disposable income in 1959, and 41.3 percent
above the $92 per $1,000 nationally. Among
other regional states, public retirement monies
are the smallest fraction of disposable income in
Louisiana, where $81 per $1,000 originates from
this source. Due largely to the concentration of
Alabama's economy in durable manufacturing
public retirement benefits, particularly Railroad
Retirement, figure heavily in the "Heart of Dixie"
Yet the rate of increase in relative shares of
spendable income made up of pension payments
tells a different story. Although the rates of
increase in relative importance of public pensions
exceeded the nationwide rate of growth in all
eight southeastern states, they grew most rapidly
in Alabama. Between 1959 and 1980, public
pensions as a share of disposable income tripled
in Alabama while it doubled nationally. Strong
economic growth in Florida contributed to a
slower rate of increase in importance of public
pensions, compared with other states with greater
dependence on heavy manufacturing Although
the Sunshine State's dependency on public retirement monies rose over the period, the rate at
which it increased was exceptionally slow in
comparison to other states in the region and
exceeded the nation by only a small margin.
JULY 1 9 8 3 , E C O N O M I C
REVIEW
Table B. A Substantial Amount of Public Pension Income Flows into the Southeast
($ Thousand) (As of 1980)
OASI
and
Dl
State/U. S.
Federal
Civil
Service
Railroad
Retirement
State
and
Local
Military
Retirement
Total
Alabama
1,925,149
71,996
311,110
140,836
279,344
2,728,435
Florida
7,141,350
219,964
1,151,081
296,260
1,224,822
10,033,477
Georgia
2,334,054
100,618
371,415
225,268
424,503
3,455,858
Louisiana
1,747,426
64,070
158,259
292,349
197,301
2,459,405
Mississippi
1,166,250
43,561
133,371
87,609
147,758
1,578,549
North Carolina
2,746,916
67,786
118,000
108,184
191,432
3,232,318
South Carolina
1,359,065
36,992
191,394
118,938
306,167
2,012,556
Tennessee
2,240,406
96,513
211,010
200,412
233,904
2,982,245
28,482,843
166,267,000
20,660,616
Southeast
United States
118,654,000
701,500
2,645,640
1,469,856
3,005,231
4,801,000
15,504,000
14,880,000
12,428,000
Source: U n p u b l i s h e d data
Of the five public pension systems, OASI and
Dl are by far the largest Of the $28.4 billion dispensed to the eight-state region in 1980, almost
three-quarters was Social Security. This amounted
to 17.4 percent of the nationwide total compared
with 15 percent of the over-65 population in
these states. Next in importance was retirement
pay to former military personnel. The $3 billion
issued in military retirement pay in 1980 represented 10.6 percent of the total public pension in
the region but an astonishing 24 percent of
national military retirement pay. Federal Civil
Service pensions rank next in importance in the
region with $2.7 billion in benefits, or9.3 percent
of all pensions, followed by $1.5 billion in pay to
former state and local government workers and
$700 million in Railroad Retirement pensions.
Where are the Recipients Located?
W e can begin to appreciate the importance of
retirement income to the region, however, only
by narrowing our focus. U.S.-to-region and state
to-state comparisons often mask important varn
ations at the substate level. Since OASI and Dl
together account for the largest portion of retirement monies to the region; we focus exclusively
on the distribution of Social Security at the
FEDERAL RESERVE B A N K O F A T L A N T A
substate level. Georgia derived 5.3 percent of its
personal income from Social Security payments
in 1980. However, the proportions of county income made up of Social Security ranged from as
low as 0.8 percent in Chattahoochee County to as
high as 1 5.1 percent in Quitman. In Tennessee,
Social Security accounts for 6.3 percent of statewide income but ranges from 3.9 percent in
Williams County (Nashville) to as high as 12.2
percent in Lake County in the extreme northwestern corner of the state. See Table E for shares
of county incomes comprised by Social Security
payments for other states.
What similarities can we find in these counties
that rely on Social Security for a high proportion of
county income? To answer this question, we
ranked each of the region's 533 counties according
to their respective share of personal income
comprised of Social Security payments. A colorcoded map pinpoints common characteristics of
counties where Social Security payments represent a high share of income.
Although the relationship is less than perfect,
one factor many of these counties have in common is
proximity to military facilities. In Georgia, Quitman and Twiggs counties provide excellent examples of the role of military facilities. Quitman
County, south of Columbus, is a popular location
for retired military personnel from Fort Benning
65
T a b l e C. Social Security P a y m e n t s are Critical t o F o u r t e e n G e o r g i a Counties
(millions of dollars)
Personal Income ($)
Quitman
OAS DI ('%)
OAS DI ($)
3.2
8.6
.314
1.315
9.8
15.1
Toombs
71.3
133.2
2.068
10.830
2.9
12.2
Twiggs
15.4
41.0
.620
2.693
4.0
12.0
Randolph
18.9
44.1
1.397
4.987
7.4
11.3
Chattooga
53.5
132.4
3.235
14.256
6.0
10.8
5.2
13.1
.410
1.398
7.9
10.7
10.5
Taliaferro
Fannin
29.1
83.5
1.946
8.800
6.7
Stewart
12.5
26.9
.773
2.838
6.2
10.4
Rabun
19.1
57.8
1.240
5.964
6.5
10.4
10.4
Webster
4.6
11.0
.204
0.908
4.4
Towns
8.8
29.4
.685
3.568
7.8
10.3
Union
12.8
40.1
.942
4.811
7.4
10.3
Whitfield
188.2
536.6
6.378
29.061
3.4
10.2
Mcintosh
12.9
41.1
.893
4.216
6.9
10.2
14 C o u n t i e s
State
455.5
1,098.8
21.105
95.645
4.6
8.7
15,303.0
44,043.7
532.692
2,334.054
3.4
5.3
S o u r c e : U. S. D e p a r t m e n t of C o m m e r c e B u r e a u of E c o n o m i c A n a l y s i s , R e g i o n a l E c o n o m i c I n f o r m a t i o n S y s t e m a n d F e d e r a l R e s e r v e B a n k
of A t l a n t a
Army Base. Quitman's popularity is enhanced by
the Walter F. George Reservoiralongthe western
border of the county. Twiggs County, south of
M a c o n in p r o x i m i t y t o Warner Robins Air
Force Base, has the third highest proportion of
Social Security payments in the state. Residents
in these t w o counties are more than twice as
dependent on Social Security as the state as a
whole.
