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I L I B R A R Y ^ ¡Economic ¡ Review FEDERAL RESERVE BANK OF ATLANTA BUDGET How Will JUNE 1981 Cuts Affect S.E.? fcS&Ls Survey of New Services jpREEZE Higher Vegetable Prices? «CHECKS Slower Growth in 70s 1 Allocation Problems in East t Economic Review FEDERAL RESERVE BANK OF ATLANTA President: William F. Ford Sr. Vice President and Director of Research: Donald L. Koch Vice President and Associate Director of Research: William N. Cox III Financial Structure: B. Frank King, Research Officer David D. Whitehead Natioanl Economics: Robert E. Keleher Regional and International Economics: Gene D. Sullivan, Research Officer Donald E. Baer, Research Officer Charlie Carter William J. Kahley Database Management: Delores W. Steinhauser Visiting Scholars: James R. Barth George Washington University George J. Benston University of Rochester Arnold A. Heggestad University of Florida Editing: Gary W. Tapp Graphics: Susan F. Taylor and Eddie W. Lee, Jr. Free subscription and additional copies available upon request to the Information Center, Federal Reserve Bank of Atlanta, P.O. Box 1731, Atlanta, Georgia 3 0 3 0 1 . Material herein may be reprinted or abstracted, provided this Review, the Bank, and the author are credited. Please provide this Bank's Research Department with a copy of any publication in which such material is reprinted. The purpose of the Economic Review\s to inform the public about Federal Reserve policies and the economic environment and, in particular, to narrow the gap between specialists and concerned laymen. 2 JUNE 1 9 8 1 , E C O N O M I C REVIEW How will the proposed federal budget cuts affect the Southeast? Which programs and which states would be affected most? Will the proposed tax cuts and increased defense spending offset the budget reductions? Survey: Georgia S&Ls Take Lead in New Services How aggressive are S&Ls in the Southeast in offering retail financial services? An Atlanta Fed survey revealed some interesting patterns in the region and some notable differences among individual states 13 The Impact of Florida's Freeze on Vegetable Prices Atlanta Study Finds Check Growth Has Slowed 22 Assessing Economic Country Risk 32 The Effects of Proposed Federal Spending Cuts on the Southeast 4 18 A freeze in Florida's winter vegetable growing region in January damaged or destroyed substantial portions of the growing crops. By March, growers' prices had already increased about 30 percent. How will the freeze affect retail vegetable prices in 1981? Water Allocation in the East .. 2 7 Faced with severe droughts and expanded water usage, Eastern states are exploring ways to allocate their limited supplies of water. The author reviews the development of water law and proposes some alternatives to traditional allocation methods. Sources for Country Risk Analysis 37 An annotated listing of essential information sources for country risk analysis. ' FEDERAL RESERVE BANK O F ATLANTA A major study paints a new picture of the check collection system's development during the 70s. Efficiency is improving; check growth is slowing. With commercial bank lending to developing countries up sharply, banks have intensified their analysis of borrowing countries. What is "country risk analysis" and why does it require a veritable "renaissance man"? Statistical Supplement This month the Review begins a new feature: a four page data insert of monthly economic and financial indicators for the six Southeastern states. An upcoming issue will contain a brief article explaining in more detail the data series and their value in economic analysis 3 T h e Effects of Proposed Federal Spending Cuts on the Southeast The Reagan A d m i n i s t r a t i o n is m o v i n g f o r w a r d with a program designed to slow and eventually reverse t h e share and i n f l u e n c e of t h e federal g o v e r n m e n t in t h e e c o n o m y . S p e n d i n g cutbacks o n t h e o r d e r of $44 b i l l i o n (in fiscal 1982) b e l o w t h e level p l a n n e d by t h e p r e v i o u s a d m i n i s t r a t i o n have been p r o p o s e d . Subseq u e n t r e d u c t i o n s t h r o u g h 1986 w o u l d b r i n g t h e total c u m u l a t i v e r e d u c t i o n s t o $417 b i l l i o n b e l o w t h e b u d g e t s u b m i t t e d earlier by t h e Carter A d m i n i s t r a t i o n . Details o n t h e list of p r o p o s e d cut-backs are f l u c t u a t i n g , of c o u r s e , as Congress p r o c e e d s . The m a g n i t u d e of federal dollars f l o w i n g i n t o t h e six-state area* is s u r p r i s i n g l y large. The federal g o v e r n m e n t spent $59 b i l l i o n (12 percent) of its fiscal 1979 b u d g e t in t h e Southeast. This a m o u n t was $9.5 b i l l i o n m o r e than w h a t W a s h i n g t o n extracted f r o m t h e r e g i o n in terms of federal taxes. 1 M o r e o v e r , t h e $9.5 b i l l i o n t h e r e g i o n received in net i n f l o w s f r o m W a s h i n g t o n was m o r e t h a n d o u b l e t h e $4.5b i l l i o n net i n f l o w of federal dollars t o t h e area f o u r years earlier. Tennessee had by far t h e largest share, receiving close t o $3 b i l l i o n m o r e f r o m W a s h i n g t o n t h a n it sent t h e r e in 1979. Florida and Mississippi w e r e t h e next highest a m o n g t h e District states, w i t h $1.9 and $1.8 b i l l i o n , respectively (see Table 1 for net i n f l o w s f o r o t h e r states). Georgia's share (a $985-million net i n f l o w ) was small relative to o t h e r Sixth District states. As a first a p p r o x i m a t i o n of w h e r e t h e southeastern states stand in t e r m s of federal outlays, w e have r a n k e d federal outlays a n d federal taxes by state o n a per capita basis. The state of Tennessee r a n k e d 1st a m o n g t h e Sixth District states a n d 12th in t h e c o u n t r y in "Georgia, Alabama, Tennessee, Mississippi, Louisiana, and Florida. G e o g r a p h i c Distribution of Federal Funds in Summary, Fiscal Years 1975-80, compiled for the Executive Office of the President by the Community Services Administration. federal outlays per capita ($2,378), t h a n k s largely t o t h e Tennessee Valley A u t h o r i t y (see Table 2). ( W i t h o u t TVA, Tennessee w o u l d have ranked 43rd w i t h o n l y $1,814 in per capita e x p e n d i t u r e s . This measure, h o w e v e r , overstates t h e net e c o n o m i c gain t o Tennessee that results f r o m TVA. It excludes fees c o l l e c t e d by t h e TVA f r o m t h e sale of electrical p o w e r t o residents in t h e general service area.) O n t h e o t h e r h a n d , lower-than-average i n c o m e s placed Tennessee 37th a m o n g t h e 50 states in federal taxes paid per p e r s o n ($1,711). M o r e over, outlays per capita g r e w 53 p e r c e n t t h e r e f r o m fiscal 1976 t o fiscal 1979 — w e l l above t h e national average increase of 47 p e r c e n t . O v e r t h e same p e r i o d , per capita federal taxes extracted f r o m Tennesseeans rose 35 p e r c e n t . Georgia r a n k e d 34th in t e r m s of federal s p e n d i n g per p e r s o n ($1,901) b u t 38th in federal taxes per p e r s o n ($1,708). Federal taxes c o l l e c t e d f r o m G e o r g i a rose slightly less than per capita federal s p e n d i n g , r e s u l t i n g in o n l y a small increase in Georgia's surplus. Per Capita Spending-Tax Ratios A n o t h e r measure of t h e federal g o v e r n ment's fiscal impact in the Southeast is t h e ratio of per capita federal s p e n d i n g t o per capita federal taxes. Spending-tax ratios greater t h a n o n e mean that a state or r e g i o n receives m o r e in federal outlays f r o m Washi n g t o n t h a n it sends t o W a s h i n g t o n in taxes. In fiscal 1979, spending-tax ratios e x c e e d e d u n i t y t h r o u g h o u t t h e District (see Table 1), b u t varied w i d e l y for i n d i v i d u a l states, f r o m 1.05 in Louisiana to 1.58 in Mississippi. But t h e c o n t r i b u t i o n of federal s p e n d i n g t o e c o n o m i c g r o w t h s h o u l d be analyzed by e x a m i n i n g t r e n d s in spending-tax ratios. Spending-tax ratios in t h e region w e r e generally l o w e r in fiscal 1979 than t h e y w e r e in 1976. Spendingtax ratios in Georgia d e c l i n e d f r o m 1.16 in 1 * 4 JUNE 1981, E C O N O M I C REVIEW * * The federal government spent $59 billion (12 percent) of its fiscal 1979 budget in the Southeast. The region's participation in certain programs targeted for reduction (food stamps, school lunches) is higher than the national average. Because of lower-than-average incomes, tax cuts may not help the region much, but if inflation is reduced, the benefits of the spending cuts to the Southeast would outweigh the costs. Table 1. Flow of Federal Funds Shifts Away from Sixth District Fiscal 1979 State * i Spending per person Taxes per person Dollar flow (in millions) Spending taxes ratio Dollar flow (in millions) Alabama 1,968 1,595 1.23 1,406 1.34 Florida 2,217 1,999 1.11 1,934 1.00 9 Georgia 1,901 1,708 1.11 985 1.16 912 627 Louisiana 1,866 1,773 1.05 377 1.16 652 Mississippi 2,073 1,314 1.58 1,845 1.76 1,621 Tennessee 2,378 1,711 1.39 2,925 1.13 627 District Average 2,067 1,683 1.23 9,472 1.26 4,448 U.S. 2,101 2,101 1.00 0 1.00 0 Source: Joel Havemann and Rochelle L. Stanfield, " 'Neutral' Federal Policies Are Reducing Frostbelt-Sunbelt Spending Imbalances," National Journal, February 7 , 1 9 8 1 , p. 234. 1976 t o 1.11 in 1979. For t h e District as a w h o l e , t h e spending-tax ratio fell f r o m 1.26 in 1976 t o 1.23 in 1979. That suggests t h a t , overall, federal s p e n d i n g d i d n o t b e c o m e m o r e i m p o r t a n t as a source of S o u t h e a s t e r n economic growth over the period. (However, since federal i n c o m e tax c o l l e c t i o n s r e d u c e private c o n s u m p t i o n as w e l l as private saving, increased federal s p e n d i n g in t h e District that is m a t c h e d by higher taxes means a m o r e i m p o r t a n t i n f l u e n c e of t h e federal g o v e r n m e n t o n e c o n o m i c g r o w t h . In o t h e r w o r d s , t h e effect of equal increases in federal taxes and federal s p e n d i n g is n o t neutral in t e r m s of aggregate d e m a n d . ) Federal Agencies » Fiscal 1975 Spending taxes ratio A closer l o o k at t h e uses of federal s p e n d i n g in t h e region can be gained by e x a m i n i n g s p e n d i n g by federal agencies a n d d e p a r t ments. The i m p o r t a n c e of s o m e federal FEDERAL RESERVE B A N K O F A T L A N T A agencies w i l l n o t c o m e as a surprise to t h o s e familiar w i t h t h e s t r u c t u r e of t h e Southeastern e c o n o m y . The Tennessee Valley A u t h o r i t y , t h e K e n n e d y Space C e n t e r in central Florida, a n d L o c k h e e d near Atlanta are h o u s e h o l d w o r d s in t h e area. Table 3 presents a b r e a k d o w n of federal outlays by m a j o r d e p a r t m e n t s . Health a n d H u m a n Services and National D e f e n s e are by far t h e biggest federal spenders in t h e r e g i o n , c o m p r i s i n g m o r e t h a n t h r e e - f i f t h s of federal outlays in t h e Sixth District states — a b o u t 3 percentage p o i n t s less t h a n t h e national share a c c o u n t e d for by these t w o departments. I n d i v i d u a l states d i f f e r w i d e l y in t h e c o m p o sition of federal outlays. Expenditures by Health a n d H u m a n Services make up close t o half of t h e federal outlays in Florida b u t a b o u t t w o - f i f t h s in Mississippi. This h i g h e r p r o p o r t i o n of federal s p e n d i n g by H e a l t h a n d H u m a n Services for Florida is d u e t o a d i s p r o p o r t i o n a tely large elderly p o p u l a t i o n t h e r e . 5 Table 2. Per Capita Federal Outlays and Taxes by State, Fiscal 1976 and 1979 Per Capita Outlays Amount State 1976 Per Capita Taxes 1979 Percent Increase Rank 1979 Amount 1976 1979 Percent Increase Rank 1979 47 Alabama 1,480 1,968 33.0 30 1,112 1,595 43.4 Alaska Arizona 3,620 1,696 4,759 2,261 31.5 2 1,920 3,304 72.1 1 15 42 1,383 1,067 1,869 1,464 35.1 34 1,815 2,315 33.3 35.2 37.2 50 22.4 14 1,670 2,240 2,654 28.8 17 62.0 7 1,503 1,995 2,366 2,119 46.8 44 1,912 Arkansas 1,342 California 1,891 Colorado 1,739 Connecticut 1,638 1,204 41.7 9 18 2,598 41.0 30.2 2,384 24.7 3 7 Delaware Florida 1,524 1,768 2,217 28.6 27 1,901 18 34 1,999 1,432 45.5 32.8 1,554 Georgia 1,299 31.5 38 Hawaii 2,906 20.0 4 1,672 33.0 13 Idaho 2,421 1,407 1,708 2,224 2,031 44.3 28 40 1,288 1,062 1,851 43.7 40 1,686 2,537 32.8 Illinois Indiana 1,270 1,822 39.2 38.3 2,098 2,104 20 Kansas 1,400 1,464 44.6 50.3 5 22 1,101 1,373 50 47 1,451 Iowa 1,469 1,602 2,089 42.7 23 Kentucky 1,149 1,678 46.0 41 Louisiana 1,773 52.7 36 1,560 27.1 49 Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri 1,997 45.5 45.4 1,483 1,872 26.2 29 37 1,255 1,579 1,866 48.7 38 2,063 30.7 26 1,161 1,227 2,808 2,377 39.6 46.2 6 1,745 14 1,662 2,375 2,100 36.1 26.4 8 21 1,071 1,271 1,556 45.3 48 1,662 2,346 41.2 1,801 41.7 1,432 11 17 2,073 22.7 2,119 1,314 48.0 1,690 43 25 39.0 51 1,847 2,450 32.6 41.0 30 32 2,012 1,626 945 1,388 9 18 1,305 1,958 1,883 21 1,433 1,998 44.3 39.4 11 1,795 2,570 43.2 4 36 45 1,477 2,034 37.7 26 1,886 2,485 31.8 6 3 1,101 1,640 1,770 1,244 2,201 1,658 49.0 24.4 43 14 33.3 42 1,275 1,830 35 2,172 1,871 43.5 37.6 52.5 33 2,178 2,078 46.6 35.4 15 24 1,580 1,164 1,991 26.0 29 1,577 35.5 48 45 37 Montana 1,588 Nebraska 1,194 2,231 2,103 Nevada New Hampshire 1,729 2,383 76.1 37.8 1,879 28.2 N e w Jersey 1,466 1,271 1,722 New Mexico 2,101 3,138 35.5 49.4 New York 1,510 1,249 1,714 2,103 1,612 39.3 29.1 22 North Carolina North Dakota 2,405 Ohio Oklahoma 1,132 1,545 40.3 36.5 10 49 1,569 1,360 2,037 29.8 27 1,578 1,227 1,911 1,905 40.5 43.4 32 1,486 1,535 2,074 38.8 33 24 1,834 31.7 41 2,249 2,378 53.6 16 12 1,145 1,268 1,611 1,711 40.7 53.3 54.5 Oregon Pennsylvania Rhode Island South Carolina 1,328 1,494 40.5 46 28 16 South Dakota 1,393 1,464 Tennessee 1,551 Texas Utah 1,396 1,960 40.5 31 1,370 2,084 1,862 33.6 23.9 23 39 1,181 2,116 1,624 Vermont 1,560 1,503 1,595 Virginia 2,050 2,901 5 2,056 40.3 25 Washington West Virginia 2,023 2,527 41.5 24.9 1,308 1,466 37.5 21.9 8 1,602 1,887 35 1,154 39 1,950 34.1 1,530 38.5 51 20 1,454 Wyoming 1,448 2,119 43.3 38.7 43.4 47.2 Wisconsin 1,317 1,044 2,297 1,699 2,364 54.2 31 10 14,713 23,529 59.9 1 1,533 1,938 2,750 41.9 2 District of C o l u m b i a Source: 1 35.0 19 44 46 12 Neutral' Federal Policies are Reducing Frostbelt-Sunbelt Spending Imbalances, National Journal, February 7, 1981; U.S. Bureau of the Census, State and Metropolitan Area Data Book, 1979 (A Statistical Abstract Supplement). Note: States in boldface are the Sixth District states. 6 JUNE 1981, E C O N O M I C REVIEW Table 3. Geographie Distribution of Federal Funds, Fiscal 1979 (Millions of Dollars) Ala. Fla. Ga. La. Miss. Tenn. District U.S. Department of Agriculture 367 719 600 533 440 569 3,227 25,059 Department of Commerce 38 64 25 378 32 25 561 3,643 1,687 4,315 2,591 1,130 1,340 1,010 12,073 108,758 Department of Defense Department of Energy Health and Human Services Housing and Urban Development 33 71 17 875 8 1,357 2,361 11,790 2,967 9,171 3,491 2,748 1,942 3,306 23,624 181,021 112 187 141 106 64 125 736 6,749 Department of the Interior 21 75 99 25 45 25 290 5,826 Department of Justice 16 65 42 18 8 17 166 1,704 224 511 308 222 142 221 1,628 15,178 Department of Labor State Department 1 4 1 — — — 6 412 Department of Transportation 217 702 452 221 126 272 1,990 16,632 Treasury Department 135 301 277 191 113 204 1,220 11,685 2 8 7 10 15 16 16 — International Department 1 Community Services Administration — 9 — 28 476 11 11 78 712 Environmental Protection Administration 55 196 90 70 60 83 553 5,332 General Services Administration 31 25 97 7 9 15 184 3,306 National Aeronautics and Space Administration 212 443 7 133 29 4 829 4,725 Postal Services 172 502 287 195 105 266 1,528 14,852 65 195 90 58 40 88 535 4,464 Veterans Administration Railroad Retirement Board 415 1,094 563 365 279 483 3,197 21,177 Tennessee Valley Authority 356 8 183 2 44 1,964 2,557 4,339 Personnel Management (Civil Service) 246 928 297 125 106 331 2,033 16,997 TOTAL 7,381 19,596 9,681 7,418 4,953 10,376 59,405 464,836 Taxes collected 5,801 16,819 8,454 6,946 3,068 7,226 48,314 464,836 Net dollar flow 1,580 2,777 1,227 472 1,885 3,150 11,091 0 1 Less than a million dollars. Source: Community Services Administration, Geographie Distribution of Federal Funds in Summary, Fiscal Year 1979. Location Quotients Location q u o t i e n t s are a n o t h e r way of u n d e r s t a n d i n g g e o g r a p h i c c o n c e n t r a t i o n of federal s p e n d i n g . A location q u o t i e n t measures outlays per capita in an area relative t o per capita outlays in t h e n a t i o n . Location q u o t i e n t s greater than o n e indicate that, o n a per p e r s o n basis, t h e d e p a r t m e n t o r agency is of greater e c o n o m i c i m p o r t a n c e t o t h e area than nationally. In t h e Sixth District, t h e Tennessee Valley A u t h o r i t y had t h e highest location q u o t i e n t s of t h e federal agencies (5.6 in t h e Sixth District a n d 19.0 in Tennessee). The Veterans A d m i n i s t r a t i o n had a l o c a t i o n FEDERAL RESERVE B A N K O F A T L A N T A 7 q u o t i e n t w e l l above u n i t y (1.164). The D e p a r t ments of A g r i c u l t u r e and Health a n d H u m a n Services w e r e near unity. Cuts in Programs For an u n d e r s t a n d i n g of h o w t h e b u d g e t cuts may affect t h e r e g i o n , w e really need t o k n o w h o w m u c h t h e Southeast d e p e n d s financially o n W a s h i n g t o n t o s u p p o r t specific programs. In l o o k i n g at these p r o g r a m s , w e need to r e m e m b e r that a substantial p r o p o r t i o n of t h e cuts w i l l be offset by b l o c k grants t o states. The b l o c k grant plan is i n t e n d e d t o give state and local g o v e r n m e n t s m o r e flexibility in h o w federal dollars are d i s t r i b u t e d a m o n g various p r o g r a m s . A l t h o u g h s p e