A second interesting pattern is that many
highly Social Security dependent counties are
located in mountainous areas. The North Georgia
counties of Chattooga, Fannin, Rabun, Towns,
Union, Whitfield, and Gilmer depend on Social
Security for a much higher proportion of county
income than does Georgia as a whole. Similarly,
five of Tennessee's ten counties most dependent
on Social Security are located in the mountains.
This feature, of course, is limited to only t w o of
the states in the Sixth District
The third factor responsible for high county
concentrations of Social Security is proximity to
large state universities. I n three Alabama counties—
Greene, Hale, and Perry—Social Security is twice
as high as its proportion in the state as a whole.
These counties are located southeast of Tuscaloosa, home of the University of Alabama, and
66
apparently are used as retirement communities
for university faculty and staff. This above-normal
share of county income in Social Security payments also characterizes Franklin County north
of Athens, home of the University of Georgia
Although the entire state of Florida has a higher
concentration of Social Security payments than
other states, some counties are more dependent
than others. Three counties—Pasco, Hernando
and Citrus—rely on Social Security payments for
16 percent or more of county-wide income.
These counties are twice as dependent on Social
Security as the state as a whole and as much as
four times as dependent as the national norm.
Furthermore, 24 more counties in Florida derive
more than 10 percent of county income from
Social Security, double the national share.
Louisiana and Mississippi are least dependent
on Social Security payments. The most dependent county in Mississippi (Yalabusha, south of
the University of Mississippi) derives about 12.3
percent of its income from Social Security. Sabine
parish in Louisiana (neighboring Fort Polk Army
Base) waits on the first of the month for about 12
percent of income.
The relative proportion of county income comprised of Social Security payments is not to be
JULY 1983, E C O N O M I C
REVIEW
Table D. Counties that Account for the Major Proportion of Social Security Payments (1980)
(Millions of Dollars)
Alabama
Florida
Georgia
Louisiana
Mississippi
Tennessee
Jefferson $408.5
Broward $970.6
Fulton $284.4
Orleans $ 2 9 9 . 8
Hinds $113.2
Shelby $342.7
Mobile 170.6
Dade 933.8
Dekalb 182.0
Jefferson 165.8
Harrison 65.8
Davidson 233.6
Montgomery 86.8
Pinellas 847.4
Chatham 102.3
E Baton Rouge 126.2
Jackson 40.3
Knox 163.5
Madison 65.0
Palm Beach 563.9
Cobb 93.5
Caddo 122.6
Lauderdale 39.6
Hamilton 158.7
Etowah 64.0
Hillsborough 339.4
Bibb 77.5
Culcasicu 72.8
Jones 37.5
Sullivan 78.1
Tuscaloosa 60.5
Sarasota 275.6
Muscogee76.5
Ouachita 58.7
Forrest 35.9
Washington 46.5
Calhoun 58.0
Duval 256.8
Richmond 72.5
Rapides 59.7
Washington 33.3
Blount 45.7
Walker 93.8
Orange 252.3
Floyd 46.0
Lafayette 40.5
Lee 29.5
Madison 37.2
Baldwin 42.9
Volusia 247.7
Clayton 40.8
Tammany 40.2
L o w n d e s 22.9
Anderson 35.9
Morgan 41.6
Pasco 230.7
Gwinett 38.5
Landry 37.2
Warren 21.3
Gibson 32.3
10 Counties 1,041.8
4,918.2
1,014.3
1,018.5
439.3
1,174.2
Percent of State 54.1 %
68.9%
43.5%
58.3%
37.8%
52.1%
confused w i t h the dollar amounts of such payments. In Georgia, although the highest concentration of Social Security payments in county
income is in Quitman County, it is far from being
the state's largest Social Security county. Fulton
County (Atlanta) receives by far the largest dollar
amount of Social Security payments—$284.7
million in 1980. Dekalb County was next largest
but a distant second to Fulton with $182 million
in 1980. Chatham County (Savannah), received
$102.3 million followed by Cobb (Atlanta), Bibb
(Macon) andMuscogee (Columbus), respectively.
As Table D shows, counties where the largest
dollar amounts of Social Security money flow are
generally the more populous. Jefferson County
(Birmingham) received $408.5 million in 1980
compared to 170.6 million in M o b i l e County.
Three Florida counties—Broward, Dade, and
Pinellas— received $2.8 billion in Social Security
payments in 1980.
Why Worry Over Changes in the System?
Social welfare spending grew from $14 billion,
or 5.3 percent of gross national product, in 1950
to $317 billion, or 13.9 percent of GNP in 1979.
Thus, over a span of only three decades, the
relative size of government social welfare expenditures increased over 160 percent However, the growth of expenditures for OASI and Dl
over this period was even greater. In 1950, only
FEDERAL RESERVE B A N K O F
ATLANTA
$800 million, or 0.3 percent, of our national
income went to these t w o major Social Security
programs. By 1980, they had grown to $166
billion, or 5.9 percent, of CNP. Today Social
Security comprises 26.7 percent of federal government outlays, making it the largest single item in
the federal budget
The Social Security system's rapid expansion
triggered a crisis that forced congressional action
early in 1983. Every minute, the system was
paying out $17,000 more in benefits than it
collected in taxes. At that rate, the trust fund on
which nearly 32 million pension checks are
drawn monthly would soon have been empty.
Congress undoubtedly w o u l d have come under
tremendous pressure t o keep the elderly from
falling behind in paying rent, food, and fuel bills.
The Social Security rescue plan signed by
President Reagan will raise the retirement age to
67 in the next century, increase payroll taxes in
1984 and 1988-1989, freeze benefits for six
months, subject some retirees' benefits to income
tax for the first time, and require all federal
employees hired after next January to join the
system.