n d i n g cuts have b e e n p r o posed in n u m e r o u s areas, f e w have received as m u c h a t t e n t i o n as t h e social p r o g r a m s — u n e m p l o y m e n t i n s u r a n c e , f o o d stamps, aid t o families w i t h d e p e n d e n t c h i l d r e n , s c h o o l l u n c h p r o g r a m s , etc. Rather t h a n u n d e r t a k i n g a line-by-line synopsis of t h e p r o p o s e d cuts, let us e x a m i n e t h e i m p o r t a n c e of t h e p r i m a r y s p e n d i n g cuts o n t h e Southeast. Food Stamps. Perhaps at t h e t o p of t h e list is t h e Food Stamp Program. The A d m i n i s t r a t i o n proposal calls f o r a $1.8-billion cut in 1982 and a $6.4-billion r e d u c t i o n o v e r t h e next f o u r years. Bear in m i n d , " h o w e v e r , that t h o s e p r o p o s e d cuts are n o t necessarily r e d u c t i o n s f r o m p r i o r s p e n d i n g levels b u t f r o m w h a t was p r o p o s e d by t h e p r e v i o u s a d m i n i s t r a t i o n . In A u g u s t 1980,1.4 m i l l i o n h o u s e h o l d s (over 4 m i l l i o n persons) w e r e receiving f o o d stamps in t h e Southeast. Charts 1 a n d 2 s h o w t h e level of p a r t i c i p a t i o n as w e l l as t h e g r o w t h of t h e Food Stamp Program in t h e Southeast. There w e r e m o r e f o o d stamp participants in t h e Sixth District states t h a n t h e e n t i r e p o p u l a t i o n of Alabama. O n e o u t of f o u r persons in Mississippi received f o o d stamps in A u g u s t 1980. In dollar t e r m s , t h e m a g n i t u d e of assistance t h e Southeast receives u n d e r t h e Food Stamp Food Stamp PartieCipation Program is just as significant. D u r i n g t h e first 11 m o n t h s of fiscal 1980 ( O c t o b e r 1,1979August 30,1980), $1.5 b i l l i o n was paid t o individuals in t h e six Southeastern states — 19 percent of t h e national total. The average value of c o u p o n s ranged f r o m $101 per m o n t h in Georgia and Tennessee t o $109 per m o n t h in Mississippi. As Table 4 s h o w s , all six District states had a higher p r o p o r t i o n of t h e i r residents receiving f o o d stamps t h a n t h e national average. In Georgia, f o r instance, 653,384 persons w e r e in t h e p r o g r a m — 12 p e r c e n t of its 1980 p o p u l a t i o n . The most p o p u l o u s state — Florida — had t h e highest n u m b e r of participants b u t was t h e lowest in t h e District relative t o its p o p u l a t i o n — 1 0 p e r c e n t . School Lunches. A s e c o n d p r o g r a m receiving w i d e s p r e a d a t t e n t i o n is t h e s c h o o l l u n c h p r o g r a m . T h e federal g o v e r n m e n t provides cash, c o m m o d i t i e s , and special cash assistance t o school districts that agree t o p r o v i d e free meals to t h e l o w - i n c o m e students (125 percent of t h e p o v e r t y i n c o m e ) a n d r e d u c e d price meals t o students f r o m families w i t h incomes 125 t o 185 p e r c e n t of t h e p o v e r t y line. (As of A p r i l 1981, t h e p o v e r t y level f o r a family of f o u r was $8,450.) U n d e r t h e Reagan p r o p o s a l , students f r o m f o u r - p e r s o n families w i t h i n c o m e s over $15,630 per year w i l l n o t c o n t i n u e t o receive t h e subsidy. C o n s e q u e n t l y , an estimated 14 m i l l i o n students nationally w i l l lose this federal subsidy. ... expanding in Southeast Percent of Population 20.8 1 9 7 9 I 1980 Percent of Population 1980 1979 District 1 1 15.7% . 8 13.3 12.0 10.2 u.s. 8.6 9.8 9.2 Ala. Fla. Ga. La. Ms. Tn. 1 8 JUNE 1 9 8 1 , E C O N O M I C REVIEW Table 4. Participation in Food Stamp Program by State, 1980 Food Stamp Participants Higher than the National Average, Puerto Rico Mississippi Food Stamp Participants Percent of Population Population 1980:9.8% 2,632,663 8.2 11,418,461 8.2 4,216,446 8.0 8.0 448,864 511,456 5,737,037 31,078 400,481 410,893 7.8 7.7 1,859,689 3,186,076 58.4 Oregon 524,139 608,867 2,520,638 20.8 Illinois 3,890,061 15.7 Maryland 637,651 1,299,968 15.5 Vermont 337,660 40,639 15.0 Massachusetts Alabama 99,081 District of C o l u m b i a Percent of Population Population 216,966 930,062 7.8 New Mexico Tennessee 194,536 677,057 4,590,750 14.8 Alaska South Carolina 444,719 3,119,208 14.3 Virginia Missouri 360,131 5,346,279 4,917,444 Indiana 398,781 5,490,179 7.3 7.3 Louisiana 584,255 4,203,972 Kentucky 490,966 3,661,433 13.9 13.4 Arkansas 305,602 140,924 2,285,513 13.4 Idaho 12.5 653,384 1,124,660 5,464,255 12.0 Oklahoma South Dakota 211,707 1,949,644 10.9 California 965,000 10.9 10.4 Washington Maine Georgia West Virginia 104,860 1,817,077 Hawaii New York 997,754 594,484 Florida North Carolina 17,557,288 9,739,992 4,874,429 Lower than the National 7.2 7.1 47,038 690,178 6.8 1,588,055 261,967 23,668,562 6.7 174,474 4,130,163 2,888,834 6.3 10.2 Colorado Montana 46,187 786,690 10.1 New Hampshire 920,610 3,107,576 5.9 5.7 Connecticut 52,317 172,841 156,569 236,821 2,913,387 Average 895,890 9,258,344 9.7 91,280 947,154 9.6 Nebraska 72,349 53,286 641,828 595,225 7,364,158 9.0 8.7 Nevada Minnesota 36,614 185,874 1,024,261 11,866,728 8.6 North Dakota 910,801 10,797,419 8.4 Kansas 1,188,559 14,228,383 8.4 8.4 Utah Rhode Island Delaware Ohio Texas Arizona 943,935 3,025,266 Iowa Wisconsin Michigan New Jersey Pennsylvania 67,592 215,837 226,916 2,717,866 ' Wyoming 6.0 5.6 5.4 4,705,335 5.0 1,570,006 799,184 4.6 4.6 4.6 4,077,148 652,695 28,554 4.4 101,981 60,584 2,363,208 1,461,037 4.3 4.2 15,173 470,816 3.2 Source: Population figures, U.S. News and World Report, February 16, 1981; food stamp data. Statistical Summary of Operations (August 1980), U.S. Department of Agriculture, Food and Nutrition Service. Note: States in boldface are the Sixth District states. Food Stamp Dollar Value District growth rate exceeds nation's. Millions of Dollars 381 1979 I 1980 I Oct:78Aug.'79 Oct.'79Aug.'80 Millions of Dollars Oct. '78Aug. '79 District 1 y1 2 4 Oct. '79Aug. '80 1,506 u.s. 6,573 7,944 Ala. Fla. Ga. FEDERAL RESERVE B A N K O F A T L A N T A La. Ms. Tn. 9 Participation in Food Stamp Program, 1980 MASS. (30) R.I. (19) 9.6% CONN. (43) 5.6% (21) 8.7% (20) 9.0% (28) 8.0% 7.8% 5.5° Numbers in parentheses indicate state ranking by Food Stamp participation. Percentages indicate portion of states' population in Food Stamp Program. Higher than National Average (1980 avg. = 9.8%) Source: Population figures, U.S. News and World Report, February 16, 1981; food stamp data, Statistical Summary of Operations (August 1980), U.S. Deparlmenf of Agriculture, Food and Nutrition Service. Table 5 provides a ranking by percent of total free or reduced-price lunches served by state. The six southeastern states all have a higher p r o p o r t i o n of students receiving subsidized lunches than the national average. Mississippi ranks second nationally, w i t h almost three o u t of f o u r lunches served daily either free or at a reduced-price. Tax C u t s Tax cuts w i l l help to offset reduced federal s p e n d i n g in t h e Southeast. Average incomes, however, are lower in t h e Southeast (about 13 percent less than the national average in 1978). Therefore, on a dollars-per-capita basis, t h e p r o p o s e d 10-percent r e d u c t i o n in federal i n c o m e taxes w i l l t e n d to benefit taxpayers less in t h e Southeast than in o t h e r regions. 10 As a general p r o p o s i t i o n , moreover, lower income households t e n d to spend, rather than save, a larger p r o p o r t i o n of their incomes. Across the board tax cuts w i l l p r o b a b l y generate fewer dollars of savings, per capita, because of b o t h lower incomes and a lower tendency to save. C o r r e s p o n d i n g l y , d e m a n d effects w i l l be greater in the region. Southeastern b o r r o w e r s w i l l p r o b a b l y not be affected m u c h , because credit is m o b i l e , but Southeastern d e p o s i t o r y institutions w h i c h rely on l o w e r - i n c o m e customer bases may get less than their share of t h e savings generated nationally by the tax cut. Southeast W i l l Also Benefit f r o m Program It s h o u l d c o m e as n o surprise that t h e Southeast depends heavily on t h e federal b u d g e t . But t h e above analysis reviews o n l y JUNE 1981, E C O N O M I C REVIEW Table 5. Participation in School Lunch Program by State, October 1980 Free (F) Reduced(R) Total F&R as Percent of Total 966,083 5,958,734 1,952,000 735,961 6,471,677 5,412,621 17,527,608 17,282,223 8,518,340 3,323,623 7,092,120 1,061,109 11,055,854 8,490,222 2,158,630 5,999,840 5,243,631 7,989,646 8,720,397 501,016 2,311,445 62,563 772,310 381,464 127,581 1,082,661 912,935 2,037,277 3,184,117 1,681,607 537,930 1,041,865 446,120 1,211,713 1,840,798 517,704 842,606 850,196 1,161,461 844,293 74,372 439,264 1,222,970 9,335,364 3,620,939 1,399,074 12,283,650 10,552,237 32,744,536 37,397,656 18,858,837 7,171,105 15,456,135 2,871,987 23,542,129 20,543,916 5,374,514 13,819,305 12,457,256 19,000,965 20,663,086 1,245,555 6,016,958 84.1 72.1 64.4 61.7 61.5 59.9 59.8 54.7 54.1 53.8 52.6 52.5 52.1 50.3 49.8 49.5 48.9 48.2 46.3 46.2 45.7 Lunches Served State Dist. of Columbia Mississippi New Mexico Rhode Island Alabama South Carolina New York Texas North Carolina Arkansas Louisiana Maine California Florida West Virginia New Jersey Tennessee Georgia Illinois Delaware Arizona Same or Lower than the National Average: 45.6% Kentucky Maryland Vermont Oklahoma Virginia Alaska Connecticut Michigan Missouri Massachusetts Hawaii Pennsylvania Colorado Nevada Washington Idaho Ohio Utah New Hampshire Kansas Oregon Wisconsin Nebraska Montana South Dakota North Dakota Minnesota Indiana Wyoming Iowa 4,300,600 2,982,339 373,106 2,534,122 5,125,798 247,686 1,954,124 5,413,044 4,188,992 4,151,506 901,822 6,908,043 1,565,713 400,994 1,826,496 581,802 6,373,550 776,411 492,579 1,413,489 1,250,000 2,143,826 772,362 415,919 502,070 355,436 1,570,629 2,367,639 157,939 1,325,168 900,400 711,002 132,843 604,426 955,396 45,024 483,913 932,679 840,062 673,682 253,065 1,948,422 438,682 86,057 632,200 204,117 1,274,631 512,431 196,789 490,508 380,000 771,710 356,283 110,852 198,447 133,324 737,747 564,675 72,265 486,979 11,401,300 8,520,769 1,178,030 7,367,593 14,437,119 709,666 6,131,119 16,033,826 13,047,431 13,400,132 3,354,801 25,991,885 5,992,749 1,463,605 7,503,667 2,437,811 23,880,506 4,079,632 2,190,860 6,294,943 5,530,000 10,060,305 3,894,308 1,845,590 2,483,032 1,853,088 10,252,395 13,812,581 1,086,224 9,213,455 45.6 43.3 42.9 42.6 42.1 41.2 39.8 39.6 38.5 36.0 34.4 34.1 33.4 33.3 32.8 32.2 32.0 31.6 31.5 30.2 29.5 29.0 29.0 28.5 28.2 26.4 22.5 21.2 21.2 19.7 Note: States in boldface are the Sixth District states. FEDERAL RESERVE B A N K O F A T L A N T A 11 t h e effects associated w i t h t h e p r o p o s e d s p e n d i n g a n d tax r e d u c t i o n s . The o b j e c t i v e of t h e p r o p o s e d cuts is t o r e d u c e i n f l a t i o n and revitalize t h e e c o n o m y . People in t h e Southeast have as m u c h stake in r e d u c i n g i n f l a t i o n as o t h e r regions of t h e c o u n t r y . Historically, o n e of t h e Sun Belt's major attractions has b e e n its relatively l o w cost of living. O v e r t h e last t w o years, h o w e v e r , i n f l a t i o n in t h e Southeast has paralleled or e x c e e d e d t h e n a t i o n . M i a m i c o n s u m e r prices rose 13.2 p e r c e n t in 1979 a n d 11.4 p e r c e n t in 1980. Atlanta prices rose 14 p e r c e n t in 1979 and 15.7 percent in 1980. Nationally, c o n s u m e r prices rose 13.9 p e r c e n t in 1979 a n d 11.7 p e r c e n t in 1980. Also, t h e p r o p o s e d cutbacks in social e x p e n d i t u r e s may be s o m e w h a t o f f s e t if t h e region c o n t i n u e s to attract a d i s p r o p o r t i o n a t e share of defense s p e n d i n g . If so, t h e effects w i l l n o t be evenly d i s t r i b u t e d , since defense 12 s p e n d i n g is m o r e c o n c e n t r a t e d in particular locations w i t h i n t h e region t h a n social expenditures. Some locations w i l l b e n e f i t m o r e t h a n o t h e r s , as m i g h t be e x p e c t e d . It is o b v i o u s that federal s p e n d i n g has b e e n g r o w i n g sharply over t h e last d e c a d e . Federal outlays have e x c e e d e d tax c o l l e c t i o n s in each of t h e past 11 years. T h e b u d g e t has n o t been in balance since 1969, p r o m p t i n g t h e federal g o v e r n m e n t t o b o r r o w heavily in s h o r t - t e r m and l o n g - t e r m c r e d i t markets a n d t h e r e b y placing u p w a r d pressure o n interest rates and i n f l a t i o n . If t h e p r o p o s e d s p e n d i n g r e d u c t i o n s can help u n w i n d i n f l a t i o n in t h e Southeast, t h e effects of increased real i n c o m e s of Southeastern residents c o u l d w e l l o u t s t r i p t h e reduced federal s p e n d i n g in t h e area. —Charlie Carter JUNE 1 9 8 1 , E C O N O M I C REVIEW • Auto Loans • Automatic Teller Machines • Consumer Installment Loans • Credit Cards • Direct Deposit • Home Improvement Loans • Overdraft Protection • Preauthorized Payments • Safe Deposit Boxes • Reti r e m e n t counts Survey: Georgia S&Ls Take Lead In New Services In the new regulatory environment, many savings and loan associations are considering whether to expand their product lines and to become more like retail commercial banks. N O W accounts filled an important gap in the S&L product line. The prospect of rate-ceiling elimination by the DIDC, the continuing portfolio imbalances and the new competition from money market funds (together with discussion of possible interstate banking) are putting additional pressure on S&Ls to diversify from their traditional savings deposit/mortgage asset business. Recognizing this, the Federal Reserve Bank of Atlanta called a representative sample of sixty thrift institutions w i t h i n its boundaries. We asked each association whether or not they were offering each o f t e n retail financial services, and whether they were planning to offer them " w i t h i n the next few months." AcDavid Rittiner assisted with the preparation of this survey. 13 FEDERAL RESERVE BANK O F ATLANTA Already offered A l m o s t all associations w e r e already o f f e r i n g f o u r of t h e services: d i r e c t d e p o s i t of checks, establishm e n t of t r u s t a c c o u n t s (IRA, Keogh, etc.), h o m e i m p r o v e m e n t loans a n d p r e a u t h o r i z e d payments. H o m e i m p r o v e m e n t loans are a n e w service in many cases, b u t o n e w h e r e t h e t r a d i t i o n a l S&L m o r t g a g e i n v o l v e m e n t w i t h h o u s i n g collateral provides obvio u s e x p e r i e n c e . S&Ls have in many cases b e e n t h e S o u t h e a s t e r n leaders in d i r e c t d e p o s i t , particularly w i t h regard t o social security checks, w h i l e prea u t h o r i z e d p a y m e n t s a n d r e t i r e m e n t accounts are allied t o t h e savings f u n c t i o n . In these f o u r services, across t h e Sixth Federal Reserve District, t h e great m a j o r i t y of associations w e r e already o f f e r i n g t h e m a n d t h e r e is little r o o m for a s u b s e q u e n t increase in competitiveness. Direct Deposit Home Improvement Loans Ala. 100% * Ga. 92 La. 70 * A * 85 67 84 56 89 Preauthorized Payments 92 78 100 92 ^ 6 1 85 » • Tn. 88 A * * 75 60 A * A Ms. 75 * • 69 84 89 Retirement Accounts Fla. 93 100 * 88 62 * 90 74 A» 100 • 88 * ^ 7 5 *No change from percent now to percent soon. Looking for expansion W h e r e t h e t h r i f t s are l o o k i n g f o r e x p a n s i o n , apparently, is w i t h their n e w access t o c o n s u m e r i n s t a l l m e n t loans a n d auto loans. A b o u t o n e - t h i r d of t h e associations s a m p l e d have already b e g u n t o o f f e r such loans, a n d that p r o p o r t i o n w i l l j u m p t o t h r e e - f i f t h s w i t h i n t h e near f u t u r e . Two-thirds of t h e associations in A l a b a m a a n d G e o r g i a plan t o be o f f e r i n g a u t o loans in t h e near f u t u r e , a n d i n t e r e s t i n g l y e n o u g h , three-quarters of t h e associations w e called in G e o r g i a already o f f e r c o n s u m e r installment loans of various sorts. M a n y associations see these loans as a s h o r t - m a t u r i t y asset t o balance l o n g e r - t e r m m o r t g a g e s (as w e l l as s h o r t - t e r m S&L liabilities). 58v600/ ••.•••••••••••••«•I 37% 33% Auto Loans Consumer Installment Loans Sixth District ^69% Moderate movement 57% 48% In t w o o t h e r p r o d u c t lines, o v e r d r a f t p r o t e c t i o n and safe d e p o s i t b o x e s , S&Ls generally are m o v i n g slowly. Three-fifths of t h e D i s t r i c t associations already o f f e r o v e r d r a f t p r o t e c t i o n (pres u m a b l y in c o n j u n c t i o n w i t h N O W accounts) and a n o t h e r ten plan t o a d d t h e service s o o n . Safe d e p o s i t boxes, a t r a d i t i o n a l c u s t o m e r service, s h o w plans for q u i e t e x p a n s i o n except in Florida, w h e r e many t h r i f t s are a d d i n g t h e m . JV Ala. Overdraft Protection Safe Deposit Boxes Sixth District Overdraft Protection Fla. 33 Safe Deposit Boxes 69 22 31 Ga. 91 j La. 50 .40 83 Ms. 50 A* A "j 40 Tn. A A* *No change from percent n o w to percent soon. Moving slowly A t t h e e n d of t h e s p e c t r u m , v e r y f e w associations o f f e r e d a u t o m a t i c t e l l e r m a c h i n e s , a n d o n l y a b o u t a q u a r t e r of t h e sample associations e x p e c t e d t o o f f e r t h e m s o o n . These w e r e t h e overall District f i n d i n g s , d e s p i t e t h e fact t h a t a b o u t a q u a r t e r of Florida associations already o f f e r a u t o m a t i c teller m a c h i n e s , a n d half of t h e G e o r g i a associations plan t o o f f e r t h e m . Elsewhere, a u t o m a t i c teller machines, because of their high cost in an e n v i r o n m e n t w h e r e S&L profits are u n d e r pressure, are a p p a r e n t l y n o t v e r y p o p u l a r o n t h e S&L agenda. C r e d i t cards are also m o v i n g slowly. O n l y o n e - t