Perhaps the most important impact of the new
bill on the program's 36 million beneficiaries—
retirees, disabled workers, and their kin—will be
the six-month delay in their annual cost-of-living
adjustment from July to next January. Since the
CPI rose by roughly 3 percent between 1982-11
67
T a b l e E. R e l a t i v e C o n c e n t r a t i o n of S o c i a l S e c u r i t y I n c o m e in S o u t h e a s t e r n S t a t e s a n d C o u n t i e s / P a r i s h e s ( 1 9 8 0 )
(U. S. = 5.2)
State
Rank
A l a b a m a (6.6)
F l o r i d a (8.1)
G e o r g i a (5.3)
L o u i s i a n a (4.9)
M i s s i s s i p p i (7.0)
T e n n e s s e e (6.3)
1
C r e n s h a w (9.3)
C i t r u s (19.0)
Q u i t m a n (15.1)
S a b i n e (10.9)
Y a l o b u s h a (12.3)
L a k e (12.2)
2
R a n d o l p h (9.2)
P a s c o (18.6)
T o o m b s (12.2)
W e s t Carroll (10.7)
L a w r e n c e (12.4)
F e n t r e s s (11.7)
3
C o v i n g t o n (8.8)
H e r n a n d o (16.9)
Twiggs(12.0)
M a d i s o n (10.1)
A t t a l a (12.0)
Pickett (11.2)
4
H a l e (8.5)
C h a r l o t t e (14.6)
R a n d o l p h (11.3)
L a S a l l e (9.6)
M o n t g o m e r y (11.8)
Polk (11.1)
5
P e r r y (8.0)
F r a n k l i n (14.1)
C h a t t o o g a (10.8)
B i e n v i l l e (9.2)
H o l m e s (11.3)
C a m p b e l l (11.0)
6
F r a n k l i n (8.0)
H i g h l a n d s (13.9)
Taliaferro (10.7)
A l l e n (9.2)
Q u i t m a n (11.3)
Perry (10.7)
7
B u t l e r (8.0)
L a k e (12.3)
F a n n i n (10.5)
J a c k s o n (9.1)
N e w t o n (10.9)
G i b s o n (10.4)
8
C o n e u h (7.8)
M a n a t e e (12.1)
S t e w a r t (10.4)
W a s h i n g t o n (8.9)
F r a n k l i n (10.7)
W h i t e (10.3)
9
W i l c o x (7.7)
Pinellas (12.0)
R a b u n (10.4)
C a l d w e l l (8.8)
C a r r o l l (10.6)
L a u d e r d a l e (10.1)
10
T a l l a p o o s a (7.7)
S a r a s o t a (12.0)
W e b s t e r (10.4)
G r a n t (8.8)
C a l h o u n (10.7)
O v e r t o n (9.6)
11
U n i o n (7.7)
M a r i o n (12.0)
T o w n s (10.3)
W i n n (8.6)
T a l l a h a t c h e e 910.)
C a r r o l l (9.9)
12
G r e e n e (7.7)
Volusia (12.0)
U n i o n (10.3)
C l a i b o r n e (8.5)
N o x u b e e (10.1)
G r u n d y (9.9)
13
B i b b (7.6)
W a s h i n g t o n (11.2)
W h i t f i e l d (10.2)
F r a n k l i n (8.4)
K e m p e r (10.1)
C u m b e r l a n d (9.9)
14
C o o s a (7.5)
P u t n a m (11.2)
M c i n t o s h (10.2)
W e b s t e r (8.3)
L e a k e (10.0)
C r o c k e t t (9.8)
15
T a l l a d e g a (7.3)
O c e o l a (11.1)
Clay (10.2)
U n i o n (8.3)
M a r i o n (9.8)
W e a k l e y (9.8)
16
M a r i o n (7.3)
C a l h o u n (11.0)
C a l h o u n (10.0)
D e s o t o (8.2)
G e o r g e (9.8)
B l e d s o e (9.7)
17
H e n r y (7.3)
L i b e r t y (11.0)
P i e r c e (9.8)
T e n s a s (8.2)
W a l t h a l l (9.8)
S t e w a r t (9.7)
18
D e k a l b (7.3)
S u m t e r (10.9)
F r a n k l i n (9.7)
A v o y e l l e s (8.0)
S h a r k e y (9.7)
H e n r y (9.7)
19
C l a y (7.3)
O k e e c h o b e e (10.9)
W o r t h (9.7)
C u t a h a u l a (8.0)
P i k e (9.7)
H o u s t o n (9.6)
20
C h o c t a w (7.3)
L e e (10.9)
G r e e n e (9.4)
E v a n g e l i n e (7.8)
C o p i a h (8.4)
H a r d e m a n (9.4)
and 1983-11, the delay will cost the typical
retiree, w h o gets $408 a month, roughly $13 a
month or about $80 over the next six months.
The most radical change, however, is the taxing
of benefits. Starting next year, retirees will pay
income tax on half of their Social Security benefits
if their adjusted gross income, including Social
security, exceeds $25,000 for an individual and
$32,000 for a couple.
The bill also boosts the tax rate paid by
employers and the self-employed. In the past
employee and employers paid an equal share of
the tax. Beginning next January, both worker and
employer will pay 7 percent of the applicant
wage base in taxes—up from 6.7 percent this
year. But three-tenths of one percent of the employee's share will be returned in the form of an
income tax credit The self-employed—a growing
segment of the work force—will pay 11.3 percent
in 1984 instead of the current 9.35 percent and
13.02 percent by 1988.
The legal retirement age also will increase.
Currently at 65, the retirement age for which a
worker is entitled to the full benefits will increase
in two phases. Starting in the year 2003 the
retirement age will increase by two months per
68
year until it reaches 66 in 2009. Between 2021
and 2027, the legal retirement age will increase
to 67. This does not mean that people will not be
able to retire at age 62. Instead, the percent of
full benefits that those retiring at age 62 are
eligible for will be only 70 percent instead of the
current 80 percent
The final important provision relates to coverage
of the Social Security system. Beginning next
year, members of Congress, congressional employees, federal judges, and other high level
federal executives will be compelled to join the
Social Security system. Moreover, all federal
workers hired after 1983 will be required to join
the system as will all employees of not-for-profit
hospitals, colleges and other non-profit organizations.
The financial squeeze on t h e Social Security
Trust Fund that dictated congressional action is
portrayed vividly in the chart on page 70. The
fund produced annual surpluses from 1967 to 1975.