h i r d of t h e associat i o n s s a m p l e d p l a n n e d t o o f f e r c r e d i t cards in t h e near f u t u r e , and o n l y a t h i r d of t h a t g r o u p o f f e r t h e m n o w . T h e e x c e p t i o n , o n c e again, was in G e o r g i a , w h e r e v i r t u a l l y sixty p e r c e n t of t h e associations plan to o f f e r c r e d i t cards s o o n . I n f o r m a l c o m m e n t s suggest that s o m e associations are h o l d i n g back because t h e y w o n d e r if their markets are already saturated a n d t h e y q u e s t i o n w h e t h e r t h e cards are really p r o f i t a b l e . We m a d e n o a t t e m p t t o d i s t i n g u i s h a m o n g various types of c r e d i t card a r r a n g e m e n t s s o m e of w h i c h involve v e r y little risk (or profit) t o p a r t i c i p a t i n g associations. So it appears that ATMs a n d credit cards are n o t t h e w a v e of t h e near f u t u r e as far as savings a n d loan associations in t h e Sixth Federal Reserve D i s t r i c t are c o n c e r n e d . Ala. 33 Automatic Teller Machines Credit Cards Fla. 23 Jo Ga. 50 * 8 33 30 59 Jo J5 J l La. 30 Ms. 25 Jo J 0 40 12 24 Jo J2 A 30 Tn. 0 0 N o t e : Sixth District portion only for Louisiana, Mississippi and Tennessee. G e o r g i a associations, in general, s h o w t h e highest d e g r e e of i n v o l v e m e n t w i t h t h e services w e asked a b o u t . N i n e t y - t w o p e r c e n t of t h e Georgia thrifts offer pre-authorized payments, home improvement loans a n d d i r e c t d e p o s i t services, f o r e x a m p l e . In v i r t u a l l y e v e r y case, t h e G e o r g i a p e r c e n t a g e s e x c e e d e d t h e percentages for t h e Sixth District as a whole. T h e G e o r g i a associations are m o r e aggressive than even t h e i r Florida c o u n t e r p a r t s in o f f e r i n g new services. This is s o m e w h a t of a surprise since Florida S&Ls are generally m u c h larger t h a n S&Ls in Georgia. G e o r g i a associations w e r e m o r e than t w i c e as likely t o o f f e r a u t o loans a n d c o n s u m e r i n s t a l l m e n t loans in late February t h a n w e r e t h e i r Florida c o u n t e r p a r t s . Florida t h r i f t s t u r n e d o u t t o be fairly typical of t h e Southeast. T h e y are already heavily i n t o d i r e c t d e p o s i t a n d trust a c c o u n t services, and high o n h o m e i m p r o v e m e n t loans a n d p r e a u t h o r i z e d payments a n d are e x p a n d i n g t h e m s o m e w h a t f u r t h e r , b u t are n o t e x p a n d i n g t h e i r p r o d u c t lines w i t h q u i t e t h e same e n t h u s i a s m as their cousins in Georgia. T h e associations in A l a b a m a also appear t o be m u c h m o r e i n t e r e s t e d in n e w services than t h o s e in Florida. All of t h e t h r i f t s sampled in Alabama already o f f e r e d d i r e c t d e p o s i t services, f o r e x a m p l e , and seventy-eight p e r c e n t of t h e m o f f e r o v e r d r a f t protect i o n in c o n j u n c t i o n w i t h N O W accounts. This was t h e highest p r o p o r t i o n in any state except Georgia. Alabama associations have m o r e aggressive plans for a u t o loans a n d c o n s u m e r loans than their c o u n t e r parts e l s e w h e r e w i t h i n t h e Sixth Federal Reserve District. In t h e o t h e r t h r e e states — Louisiana, Mississippi a n d Tennessee — w h e r e t h e n u m b e r of associations a n d t h e c o m p e t i t i o n b e t w e e n t h r i f t s and banks are m u c h m o r e l i m i t e d , t h e interest in t h e f o u r p r i m a r y services ( d i r e c t d e p o s i t , t r u s t a c c o u n t s , h o m e i m p r o v e m e n t a n d p r e a u t h o r i z e d p a y m e n t s ) is s t r o n g . A l l o f t h e associations sampled in Mississippi o f f e r t r u s t a c c o u n t s , f o r e x a m p l e , a n d all of t h e associations in Louisiana are already o f f e r i n g h o m e i m p r o v e m e n t loans. But t h e thrifts in these t h r e e states are generally n o t as interested in t h e o t h e r services: a u t o loans, c o n s u m e r installment loans, o v e r d r a f t p r o t e c t i o n (except for Tennessee), safe d e p o s i t boxes a n d p a r t i c u l a r l y a u t o m a t i c t e l l e r machines. Louisiana thrifts d o , h o w e v e r , s h o w some interest in t h e c r e d i t card p r o d u c t , relative t o their c o u n t e r p a r t s in t h e rest of t h e District. 16 Sixth District S&Ls • Georgia thrifts more aggressive • Alabama S & Ls exp a n d i n g plans for auto and consumer loans Florida pattern typical of S.E. Credit cards attracting activity in Louisiana Thrift-bank competition limited in Tennessee and Mississippi William N. Cox JUNE 1 9 8 1 , E C O N O M I C REVIEW Federal Reserve Bank of Atlanta Working Papers Estimating Sixth District Consumer Spending by Brian D. Dittenhafer Changes in Seller Concentration in Banking Markets by B. Frank K i n g Regional Impacts of Monetary and Fiscal Policies in the Postwar Period: Some Initial Tests by William D. Toal A Framework for Examining the Small, Open Regional Economy: An Application of the Macroeconomics of Open Systems by Robert E. Keleher Southern Banks and the Confederate Monetary Expansion by J o h n M. G o d f r e y An Empirical Test of the Linked Oligopoly Theory: An Analysis of Florida Holding Companies by David D. W h i t e h e a d Regional Credit Market Integration: A Survey and Empirical Examination by Robert E. Keleher Entry, Exit, and Market Structure Change in Banking by B. Frank K i n g Future Holding Company Lead Banks: Federal Reserve Standards and Record by B. Frank K i n g Money-Income Causality at the State-Regional Level by Robert E. Keleher and Charles J. H a u l k The Influence of Selected Factors on the Slowdown in Southeastern Manufacturing Productivity by Charlie Carter 1919-1939 Reassessed: Unemployment and Nominal Wage Rigidity in the U.K. by Barbara Henneberry, Robert E. Keleher, and J a m e s G. Witte H o m e Office Pricing: The Evidence from Florida by David D. W h i t e h e a d Supply-Side Effects of Fiscal Policy: S o m e Historical Perspectives by Robert E. Keleher and William P. Orzechowski Copies of these publications are available upon request from: Research Department, Federal Reserve Bank of Atlanta, P.O. Box 1731, Atlanta, Georgia 30301. Please include a complete mailing address with ZIP Code to ensure delivery. Interested parties may also have their names placed on a subscription list for future studies. FEDERAL RESERVE BANK O F ATLANTA 17 T h e Impact of Florida's Freeze on Vegetable Prices Florida, which provides about 40 percent of the U.S. winter vegetable crop, suffered a damaging freeze in January. With supplies of imports and processed vegetables also down, higher food prices appear likely, but changes in prices for specific foods are difficult to predict. A freeze in Florida's w i n t e r v e g e t a b l e - g r o w i n g r e g i o n in January d a m a g e d or d e s t r o y e d a substantial p r o p o r t i o n of t h e g r o w i n g crops. Items such as sweet c o r n a n d peppers w e r e a f f e c t e d m o r e severely t h a n w e r e t h e m o r e h a r d y celery, lettuce, a n d carrot crops. In total, however, vegetable tonnage shipped f r o m t h e area d e c l i n e d by an estimated one-third d u r i n g the weeks f o l l o w i n g the freeze. W i t h supplies r e d u c e d , prices w e r e e x p e c t e d t o rise as market forces c o m p e t e d f o r t h e smaller quantities available for sale. W h e n a similar f r e e z e o c c u r r e d in early 1977, prices t o g r o w e r s increased a b o u t 40 percent w i t h i n t w o m o n t h s f o l l o w i n g t h e freeze (see Figure 1). Fresh vegetable prices at retail c o n t i n u e d t o advance u n t i l t h r e e m o n t h s had passed, reaching a b o u t 33 p e r c e n t above t h e pre-freeze level (see Figure 2). F o l l o w i n g January's freeze this year, g r o w e r s ' prices had risen a b o u t 30 percent by M a r c h . If 1981's c o n s u m e r price increases f o l l o w t h e 1977 p a t t e r n , t h e supply r e d u c t i o n f r o m January's freeze w o u l d be expected t o cause an e v e n t u a l price rise of o n e - t h i r d or 18 m o r e . Price increases are p r o b a b l y b e i n g t e m p e r e d s o m e w h a t , h o w e v e r , by t h e rapid p r i c e escalation that had already o c c u r r e d in 1980 as a c o n s e q u e n c e of d r o u g h t . Predicting Food Price Changes W h y is it d i f f i c u l t t o p r e d i c t m o r e accurately price changes for specific foods? Food prices are nearly always h i g h l y sensitive t o changes in supply. A s u p p l y r e d u c t i o n typically results in an increase in f o o d prices. For most f o o d c o m m o d i t i e s , t h e price increase w i l l be relatively greater t h a n t h e d r o p in supply. This r e l a t i o n s h i p is basically a t t r i b u t a b l e t o t h e nature of h u m a n f o o d r e q u i r e m e n t s . Since h u m a n physiological r e q u i r e m e n t s are relatively f i x e d , t h e total v o l u m e of f o o d c o n s u m e d by a given p o p u l a t i o n w i t h i n short p e r i o d s of t i m e (e.g., a f e w years) does not change much. This relative stability in d e m a n d means that if t h e q u a n t i t y of available f o o d changes, t h e price w i l l also change, b u t by an even greater p r o p o r t i o n and in t h e o p p o s i t e d i r e c t i o n . If t h e total f o o d s u p p l y w e r e t o d r o p 30 p e r c e n t , J U N E 1 9 8 1 , E C O N O M I C REVIEW Chart 1 Price of Commercial Vegetables Chart 2 Consumer Price Index for Fresh Vegetables (Monthly Index of Prices Received by Farmers) 1967 = 100 for example, and the demand remained about t h e same, prices w o u l d rise, p r o b a b l y by m o r e t h a n 100 p e r c e n t . In e c o n o m i c t e r m s , t h e total d e m a n d for f o o d is relatively price inelastic (changes in price are a c c o m p a n i e d by relatively small changes in t h e total q u a n t i t y of f o o d purchased). 1 A n elasticity c o e f f i c i e n t of - 0 . 5 means that a o n e - p e r c e n t increase in price results in a 0.5-percent d e c l i n e in f o o d purchased. A c o e f f i c i e n t of 1.5 signifies that for each o n e - p e r c e n t change in price, q u a n t i t y changes by 1.5 p e r c e n t . 1 A number of d e m a n d studies have confirmed the relative inelasticity of overall food demand. The most recent comprehensive study determined price elasticities for 49 separate food groups and/or commodities. See P. S. George and G. A. King, Consumer Demand for Food Commodities in the United States with Projections for 1980, California Agricultural Experiment Station, Giannini Foundation Monograph No. 26, March 1971. Although coefficients for some individual vegetables appear to differ from the combined group, individual coefficients have not proven stable over varying time periods, geographic locations, and market levels. See Carole F. Nuckton, Demand Relationships for Vegetables: A Review of Past Studies, Giannini Foundation Special Report 80-1, California Agricultural Experiment Station, Davis, California. FEDERAL RESERVE B A N K O F A T L A N T A 1967 = 100 Forecasting i n d i v i d u a l price changes, h o w e v e r , is m o r e c o m p l i c a t e d than that. The d e m a n d for i n d i v i d u a l f o o d g r o u p s or c o m m o dities typically has greater price elasticity t h a n total f o o d d e m a n d because c o n s u m e r s can s u b s t i t u t e o n e f o o d f o r another. Thus, if t h e price of o n e c o m m o d i t y rises, t h e q u a n t i t y p u r c h a s e d can d e c l i n e , since c o n s u m e r s can s w i t c h t o o t h e r f o o d s . Even so, habits and c u s t o m make most c o n s u m e r s reluctant t o change t h e i r usual diets, so q u a n t i t y purchased typically changes less t h a n t h e price f o r m o s t i n d i v i d u a l f o o d s as w e l l ( w h e n all o t h e r variables r e m a i n u n c h a n g e d ) . The Case of Florida Elasticity statistics for a g r o u p of w i n t e r vegetables are p r o b a b l y m o r e m e a n i n g f u l indicators than are statistics for i n d i v i d u a l 19 crops. In Florida, at least, most i n d i v i d u a l w i n t e r vegetables account f o r a rather small p r o p o r t i o n of the total c r o p (see Table 1). The t o m a t o c r o p is t h e major e x c e p t i o n , accounting for a b o u t o n e - t h i r d of t h e total f a r m value of Florida's w i n t e r vegetables in 1980. M a n y of t h e crops can be and are s u b s t i t u t e d o n e for another by c o n s u m e r s . For e x a m p l e , if a large p r o p o r t i o n of t h e green p e p p e r c r o p is destroyed by a freeze, lettuce, w h i c h is less susceptible t o freeze damage, can be used in greater quantities t o replace peppers in g r e e n salads. The price increase for p e p p e r s , t h e n , w o u l d not be as large as it w o u l d have been had lettuce not been available. A d e m a n d curve can be c o n s t r u c t e d f o r a given p r o d u c t that is a graphic portrayal of t h e q u a n t i t y of t h e g o o d that w o u l d be p u r c h a s e d at each price level. If these relationships b e t w e e n price and q u a n t i t y (the d e m a n d curve) h o l d stable over a p e r i o d of t i m e , o n e c o u l d d e t e r m i n e t h e a p p r o x i m a t e increase in price that w o u l d result f r o m a given r e d u c t i o n in q u a n t i t y or h o w m u c h m o r e of a p r o d u c t w i l l be purchased w h e n price declines. Table 1. Winter Vegetable Crops for Fresh Market 1978 1979 302 444 Florida U.S. 1,523 4,701 2,448 4,126 Florida U.S. 1,848 4,149 2,244 4,890 Florida (also U.S.) 767 833 Florida (also U.S.) 99 128 Florida (also U.S.) 325 429 779 14,342 1,290 14,231 Florida (also U.S.) Florida U.S. 1980 1978 Snap Beans 4 1 9 10,570 Cabbage 2 , 2 8 0 14,194 4,931 41,621 Celery 2,325 20,698 4,890 40,995 Sweet Corn 8 6 7 10,048 Eggplant 126 1,020 Escarole/Endive 360 6,858 Lettuce 1,360 13,087 15,117 135,820 1979 1980 12,698 13,534 35,251 55,828 11,172 26,012 25,133 50,376 21,297 40,715 11,162 12,225 1,702 1,676 8,451 4,608 27,090 16,048 216,512121,877 Green Peppers 5 7 2 13,103 16,918 Tomatoes 2,583 3 , 7 2 5 4 0 , 3 2 0 60,184 Strawberries 384 4 7 5 16,646 2 2 , 1 5 7 Spinach 7,829 309 416 5,611 Broccoli 1,422 1,394 2 1 , 1 7 6 2 9 , 4 1 9 Carrots 3,552 3 , 8 2 5 28,761 34,991 Cauliflower 677 6 4 0 10,983 17,973 Artichokes 7 9 2 14,201 2 4 , 2 2 0 873 All W i n t e r Vegetables 11,485 12,509 146,544 2 2 0 , 7 4 6 35,583 38,549 397,733 570,420 189,066 448,829 39% 42% 702 14,643 Florida (also U.S.) 633 Florida (also U.S.) 2,240 Florida (also U.S.) 290 U.S. 305 U.S. 1,180 Changes in d e m a n d can occur, h o w e v e r , that result in consumers t a k i n g t h e same q u a n t i t y at either a higher or a l o w e r price. O r , w i t h t h e price r e m a i n i n g constant, c o n sumers may purchase either m o r e or less of a given c o m m o d i t y . In such instances, t h e w h o l e d e m a n d curve is said t o have shifted t o t h e left (a decrease) or to t h e right (an increase), resulting in a n e w schedule of price and q u a n t i t y relationships. In t h e previous case, w h e n price changed, t h e q u a n t i t y also changed, b u t it merely reflected a m o v e m e n t along t h e same d e m a n d s c h e d u l e , n o t a shift to a d i f f e r e n t schedule. U.S. 4,059 U.S. 409 U.S. 525 W h e n t h e relationship b e t w e e n price and q u a n t i t y (the d e m a n d curve) is stable, data o n q u a n t i t y sold and total revenue f r o m a given c r o p can give us an i n d i c a t i o n of t h e actual price elasticity of d e m a n d for that p r o d u c t . If total revenue increases w h e n a larger q u a n t i t y is m a r k e t e d (as w i t h sweet c o r n in 1980), d e m a n d is d e m o n s t r a t e d to be relatively elastic. If a smaller q u a n t i t y m a r k e t e d generates an increase in revenue (as w i t h snap beans in 1980), a relatively inelastic d e m a n d is indicated. W h e n p r o d u c t i o n and revenue change in a p p r o x i m a t e l y equal p r o p o r t i o n s (as w i t h eggplant in 1980), a price elasticity of unity is indicated. Table 1 shows p r o d u c t i o n and c r o p values for individual w i n t e r vegetable crops p r o d u c e d in Florida and in t h e U n i t e d States in 1979 and 1980. A c o m p a r i s o n of percentage changes in p r o d u c t i o n and r e v e n u e , s h o w n in 20 Florida Total U.S. Total Florida as Percent of U.S. Total 8,806 34,326 26% 33% 32% 37% 65,933 27,930 10,794 32,777 27,707 20,925 27,473 Source: USDA, Vegetables, 1980 A n n u a l S u m m a r y : Acreage, Yield, Production, a n d Value, D e c e m b e r 1980. JUNE 1981, E C O N O M I C REVIEW gmiimnigm FINANCE $ millions UNITED S T A T E S C o m m e r c i a l Bank Deposits Demand NOW Savings Time Credit Union D e p o s i t s Share D r a f t s Savings & T i m e SOUTHEAST MAY 1981 APR 1981 DEC 1980 1,015,840 1,010,492 1,023,890 301,203 292,103 331,555 41,384 38,185 0 164,080 165,403 173,173 542,010 540,736 525,805 38,276 37,716 35,882 2,107 1,834 1,631 34,153 33,705 32,102 C o m m e r c i a l Bank Deposits Demand NOW Savings Time Credit Union Deposits Share D r a f t s Savings & T i m e 110,028 35,624 5,298 15,700 56,923 3,311 261 2,870 108,791 34,614 4,853 15,805 56,300 3,312 210 2,868 104,546 38,707 0 16,357 51,539 3,209 174 2,345 C o m m e r c i a l Bank Deposits Demand NOW Savings Time Credit Union Deposits Share D r a f t s Savings óc T i m e 12,678 3,599 477 1,662 7,346 544 51 491 12,325 3,394 442 1,664 7,120 537 46 486 12,260 3,955 0 1,745 6,751 521 41 479 C o m m e r c i a l Bank Deposits Demand NOW Savings Time Credit Union Deposits Share D r a f t s Savings à T i m e 36,831 13,217 2,361 6,786 15,532 1,550 135 1,192 36,466 12,983 2,142 6,873 15,230 1,530 116 1,191 35,079 14,219 0 7,100 14,000 1,491 106 1,177 C o m m e r c i a l Bank Deposits Demand NOW Savings Time Credit