Over that period the balance doubled from
$19.9 billion in 1966 to $39.9 billion in fiscal
1975. After 1975, benefit payments began to
exceed taxes. The balance in the trust fund
shrank from $39.9 billion in 1975 to only $12.6
JULY 1983, E C O N O M I C
REVIEW
-
f
?
I
I
i
*
>•
*
„
*
.4
billion in 1982. Congress had addressed the
problem previously by raising both the tax rate
and the wage base. In 1966, the Social Security
tax rate was only4.2 percent of the first $6,600 in
wage income. By 1983, the rate had increased to
6.7 percent on the first $35,700 in annual wages.
Thus, payroll taxes for a worker and employer
with earnings at or above the maximum wage
base rose from $554.40 in 1966 t o $4,783.80 in
1983.
Causes of the system's persistent financial
problems are deeply rooted. First and perhaps of
foremost importance is an unfavorable d e m o
graphic mix. The aging population has changed
the pattern between people benefiting from the
FEDERAL RESERVE BANK O F A T L A N T A
I
i
program compared to the number of workers
paying into it The ratio of workers paying into the
system to people drawing benefits has fallen
from 16.5 to 1 in 1950 t o 3.2 to 1 today. Starting
in the year 2010, an unprecedented number of
Americans will begin to retire. Meanwhile, the
working population will have been reduced by
the low birth rates during the last 20 years. It is
conceivable that the worker-beneficiary ratio
could fall even further by the year 2030. If this
occurs payroll taxes could eventually rise to 25
percent of wage and salary disbursements.
The second factor affecting the financial soundness of the Social Security system is political. In
1972, Congress passed a bill raising Social Se69
Federal O l d - A g e & Survivors I n s u r a n c e Trust F u n d
Cumulative Balance
40
35
30
25
20
15
M
10
'66
' 68
'70
'72
'74
'76
'78
'80
'82
curity benefits by 20 percent More important,
the bill decreed that Social Security benefits be
keyed to the Consumer Price Index beginning in
1975. If the CPI in the first quarter of any given
year averaged more than 3 percent higher than it
was 12 months earlier, benefits would be raised
by an amount equal to the full increase the
following July.
As a measure to protect the elderly against
inflation, t h e bill c o n t a i n e d serious imperfections. For example, the CPI was influenced
heavily by increases in housing prices and mortgage interest rates, but relatively few elderly
people buy houses. Many have already provided
for housing prior to retirement, as is indicated by
the popularity of living areas in the vicinity of
places of former employment such as military
bases and universities. Thus the measure overprotected the elderly from housing inflation. In
any case, the resulting benefit increases proved
to be poorly timed as the CPI rose at rates
unprecedented in U.S. history in the year immediately after the cost-of-living adjustment became effective. The maximum yearly Social Security benefit leaped 200 percent during the
decade of the 1970s.
W e can draw t w o conclusions. First, these
public pension funds account fora slightly higher
share of personal income in the region than in
the nation as a whole. Therefore, any change in
those funds would have a somewhat disproportionate consequence on the region in general and
particularly on those areas w e have discussed.
Second, growth of pension payments in the
region has continually exceeded growth of personal income since 1959. The disproportionate
importance of retirement income is due largely
to the region's attractiveness to retirees as well as
to the method by which monthly benefits are
determined.
As the national population continues to age,
counties near the north Georgia mountains, military bases and state universities in the Southeast
are likely to grow faster than other counties.
Health care services can be expected to expand
in these areas to accomodate a growing elderly
population.
— C h a r l i e Carter
,
e»
70
70
J U L Y 1 9 8 3 , E C O N O M I C R E V I E W,m
Iii
FINANCE
MAY
1983
UNITED STATES
Commercial Bank Deposits
Demand
NOW
Time
Credit Union Deposits
Share D r a f t s
Savings & Time
SOUTHEAST
Commercial Bank Deposits
Demand
NOW
Time
Credit Union Deposits
Share Drafts
Savings <5c Time
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share D r a f t s
Savings & Time
FLORIDA
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share D r a f t s
Savings & Time
GEORGIA
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share D r a f t s
Savings & Time
LOUISIANA
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share D r a f t s
Savings & Time
MISSISSIPPI
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share D r a f t s
Savings <5c Time
TENNESSEE
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share D r a f t s
Savings & Time
Notes:
APR
1983
MAY
1982
ANN.
%
CHG.
1,251,299 1,265,842 1,123,789
299,605
303,382
289,024
78,334
56,153
76,933
329,405
324,384
150,270
580,502
588,845
659,361
59,071
57,379
46,238
5,172
5,149
3,090
39,868
47,374
46,000
+ 11
+ 4
+ 37
+119
- 12
+ 28
+ 67
+ 19
Savings & Loans
T o t a l Deposits
NOW
Savings
Time
+ 15
+ 2
+ 36
+145
- 9
+ 31
+ 38
+ 30
Savings & Loans
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage C o m m i t m e n t s
141,170
35,332
9,986
36,396
62,948
5,557
436
4,770
142,329
36,515
10,365
35,856
63,017
5,314
424
4,454
122,294
34,549
7,349
14,850
68,936
4,235
315
3,656
14,891
3,624
902
3,033
7,864
863
80
721
14,957
3,748
929
3,002
7,797
883
83
747
13,512
3,511
636
1,555
8,276
599
61
559
+
+
+
+
+
+
+
10
3
42
95
5
44
31
29
Savings <5c Loans
Total Deposits
NOW
Savings
Time
48,744
12,633
4,246
16,390
16,559
2,414
219
1,852
49,186
13,213
4,436
16,056
16,631
2,420
222
1,870
40,332
12,305
3,244
6,321
19,466
2,016
175
1,591
+ 21
+ 3
+ 31
+159
- 15
+ 20
+ 25
+ 16
Savings & Loans
T o t a l Deposits
NOW
Savings
Time
20,117
6,572
1,315
4,450
8,719
1,273
61
1,142
20,214
6,653
1,359
4,469
8,665
1,017
49
895
17,047
6,040
1,041
1,637
9,243
803
29
728
+ 18
+ 9
+ 26
+172
- 6
+ 59
+110
+ 57
Savings & Loans
Total Deposits
NOW
Savings
Time
24,552
5,876
1,311
5,034
12,871
195
22
287
24,840
6,104
1,385
4,914
12,931
172
15
164
22,045
6,140
999
2,456
13,051
120
10
111
+ 11
- 4
+ 31
+105
- 1
+ 63
+120
+159
Savings & Loans
Total Deposits
NOW
Savings
Time
11,390
2,401
788
2,349
6,156
N.A.
N.A.
N.A.
11,388
2,435
803
2,244
6,199
N.A.
N.A.
N.A.
10,227
2,378
546
740
6,797
N.A.
N.A.
N.A.
+ 11
+ 1
+ 44
+217
- 9
Savings & Loans
Total Deposits
NOW
Savings
Time
21,495
4,226
1,424
5,148
10,790
812
54
768
21,744
4,362
1,453
5,171
10,794
822
55
778
19,131
4,175
883
2,141
12,103
697
40
667
+ 12
+ 1
+ 61
+140
- 11
+ 16
+ 35
+ 15
Mortgages Outstanding
Mortgage C o m m i t m e n t s
Mortgages Outstanding
Mortgage C o m m i t m e n t s
Mortgages Outstanding
Mortgage C o m m i t m e n t s
Mortgages Outstanding
Mortgage C o m m i t m e n t s
Mortgages Outstanding
Mortgage C o m m i t m e n t s
Mortgages Outstanding
Mortgage C o m m i t m e n t s
Savings 3c Loans
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage C o m m i t m e n t s
ANN.
%
CHG.
MAY
1983
APR
1983
MAY
1982
600,932
17,174
190,693
396,764
MAR
467,127
18,092
592,720
17,383
187,367
390,988
FEB
472,529
16,005
527,933
9,531
92,199
426,790
MAR
507,016
11,124
+ 14
+ 80
+107
- 7
88,565
2,929
25,367
61,183
MAR
65,719
3,785
86,747
2,954
24,743
59,755
FEB
66,020
3,457
77,743
1,560
11,677
64,531
MAR
74,341
3,396
+ 14
+ 88
+117
- 5
4,959
134
857
4,028
MAR
3,583
103
4,754
132
847
3,850
FEB
3,602
97
4,440
80
555
3,826
MAR
3,978
60
+ 12
+ 68
+ 54
+ 5
54,763
2,051
17,471
35,715
MAR
38,687
2,812
52,858
2,058
16,839
34,256
FEB
38,769
2,595
47,230
1,081
7,821
38,251
MAR
45,496
2,892
+ 16
+ 90
+123
- 7
10,421
314
2,396
7,941
MAR
8,190
288
10,633
312
2,491
8,008
FEB
8,427
276
9,681
168
1,182
8,367
MAR
9,313
147
+ 8
+ 87
+103
- 5
8,755
181
2,468
6,179
MAR
7,346
380
8,918
188
2,416
6,396
FEB
7,283
295
7,681
98
1,222
6,371
MAR
7,191
223
+ 14
+ 85
+102
- 3
2,529
81
519
1,960
MAR
2,038
30
2,537
79
518
1,973
FEB
2,044
26
2,408
46
221
2,152
MAR
2,198
17
+ 5
+ 76
+135
- 9
7,138
168
1,656
5,360
MAR
5,875
172
7,047
185
1,632
5,272
FEB
5,895
168
6,303
87
676
5,564
MAR
6,165
57
- 8
+ 63
- 12
+ 11
-10
+ 72
- 15
- 3
- 12
+ 96
+ 2
+ 70
- 7
+ 76
+ 13
+ 93
+145
- 4
- 5
+202
All deposit data are e x t r a c t e d from the Federal Reserve Report of Transaction Accounts, other Deposits and Vault Cash (FR2900),
and are reported for the average of the week ending the 1st Wednesday of the month. This d a t a , reported by institutions with
over $15 million in deposits as of December 31, 1979, r e p r e s e n t s 95% of deposits in the six s t a t e a r e a . The major d i f f e r e n c e s betw«
this report and the "call report" are size, the t r e a t m e n t of interbank deposits, and the t r e a t m e n t of float. The data generated from
the Report of Transaction Accounts is for banks over $15 million in deposits as of December 31, 1979. The t o t a l deposit data gener
from the Report of Transaction Accounts eliminates interbank deposits by reporting the net of deposits "due to" and "due f r o m " o t h e
depository institutions. The Report of Transaction Accounts s u b t r a c t s cash in process of collection from demand deposits, while the
report does not. Savings and loan mortgage data a r e from the Federal Home Loan Bank Board Selected Balance Sheet Data. The
Southeast data represent the t o t a l of the six s t a t e s . Subcategories were chosen on a selective basis and do not add to total.
FRASER
N.A. = fewer than four institutions reporting.
Digitized for
http://fraser.stlouisfed.org/
FED
E R A L R E SBank
E R V E of
B ASt.
N K Louis
OF ATLANTA
Federal
Reserve
71
a
CONSTRUCTION
MAR
1983
APR
1982
ANN
%
CHG
12-month Cumulative R a t e
UNWED STATES
Nonresidential Building P e r m i t s - $ Mil.
44,768
T o t a l Nonresidential
4,669
Industrial Blcfes.
11,130
Offices
5,391
Stores
1,832
Hospitals
875
Schools
44,533
4,783
11,255
5,186
1,778
812
51,168
6,842
15,028
5,918
1,594
793
+
+
13
32
26
9
15
10
Residential Building P e r m i t s
Value - $ Mil.
Residential P e r m i t s - Thous.
Single-family units
Multi-family units
Total Building P e r m i t s
Value - $ Mil.
SOUTHEAST
Nonresidential Building P e r m i t s - $ MEL
6,815
T o t a l Nonresidential
618
Industrial Bldgs.
1,558
Offices
963
Stores
398
Hospitals
165
Schools
6,582
634
1,443
962
377
136
6,627
810
1,351
1,107
286
89
+
+
+
+
3
24
15
13
39
85
Residential Building P e r m i t s
Value - $ Mil.
Residential P e r m i t s - Thous.