Union Deposits Share D r a f t s Savings & T i m e 14,614 6,046 754 1,629 7,194 565 18 536 14,442 5,953 686 1,620 7,130 565 14 537 14,217 6,663 0 1,650 6,854 543 12 517 C o m m e r c i a l Bank Deposits Demand NOW Savings Time Credit Union Deposits Share D r a f t s Savings & T i m e 19,467 6,086 687 2,506 10,756 83 5 78 19,349 5,907 651 2,494 10,754 79 4 74 18,689 6,541 0 2,539 10,086 57 4 51 C o m m e r c i a l Bank Deposits Demand NOW Savings Time Credit Union D e p o s i t s Share D r a f t s Savings & Time 9,168 2,453 398 811 5,765 N.A. N.A. N.A. 8,993 2,302 362 821 5,702 N.A. N.A. N.A. 8,662 2,620 0 861 5,364 N.A. N.A. N.A. C o m m e r c i a l Bank Deposits Demand NOW Savings Time Credit Union Deposits Share D r a f t s Savings & T i m e 17,270 4,223 621 2,306 10,330 599 32 573 17,216 4,075 570 2,333 10,364 601 30 580 15,639 4,709 0 2,462 8,484 597 29 572 ALABAMA FLORIDA GEORGIA LOUISIANA MISSISSIPPI TENNESSEE Notes: ANN. RATE OF CHG. - 2 -26 -15 + 9 + 19 +83 + 18 + 15 -23 -12 +30 + 9 +43 +64 +10 -26 -14 +25 + 13 +70 + 7 + 14 -20 -13 *31 + 11 +78 + 4 + 8 -27 - 4 +14 + 12 +43 + 11 + 12 -20 - 4 + 19 +130 +71 + 151 +17 -18 -17 +21 MAY 1981 Savings & Loans T o t a l Deposits NOW Savings Time Mortgages Outstanding Mortgage Commitments Savings & Loans Total Deposits NOW Savings Time Mortgages Outstanding Mortgage Commitments Savings & Loans T o t a l Deposits NOW Savings Time Mortgages Outstanding Mortgage Commitments Savings & Loans Total Deposits NOW Savings Time Mortgages Outstanding Mortgage Commitments Savings & Loans Total Deposits NOW Savings Time Mortgages Outstanding Mortgage Commitments Savings & Loans Total Deposits NOW Savings Time Mortgages Outstanding Mortgage Commitments Savings & Loans T o t a l Deposits NOW Savings Time Mortgages Outstanding Mortgage C o m m i t m e n t s +30 -30 -18 +62 + 1 +30 + 1 Savings & Loans Total Deposits NOW Savings Time DEC 1980 ANN. RATE OF CHG. 511,371 5,656 103,075 402,409 513,352 4,725 105,007 402,584 504,630 0 107,765 394,296 -12 + 6 498,320 17,196 496,610 16,197 494,179 16,021 + 3 +29 80,838 890 13,047 60,578 80,957 747 12,834 60,958 78,684 0 12,852 59,205 + 8 + 4 + 7 72,314 3,825 71,906 3,530 71,065 3,656 + 7 +19 4,382 47 653 3,697 4,395 39 664 3,697 4,262 0 691 3,572 + 8 -16 +10 3,971 143 3,967 155 3,947 140 + 2 + 9 45,391 640 8,780 35,736 45,414 547 8,500 36,087 43,967 0 8,415 35,026 +12 + 6 43,791 3,116 43,426 2,828 42,742 2,984 +10 +18 9,505 86 1,368 8,063 9,540 66 1,397 8,074 9,259 0 1,434 7,817 + 8 -13 + 9 9,392 174 9,358 158 9,332 183 + 3 -20 7,063 47 1,276 5,747 7,081 39 1,289 5,757 6,883 0 1,287 5,595 + 7 - 2 + 8 6,862 257 6,835 238 6,777 221 + 5 +65 1,819 16 195 1,615 1,822 13 197 1,615 1,794 0 210 1,587 + 4 -20 + 5 2,188 57 2,188 61 2,182 58 + 1 - 7 6,560 54 775 5,720 6,569 43 787 5,728 6,431 0 815 5,608 + 6 MAR MAR MAR MAR MAR MAR MAR MAR 6,110 78 FEB FEB FEB FEB FEB FEB FEB FEB DEC DEC DEC DEC DEC DEC DEC DEC + 4 + 9 -14 + 6 6,132 6,085 + 2 90 70 +46 All deposit d a t a a r e e x t r a c t e d f r o m the F e d e r a l R e s e r v e R e p o r t of T r a n s a c t i o n A c c o u n t s , o t h e r D e p o s i t s and Vault C a s h (FR2900), and are r e p o r t e d f o r t h e a v e r a g e of t h e week ending t h e 1st Wednesday of t h e m o n t h . This d a t a , r e p o r t e d by i n s t i t u t i o n s with over $15 million in deposits as of D e c e m b e r 31, 1979, r e p r e s e n t s 95% of deposits in t h e six s t a t e a r e a . T h e annual r a t e of c h a n g e is based on m o s t r e c e n t d a t a over D e c e m b e r 31, 1980 b a s e , a n n u a l i z e d . Savings and loan m o r t g a g e d a t a a r e f r o m t h e F e d e r a l H o m e Loan Bank Board S e l e c t e d B a l a n c e S h e e t D a t a . The S o u t h e a s t d a t a r e p r e s e n t t h e t o t a l of the six s t a t e s . S u b c a t e g o r i e s w e r e chosen on a s e l e c t i v e basis and do not add to t o t a l . N.A. = f e w e r than four institutions r e p o r t i n g . http://fraser.stlouisfed.org/ June 1981, ECONOMIC REVIEW Federal Reserve Bank of St. Louis Mortgages Outstanding Mortgage Commitments ' APR 1981 Federal Reserve Bank of Atlanta EMPLOYMENT ANN. MAR 1981 FEB 1981 MAR 1980 Civilian Labor F o r c e - thous. Total Employed - thous. Total Unemployed - thous. Unemployment R a t e - % SA Insured Unemployment - thous. Insured Unempl. R a t e - % Mfg. Avg. Wkly. Hours Mfg. Avg. Wkly. Earn. - $ 105,405 97,318 8,087 7.3 3,471 4.1 40.0 312 104,808 96,383 8,425 7.3 3,704 4.3 39.5 306 103,351 96,546 6,805 6.3 3,492 4.1 39.8 281 Civilian Labor F o r c e - thous. Total Employed - thous. Total Unemployed - thous. Unemployment R a t e - % SA Insured Unemployment - thous. Insured Unempl. R a t e - % Mfg. Avg. Wkly. Hours Mfg. Earn. - $ M Ig. Avg. Wkly. ' 12,830 11,901 929 7.4 310 2.9 40.1 265 Civilian Labor F o r c e - thous. Total Employed - thous. Total Unemployed - thous. Unemployment R a t e - % SA Insured Unemployment - thous. Insured Unempl. R a t e - % Mfg. Avg. Wkly. Hours Mfg. Avg. Wkly. Earn. - $ 1,637 1,486 151 8.9 55 4.4 39.8 275 1,639 1,484 155 9.1 56 4.5 39.7 274 1,623 1,493 130 7.8 51 4.0 40.3 256 Civilian Labor Force - thous. Total Employed - thous. Total Unemployed - thous. Unemployment R a t e - % SA Insured Unemployment - thous. Insured Unempl. R a t e - % Mfg. Avg. Wkly. Hours Mfg. Avg. Wkly. Earn. - $ 4,021 3,761 259 7.0 58 1.7 40.6 256 4,015 3,763 252 6.7 63 1.8 41.2 258 3,898 3,709 189 5.5 58 1.8 40.6 235 Civilian Labor F o r c e - thous. Total Employed - thous. Total Unemployed - thous. Unemployment R a t e - % SA Insured Unemployment - thous. Insured Unempl. R a t e - % Mfg. Avg. Wkly. Hours Mfg. Avg. Wkly. Earn. - $ 2,397 2,260 137 2,396 2,239 157 6.4 57 40.1 245 2,364 2,224 139 6.3 47 2.4 40.3 225 Civilian Labor F o r c e - thous. Total Employed - thous. Total Unemployed - thous. Unemployment R a t e - % SA Insured Unemployment - thous. Insured Unempl. R a t e - % Mfg. Avg. Wkly. Hours Mfg. Avg. Wkly. Earn. - $ 1,766 1,639 127 7.2 44 3.0 41.5 351 1,761 1,634 126 6.9 48 3.2 40.8 341 1,689 1,583 106 6.4 43 3.0 41.9 314 + 5 + 4 +20 1,022 1,010 1,011 +1 - 1 +33 UNITED STATES AST ALABAMA G GIÀ Civilian Labor F o r c e - thous. Total Employed - thous. Total Unemployed - thous. Unemployment R a t e - % SA Insured Unemployment - thous. Insured Unempl. R a t e - % Mfg. Avg. Wkly. Hours Mfg. Avg. Wkly. Earn. - $ E Civilian Labor F o r c e - thous. Total Employed - thous. Total Unemployed - thous. Unemployment R a t e - % SA Insured Unemployment - thous. Insured Unempl. R a t e - % Mfg. Avg. Wkly. Hours Mfg. Avg. Wkly. Earn. - $ Notes: 6.0 48 2.4 40.2 250 934 88 12,801 11,848 954 7.4 334 3.1 40.1 262 2.8 921 89 12,590 11,829 761 6.3 293 2.8 40.2 240 946 66 8.4 34 4.3 39.3 235 34 4.4 39.1 230 27 3.5 39.3 1,986 1,820 167 8.1 70 4.2 39.7 256 1,980 1,806 174 7.8 76 4.5 39.4 255 2,004 1,873 131 6.3 67 4.0 39.4 235 8.2 6.6 211 MAR 1981 CHG. + 2 + 1 +19 - 1 + 1 +11. + 2 +1 +22 -0 +10 + 1 - 0 +16 +8 - 1 + 7 + 3 + 1 +37 0 0 + 9 +1 + 2 -1 + 2 -0 + 11 +2 - 1 +12 +26 0 +11 -1 - 3 +27 + 4 +1 + 9 FEB 1981 ANN. MAR 1980 % CHG. Nonfarm E m p l o y m e n t - thous. Manufacturing Construction Trade Government Services Fin., Ins., <3c Real Est. Trans. Com. & Pub. Util. 90,759 20,222 4,137 20,478 16,393 18,107 5,247 5,096 90,236 20,147 3,987 20,397 16,368 17,953 5,232 5,080 90,316 20,793 4,150 20,226 16,445 17,478 5,085 5,143 + + + + - 1 3 0 1 0 4 3 1 Nonfarm E m p l o y m e n t - thous. Manufacturing Construction Trade Government Services Fin., Ins., & Real Est. Trans. C o m . & Pub. Util. 11,421 2,281 710 2,627 2,226 2,120 624 685 11,380 2,280 698 2,619 2,222 2,107 623 683 11,196 2,311 689 2,637 2,175 1,988 591 671 + 2 - 1 + 3 - 0 + 2 + 7 + 6 +2 Nonfarm E m p l o y m e n t - thous. Manufacturing Construction Trade Government Services Fin., Ins., & Real Est. Trans. Com. <5c Pub. Util. 1,350 354 71 268 303 208 59 72 1,353 356 70 268 304 208 59 71 1,363 370 66 277 301 201 58 72 - 1 - 4 +8 - 3 + 1 + 3 +2 0 Nonfarm E m p l o y m e n t - thous. Manufacturing Construction Trade Government Services Fin., Ins., & Real Est. Trans. Com. & Pub. Util. 3,750 472 282 978 640 874 267 227 3,735 475 281 977 636 866 266 224 3,548 452 269 953 622 783 240 219 +6 + 4 + 5 + 3 + 3 +12 +11 + 4 Nonfarm E m p l o y m e n t - thous. Manufacturing Construction Trade Government Services Fin., Ins., & Real Est. Trans. C o m . & Pub. Util. 2,163 518 99 487 445 354 114 139 2,151 513 98 485 443 352 113 139 2,138 525 97 501 424 337 108 138 + 1 - 1 +2 - 3 + 5 + 5 + 6 +1 N o n f a r m E m p l o y m e n t - thous. Manufacturing Construction Trade Government Services Fin., Ins., & Real Est. Trans. C o m . & Pub. Util. 1,617 214 152 360 320 278 75 126 1,610 215 147 358 321 277 76 126 1,521 208 128 359 304 254 75 113 + 6 + 3 +19 + 0 + 5 + 9 0 +12 Nonfarm E m p l o y m e n t - thous. Manufacturing Construction Trade Government Services Fin., Ins., & Real Est. Trans. C o m . & Pub. Util. 826 216 40 165 197 123 33 41 826 218 39 164 198 122 33 41 837 228 43 162 198 120 33 4 2 - 1 - 5 -7 + 2 - 1 + 3 0 - 2 Nonfarm E m p l o y m e n t - thous. Manufacturing Construction Trade