Single-family units
Multi-family units
Total Building P e r m i t s
Value - $ Mil.
ALABAMA
Nonresidential Building P e r m i t s - $ Mfl.
348
T o t a l Nonresidential
34
Industrial Blcfes.
72
Offices
46
Stores
29
Hospitals
5
Schools
377
40
73
67
30
5
422
80
36
68
32
6
- 18
- 58
+100
- 32
- 9
- 17
Residential Building P e r m i t s
Value - $ Mil.
Residential P e r m i t s - Thous.
Single-family units
Multi-family units
Total Building P e r m i t s
Value - $ Mil.
FLORIDA
Nonresidential Building Permits - $ Mil.
3,543
T o t a l Nonresidential
331
Industrial Bldgs.
812
Offices
566
Stores
229
Hospitals
54
Schools
3,398
354
718
549
210
53
3,355
391
588
591
160
23
+ 6
- 15
+ 38
- 4
+ 43
+135
Residential Building P e r m i t s
Value - $ Mil.
Residential P e r m i t s - Thous.
Single-family units
Multi-family units
T o t a l Building Permits
Value - $ Mil.
GEORGIA
Nonresidential Building P e r m i t s - $ Mil.
1,043
T o t a l Nonresidential
135
Industrial Bldgs.
248
Offices
88
Stores
Hospitals
25
25
Schools
983
127
229
84
26
10
1,046
178
255
119
30
33
-
0
24
3
26
17
24
Residential Building P e r m i t s
Value - $ Mil.
Residential P e r m i t s - Thous.
Single-family units
Multi-family units
Total Building P e r m i t s
Value - $ Mil.
LOUISIANA
Nonresidential Building P e r m i t s - $ Mil.
1,103
T o t a l Nonresidential
59
Industrial Bldgs.
320
Offices
113
Stores
61
Hospitals
68
Schools
1,064
61
316
122
60
53
910
90
294
175
27
19
+ 21
- 34
+ 9
- 35
+126
+258
Residential Building P e r m i t s
Value - $ Mil.
Residential P e r m i t s - Thous.
Single-family units
Multi-family units
T o t a l Building P e r m i t s
Value - $ Mil.
MISSISSIPPI
Nonresidential Building P e r m i t s - $ Mil.
163
T o t a l Nonresidential
8
Industrial Bldgs.
Offices
16
33
Stores
12
Hospitals
Schools
5
169
11
16
40
10
5
178
22
44
37
6
1
- 8
- 64
- 64
- 11
+100
+400
Residential Building P e r m i t s
Value - $ Mil.
Residential P e r m i t s - Thous.
Single-family units
Multi-family units
Total Building P e r m i t s
Value - $ Mil.
TENNESSEE
Nonresidential Building P e r m i t s - $ Mil.
Total Nonresidential
615
49
Industrial Bldgs.
89
Offices
Stores
116
Hospitals
41
7
Schools
591
40
92
100
42
9
716
49
134
116
22
7
- 14
0
- 34
0
+ 86
0
Residential Building P e r m i t s
Value - $ Mil.
Residential P e r m i t s - Thous.
Single-family units
Multi-family units
Total Building P e r m i t s
Value - $ Mil.
APR
1983
APR
1983
ANN
%
CHG
APR
1982
MAR
1983
47,933
45,373
36,074
+33
655.6
520.8
620.5
500.2
488.6
385.5
+34
+35
92,702
89,907
87,242
+ 6
8,516
8,056
7,049
+21
135.9
102.3
128.7
96.1
100.0
88.2
+36
+16
15,331
14,638
13,677
+12
295
274
250
+18
6.3
4.6
5.9
4.3
4.2
4.9
+50
- 6
643
651
672
- 4
4,891
4,678
4,715
+ 4
70.3
59.4
66.6
57.0
57.6
58.9
+22
+ 1
8,433
8,076
8,070
+ 4
1,719
1,586
1,011
+70
31.7
17.5
30.0
15.0
19.7
9.9
+61
+77
2,762
2,568
2,057
+34
797
758
557
+43
13.7
10.6
12.9
10.1
9.0
7.6
+52
+39
1,901
1,822
1,468
+29
218
208
137
+59
4.0"
2.7
3.9
2.5
2.9
1.7
+38
+59
381
377
315
+21
597
552
379
+58
9.9
7.5
9.4
7.2
6.6
5.2
+50
+44
1,211
1,143
1,095
+11
NOTES:
Data supplied by the U. S. Bureau of the Census, Housing Units Authorized By Building P e r m i t s and Public Contracts, C-40.
Nonresidential data excludes the cost of construction for publicly owned buildings. The southeast data represent the t o t a l of
the six states. The annual p e r c e n t change calculation is based on the most recent month over prior year. Publication of F. W.
Dodge construction c o n t r a c t s has been discontinued.
http://fraser.stlouisfed.org/
72
Federal Reserve Bank of St. Louis
JULY 1983, E C O N O M I C
REVIEW
GENERAL
LATEST
DATA
CURR.
PERIOD
PREV.
PERIOD
YEAR
AGO
ANN.
%
CHG.
MAY
1983
MAY
1982
APR (R)
1983
ANN.
%
CHG.
—
Personal Income
($bil. - SAAR)
Taxable Sales - $ bil.
Plane Pass. Arr. 000's
Petroleum Prod, (thous.)
Consumer Price Index
1967=100
Kilowatt Hours - mils.
SOUTHEAST
Personal Income
($bil. - SAAR)
Taxable Sales - $ bil.
Plane Pass. Arr. 000's
Petroleum Prod, (thous.)
Consumer Price Index
1967=100
Kilowatt Hours - mils.
ALABAMA
Personal Income
($bil. - SAAR)
Taxable Sales - $ bil.
Plane Pass. Arr. 000's
Petroleum Prod, (thous.)
Consumer Price Index
1967=100
Kilowatt Hours - mils.
FLORIDA
Personal Income
($bil. - SAAR)
Taxable Sales - $ bil.
Plane Pass. Arr. 000's
Petroleum Prod, (thous.)
Consumer Price Index Nov. 1977 = 100
Kilowatt Hours - mils.
GEORGIA
Personal Income
($bil. - SAAR)
Taxable Sales - $ bil.
Plane Pass. Arr. 000's
Petroleum Prod, (thous.)
Consumer Price Index 1967 = 100
Kilowatt Hours - mils.
IQOBIAHA
Personal Income
($bil. - SAAR)
Taxable Sales - $ bil.
Plane Pass. Arr. 000's
Petroleum Prod, (thous.)
Consumer Price Index
1967 = 100
Kilowatt Hours - mils.
2581.8
N.A.
N.A.
8,712.0
2483.7
N.A.
N.A.
8,688.6
+ 5
MAY
2616.1
N.A.
N.A.
8,670.5
MAY
DEC
297.1
170.3
295.5
160.5
284.3
172.4
+ 5
- 1
308.6
N.A.
4,332.1
1,407.0
293.9
N.A.
4,672.5
1,393.0
+ 7
MAR
MAY
314.5
N.A.
5,270.3
1,407.0
DEC
N.A.
26.2
N.A.
25.0
N.A.
25.5
4Q
APR
MAR
MAY
34.7
26.5
117.8
55.0
33.9
25.3
90.6
55.0
32.9
24.7
122.6
56.0
DEC
N.A.
3.5
N.A.
3.4
N.A.
3.7
117.4
68.4
2,815.2
64.0
MAY
159.4
7.1
114.8
68.4
2,379.9
65.0
MAR
159.0
6.8
108.0
67.8
2,440.4
79.0
MAY
155.7
6.7
+ 9
+ 1
+15
-19
55.3
39.9
1,846.8
N.A.
APR
297.6
4.1
54.0
39.4
1,454.8
N.A.
FEB
295.1
3.8
51.2
38.2
1,642.2
N.A.
APR
280.2
4.1
+ 8
+ 4
+12
MAR
MAY
44.7
N.A.
292.2
1,202.0
44.4
N.A.
260.4
1,200.0
42.5
N.A.
284.2
1,164.0
DEC
N.A.
4.1
N.A.
4.3
N.A.
3.7
20.4
N.A.
37.6
86.0
19.9
N.A.
25.2
87.0
19.3
N.A.
33.4
94.0
N.A.
1.8
N.A.
1.7
N.A.
1.6
42.0
29.2
160.8
N.A.
41.5
28.7
121.2
N.A.
39.9
28.4
149.6
N.A.
N.A.
5.6
N.A.
5.0
N.A.
5.7
4Q
4Q
4Q
MAY
MAR
MAY
Miami
DEC
4Q
1Q
MAR
Atlanta
DEC
4Q
Personal Income
($bil. - SAAR)
4Q
Taxable Sales - $ bil.
Plane Pass. Arr. 000's
MAR
Petroleum Prod, (thous.) MAY
Consumer Price Index
1967 = 100
Kilowatt Hours - mils.
DEC
Personal Income
($• 0 . - SAAR)
4Q
Taxable Sales - $ biL
APR
Plane Pass. Arr. 000's
MAR
Petroleum Prod, (thous.)
Consumer Price Index
1967 = 100
Kilowatt Hours - mils.
DEC
- 1
+13
+ 1
+ 3
+
+
-
5
7
4
2
- 5
+ 2
+ 6
+ 6
0
+ 5
+ 3
+ 3
+11
+ 6
+13
- 9
+13
+
+
+
-
5
3
7
2
Agriculture
Prices Rec'd by Farmers
137
Index (1977=100)
83,638
Broiler Placements (thous.)
66.60
Calf Prices ($ per cwt.)
26.1
Broiler Prices (« per lb.)
Soybean Prices ($ per bu.)
6.03
Broiler Feed Cost ($ per ton)
220
136
84,992
66.60
24.7
6.08
215
139
84,927
64.20
28.0
6.27
217
+
+
1
2
4
7
4
1
Agriculture
Prices Rec'd by Farmers
122
Index (1977=100)
Broiler Placements (thous.)
32,406
62.57
Calf Prices ($ per cwt.)
Broiler Prices (« per lb.)
25.5
6.18
Soybean Prices ($ per bu.)
Broiler Feed Cost ($ per ton)
207
121
32,818
63.79
24.1
6.26
201
123
32,249
60.16
26.7
6.43
214
+
+
-
1
0
4
4
4
3
Agriculture
Farm Cash Receipts - $ mil.
269
(Dates: FEB, FEB)
10,648
Broiler Placements (thous.)
58.70
Calf Prices ($ per cwt.)
25.5
Broiler Prices (<t per lb.)
Soybean Prices ($ per bu.)
6.13
Broiler Feed Cost ($ per ton)
210
10,916
60.70
23.5
6.15
210
275
10,827
57.00
26.5
6.13
225
+
-
Agriculture
Farm Cash Receipts - $ mil.
992
(Dates: FEB, FEB)
Broiler Placements (thous.)
2,031
Calf Prices ($ per cwt.)
68.40
Broiler Prices (<t per lb.)
25.0
Soybean Prices ($ per bu.)
6.13
Broiler Feed Cost ($ per ton))
230
2,040
70.10
24.0
6.15
225
1,060
2,087
66.60
26.0
6.13
225
+
-
Agriculture
Farm Cash Receipts - $ mil.
(Dates: FEB, FEB)
405
Broiler Placements (thous.)
13,047
Calf Prices ($ per cwt.)
59.80
Broiler Prices (4 per lb.)
25.5
Soybean Prices ($ per bu.)
6.06
Broiler Fe6d Cost ($ per ton)
197
13,009
59.10
24.0
6.17
197
382
12,840
56.70
26.0
6.22
210
+
+
+
-
Agriculture
Farm Cash Receipts - $ mil.
(Dates: FEB, FEB)
316
Broiler Placements (thous.)
N.A.
Calf Prices ($ per cwt.)
63.00
Broiler Prices (« per lb.)
26.0
Soybean Prices ($ per bu.)
6.28
Broiler Feed Cost ($ per ton)
265
N.A.
63.90
24.5
6.32
260
Agriculture
Farm Cash Receipts - $ mil.
392
(Dates: FEB, FEB)
6,681
Broiler Placements (thous.)
62.20
Calf Prices ($ per cwt.)
26.0
Broiler Prices (<fc per lb.)
Soybean Prices ($ per bu.)
6.12
Broiler Feed Cost ($ per ton)
197
6,865
63.80
25.5
6.29
175
Agriculture
Farm Cash Re eipts - $ mil.
366
(Dates: FEB, FEB)
Broiler Placements (thous.)
N.A.
Calf Prices ($ per cwt.)
62.40
Broiler Prices (<fc per lb.)
24.0
Soybean Prices ($ per bu.)
6.29
Broiler Feed Cost ($ per ton)
225
N.A.
63.70
23.5
6.31
198
-
-
-
-
-
-
2
2
3
4
0
- 7
6
3
3
4
0
+ 2
- 2
323
N.A.
59.60
27.5
6.81
250
+
+
6
5
8
6
364
6,590
62.40
28.5
6.34
197
+
+
-
8
1
0
9
3
0
269
N.A.
57.50
25.0
6.49
197
+36
+ 9
- 4
- 3
+14
Notes
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 a r e an average weekly
rate.
Southeast data represent the total of the six states. N.A. = not available. The annual percent change calculation is based
Digitized forThe
FRASER
on most recent data over prior year. R = revised.
http://fraser.stlouisfed.org/
FEDERAL R E S E R V E B A N K O F A T L A N T A
Federal
Reserve Bank of St. Louis
6
2
5
2
3
6
73
M
EMPLOYMENT
ANN.
APR
1983
MAR
1983
APR
1982
%
CHG.
109,875
98,840
11,035
10.2
N.A.
N.A.
39.7
349
109,873
97,994
11,879
10.3
N.A.
N.A.
39.6
347
108,814
98,858
9,957
9.3
N.A.
N.A.
38.7
326
+1
-0
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment Rate - 96 SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
ALABAMA
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfg.
M t g . Avg.
A v g . Wkly. Earn. - $
FLORIDA
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
14,168
12,757
1,412
10.3
N.A.
N.A.
40.0
304
14,040
12,537
1,503
10.6
N.A.
N.A.
39.9
302
13,911
12,630
1,281
9.9
N.A.
N.A.
39.1
286
1,730
1,496
234
14.4
N.A.
N.A.
40.2
304
1,740
1,478
262
14.7
N.A.
N.A.
39.8
301
4,727
4,332
395
8.6
N.A.
N.A.
40.2
293
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
UNITED STATES"
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfjr. Avg. Wkly. Earn. - $
APR
1983
MAR
1983
APR
1982
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & Real Est.
Trans. Com. & Pub. Util.
89,117
18,287
3,671
20,374
16,019
19,457
5,408
4,920
88,341
18,161
3,486
20,173
16,044
19,237
5,374
4,885
89,984
19,073
3,796
20,446
16,154
18,967
5,319
5,058
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., <5c Real Est.
Trans. Com. & Pub. Util.
11,433
2,134
609
2,709
2,179
2,302
662
693
11,388
2,129
603
2,697
2,173
2,293
657
691
11,460
2,200
660
2,685
2,172
2,235
648
702
1,699
1,476
223
14.0
N.A.
N.A.
39.1
288
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & Real Est.
Trans. Com. <5c Pub. Util.
1,309
329
59
266
292
220
59
70
1,304
327
58
264
292
219
60
70
1,327
345
56
268
293
217
59
72
4,610
4,202
408
8.9
N.A.
N.A.
40.3
294
4,607
4,244
363
8.7
N.A.
N.A.
39.0
269
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., <5c Real Est.
Trans. Com. & Pub. Util.
3,857
461
236
1,027
650
944
291
235
3,855
463
236
1,028
645
950
288
235
3,796
465
258
1,003
644
906
281
229
2,689
2,495
194
7.6
N.A.
N.A.
40.5
283
2,677
2,460
217
8.3
N.A.
N.A.
40.3
285
2,641
2,447
194
7.7
N.A.
N.A.
38.6
258
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., <5c Real Est.
Trans. Com. Sc Pub. Util.
2,227
497
98
528
445
388
119
145
2,209
495
95
521
445
384
118
145
2,205
505
104
517
438
370
116
147
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
1,843
1,624
219
11.9
N.A.
N.A.
39.8
387
1,844
1,616
228
12.3
N.A.
N.A.
39.9
382
1,836
1,669
167
10.4
N.A.
N.A.
40.9
384
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., <5c Real Est.
Trans. Com. & Pub. Util.
1,590
192
116
364
313
308
80
125
1,588
192
115
364
313
307
80
124
1,624
208
124
368
309
305
79
130
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
TENNESSEE
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
1,053
933
120
12.3
N.A.
N.A.
39.5
262
1,052
930
122
11.4
N.A.
N.A.
39.2
258
1,057
945
- 1
112
+ 7
783
196
39
159
182
124
33
38
800
205
42
161
184
123
33
40
2,126
1,877
250
11.9
N.A.
N.A.
39.9
296
2,117
1,851
266
12.0
N.A.
N.A.
39.7
294
2,071
1,849
222
11.1
N.A.
N.A.
38.1
271
1,649
456
60
361
296
309
80
79
1,708
472
76
368
304
314
80
84
Notes:
+11
2
+ 1
+10
+ 5
+10
+ 0
- 3
+31
- 3
+1
- 0
10.4
N.A.
N.A.
38.6
246
+ 3
+ 2
+13
+ 5
+ 9
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., 3c Real Est.
Trans. Com. <5c Pub. Util.
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., <5c Real Est.
Trans. Com. & Pub. Util.
787
197
40
161
182,
124
33
39
1,663
458
60
363
297
318
80
79
- 2
- 8
- 6
- 1
+ 1
+ 1
+1
- 4
- 4
- 5
- 3
"3
-
-1
-
JULY 1983, E C O N O M I C
2
+1
0
All labor force data a r e from Bureau of Labor Statistics reports supplied by s t a t e agencies.
Only the unemployment r a t e 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.
74
3»s
-21
REVIEW
I
Federal Reserve Bank of Atlanta
P.O. Box 1731
Atlanta, Georgia 30301
Address Correction Requested
B u l k Rate
U.S. Postage
PAID
A t l a n t a , Ga.
P e r m i t 292
@FedFRASER