Government Services Fin., Ins., <5c Real Est. Trans. Com. & Pub. Util. 1,715 507 66 370 321 234 76 81 1,705 503 64 367 321 283 77 81 1,789 528 85 385 326 292 77 8 6 - 4 - 4 -22 - 4 - 2 -20 -1 - 6 All labor f o r c e d a t a are from Bureau of Labor S t a t i s t i c s reports supplied by s t a t e agencies. Only the unemployment r a t e data are seasonally adjusted. h e Southeast d a t a represent the t o t a l of the six s t a t e s . The annual percent change calculation is based on the most recent data over prior year. T J u n e 1981, E C O N O M I C REVIEW CONSTRUCTION 12-Month Cumulative UNITED S T A T E S Rate Total C o n s t r u c t i o n C o n t r a c t s Value - $ mil. Nonresidential C o n t r a c t s Value - $ mil. Sq. F t . - mil. Nonbuilding C o n t r a c t s Value - $ mil. MAR 1981 FEB 1981 MAR 1980 ANN. % CHG. 149,697 146,849 160,427 - 7 53,946 1,192.9 52,769 1,184.3 51,004 1,359.5 + 6 -12 31,021 30,888 37,973 -18 26,873 26,158 26,462 + 2 7,760 187.2 7,668 186.0 7,155 199.0 + 8 - 6 5,735 5,448 6,692 -14 1,936 1,880 2,352 -18 521 13.5 511 13.3 639 17.3 -18 -22 461 447 827 -44 13,130 12,785 12,329 + 6 3,115 82.8 2,963 80.0 2,578 82.6 -+21 + 0 2,471 2,449 2,793 -12 3,859 3,773 3,890 - 1 1,222 34.3 1,319 36.4 1,268 40.0 - 4 -14 768 657 861 -11 3,326 3,243 3,442 - 3 1,153 20.6 1,135 19.8 1,436 23.8 -20 -13 980 943 821 + 9 1,672 1,603 1,600 + 5 610 8.5 614 9.0 312 8.2 +96 + 3 436 376 702 -38 2,950 2,874 2,849 + 4 1,139 27.7 1,126 27.5 922 27.1 +24 + 2 619 576 SOUTHEAST Total C o n s t r u c t i o n C o n t r a c t s Value - $ mil. Nonresidential C o n t r a c t s Value - $ mil. Sq. F t . - mil. Nonbuilding C o n t r a c t s Value - "$ mil.' ALABAMA Total C o n s t r u c t i o n C o n t r a c t s Value - $ mil. Nonresidential C o n t r a c t s Value - $ mil. Sq. F t . - mil. Nonbuilding C o n t r a c t s Value - $ mil. FLORIDA Total C o n s t r u c t i o n C o n t r a c t s Value - $ mil. Nonresidential C o n t r a c t s Value - $ mil. Sq. F t . - mil. Nonbuilding C o n t r a c t s Value - $ mil. GEORGIA Total C o n s t r u c t i o n C o n t r a c t s Value - $ mil. Nonresidential C o n t r a c t s Value - $ mil. Sq. F t . - mil. Nonbuilding C o n t r a c t s Value - $ mil. LOUISIANA Total C o n s t r u c t i o n C o n t r a c t s Value - $ mil. Nonresidential C o n t r a c t s Value - $ mil. Sq. F t . - mil. Nonbuilding C o n t r a c t s Value - $ mil. MISSISSIPPI Total C o n s t r u c t i o n C o n t r a c t s Value - $ mil. Nonresidential C o n t r a c t s Value - $ mil. Sq. F t . - mil. Nonbuilding C o n t r a c t s Value - $ mil. TENNESSEE Total C o n s t r u c t i o n C o n t r a c t s Value - $ mil. Nonresidential C o n t r a c t s Value - $ mil. Sq. F t . - mil. Nonbuilding C o n t r a c t s Value - $ mil. Notes: -10 ANN. % CHG. MAR 1981 FEB 1981 MAR 1980 64,730 1,327.6 63,192 1,306.5 71,450 1,640.0 - 9 -19 R e s i d e n t i a l P e r m i t s - Thous. Number single-family Number multi-family 706.0 475.5 693.9 486.9 902.2 546.2 -22 -13 Residential C o n t r a c t s Value - $ mil. N u m b e r of Units - Thous. 13,376 311.2 13.0 306.5 12,615 331.6 + 6 - 6 R e s i d e n t i a l P e r m i t s - Thous. Number single-family Number multi-family 155.0 127.6 152.1 127.2 167.5 102.5 - 7 +24 Residential C o n t r a c t s Value - $ mil. N u m b e r of Units - Thous. 953 26.6 922 25.5 886 26.4 + 8 + 1 R e s i d e n t i a l P e r m i t s - Thous. Number single-family Number multi-family 8.9 8.1 8.8 8.0 9.5 6.6 - 6 +22 Residential Contracts Value - $ mil. N u m b e r of Units - Thous. 7,543 173.3 7,373 171.7 6,958 181.9 + 8 - 5 Residential P e r m i t s - Thous. Number single-family Number multi-family 89.6 88.8 88.3 88.9 94.6 69.3 - 5 +28 Residential C o n t r a c t s Value - $ mil. N u m b e r of Units - Thous. 1,869 44.7 1,796 43.1 1,761 45.9 + 6 - 3 R e s i d e n t i a l P e r m i t s - Thous. Number single-family Number multi-family 27.1 9.7 26.1 9.4 29.8 8.6 - 9 +14 Residential Contracts Value - $ mil. N u m b e r of Units - Thous. 1,193 24.9 1,165 24.6 1,185 29.4 + 1 -15 R e s i d e n t i a l P e r m i t s - Thous. Number single-family Number multi-family 11.6 8.2 11.3 8.0 13.7 7.3 -15 +13 Residential Contracts Value - $ mil. N u m b e r of Units - Thous. 626 15.3 613 15.3 586 15.8 + 7 - 3 R e s i d e n t i a l P e r m i t s - Thous. Number s i n g l e - f a m i l y Number multi-family 5.3 5.1 5.2 5.1 5.0 3.0 + 6 +67 Residential C o n t r a c t s Value - $ mil. N u m b e r of Units - Thous. 1,192 26.4 1,172 26.4 1,239 32.3 - 4 -18 R e s i d e n t i a l P e r m i t s - Thous. Number single-family Number multi-family 12.5 7.6 12.4 7.7 14.9 7.7 - 1 Residential Contracts Value - $ mil. N u m b e r of Units - Thous. -16 C o n t r a c t s are c a l c u l a t e d f r o m t h e F . W. Dodge C o n s t r u c t i o n P o t e n t i a l s . P e r m i t s a r e c a l c u l a t e d f r o m t h e Bureau of t h e Census, Housing Units A u t h o r i z e d By Building P e r m i t s and Public C o n t r a c t s . T h e S o u t h e a s t d a t a r e p r e s e n t t h e t o t a l of t h e six s t a t e s . T h e annual p e r c e n t change c a l c u l a t i o n is based on t h e most r e c e n t m o n t h over prior y e a r . Federal Reserve Bank of Atlanta GENERAL MAR 1981 ANN. FEB 1981 MAR 1980 2,155.8 86.9 N.A. 8,572 2,010.0 77.6 N.A. 8,694 + 11 +12 265 242 + 10 249.2 N.A. 4,093.9 1439 229.5 N.A. 5,245.1 1551 +13 N.A. N.A. 30.3 N.A. 102.6 63 29.1 N.A. 97.0 63 27.6 N.A. 113.3 58 N.A. N.A. N.A. Personal Income-? bil. SAAR (Dates: 4Q, 3Q, 4Q) 92.2 Taxable Sales - $ bil. 59,750 Plane Passenger Arrivals (thous.) 2,511.3 Petroleum Prod, (thous. bis.) 117 Consumer Price Index - Miami MAR Nov. 1977 = 100 140 88.8 59,334 2,240.7 118 79.7 53,278 2,812.3 125 +16 + 12 -11 - 6 137 128 + 9 43.7 N.A. 1,341.0 N.A. 40.8 N.A. 1,812.2 N.A. + 11 263 235 + 13 +14 % CHG. UNITED S T A T E S Personal Income-$ bil. SAAR (Dates: 4Q, 3Q, 4Q) 2,228.3 Retail Sales - $ bil.- SA 86.9 N.A. Plane Passenger Arrivals (thous.) Petroleum Prod, (thous. bis.) 8,619 Consumer Price Index APR 1967=100 267 MAR APR - 1 SOUTHEAST Personal Income-$ bil. SAAR (Dates: 4Q, 3Q, 4Q) 258.6 N.A. Taxable Sales - $ bil. Plane Passenger Arrivals (thous.) 4,691.3 Petroleum Prod, (thous. bis.) 1442 Consumer Price Index 1967=100 N.A. -11 - 7 ALABAMA Personal Income-$ bil. SAAR (Dates: 4Q, 3Q, 4Q) Taxable Sales - $ bil. Plane Passenger Arrivals (thous.) P e t r o l e u m Prod, (thous. bis.) Consumer Price Index 1967=100 + 10 - 9 + 9 FLORIDA JAN MAR GEORGIA Personal Income-$ bil. SAAR 45.4 (Dates: 4Q, 3Q, 4Q) Taxable Sales - $ bil. N.A. Plane Passenger Arrivals (thous.) 1,618.8 Petroleum Prod, (thous. bis.) N.A. Consumer Price Index - Atlanta APR 1967 = 100 266 FEB APR -11 LOUISIANA Personal Income-$ bil. SAAR (Dates: 4Q, 3Q, 4Q) Taxable Sales - $ bil. Plane Passenger Arrivals (thous.) P e t r o l e u m Prod, (thous. bis.) Consumer Price Index 1967 = 100 36.7 N.A. 283.1 1167 35.3 N.A. 253.1 1164 32.3 N.A. 300.3 1266 N.A. N.A. N.A. 17.0 N.A. 33.3 95 16.5 N.A. 29.1 94 15.9 N.A. 43.0 102 N.A. N.A. N.A. 37.0 N.A. 142.3 N.A. 35.8 N.A. 133.0 N.A. 33.2 N.A. 164.1 N.A. N.A. N.A. N.A. - 6 - 8 MISSISSIPPI Personal Income-$ bil. SAAR (Dates: 4Q, 3Q, 4Q) Taxable Sales - $ bil. Plane Passenger Arrivals (thous.) P e t r o l e u m Prod, (thous. bis.) Consumer Price Index 1967 = 100 + 7 -23 - 7 TENNESSEE Personal Income-$ bil. SAAR (Dates: 4Q, 3Q, 4Q) Taxable Sales - $ bil. Plane Passenger Arrivals (thous.) Petroleum Prod, (thous. bis.) Consumer Price Index 1967 = 100 +11 -13 APR 1981 MAR 1981 APR 1980 ANN. % CHG. Agriculture Prices R e c ' d by F a r m e r s 261 Index (1967=100) Broiler P l a c e m e n t s (thous.) 85,368 Calf Prices ($ per cwt.) 71.40 Broiler P r i c e s (<t per lb.) 26.8 Soybean Prices ($ per bu.) 7.33 Broiler F e e d Cost ($ per ton) 234 262 85,608 69.80 29.7 7.59 229 225 82,281 76.80 22.5 5.94 193 +16 +4 -7 +19 +23 +21 Agriculture Prices R e c ' d by F a r m e r s Index (1967=100) 262 Broiler P l a c e m e n t s (thous.) 33,692 67.08 Calf Prices ($ per cwt.) Broiler Prices (<t per lb.) 25.6 Soybean Prices ($ per bu.) 7.50 Broiler Feed Cost ($ per ton) 228 264 31,062 66.59 28.6 7.24 222 226 32,394 73.76 21.4 5.72 187 +16 + 4 - 9 +20 +31 +22 Agriculture Farm Cash R e c e i p t s - $ mil. (Dates: FEB, FEB) 283 Broiler P l a c e m e n t s (thous.) 11,077 Calf Prices ($ per cwt.) 65.80 Broiler P r i c e s ($ per lb.) 24.5 Soybean Prices ($ per bu.) 7.43 Broiler Feed Cost ($ per ton) 245 11,141 66.80 27.5 7.10 220 315 10,821 71.80 20.5 5.85 184 -10 + 2 - 8 +20 +27 +33 Agriculture Farm Cash R e c e i p t s - $ mil. (Dates: FEB, FEB) 872 Broiler P l a c e m e n t s (thous.) 1,897 Calf Prices ($ per cwt.) 70.10 Broiler Prices (« per lb.) 25.5 Soybean Prices ($ per bu.) 7.43 Broiler Feed Cost ($ per ton) 240 1,772 69.50 29.0 7.10 255 847 1,943 78.00 20.5 5.85 215 + 3 - 2 -10 +24 +27 + 12 Agriculture Farm Cash R e c e i p t s - $ mil. (Dates: FEB, FEB) 395 Broiler P l a c e m e n t s (thous.) 12,808 Calf Prices ($ per cwt.) 62.40 Broiler Prices (<t per lb.) 25.5 Soybean Prices ($ per bu.) 7.39 Broiler Feed Cost ($ per ton) 220 10,695 64.00 28.5 7.06 220 375 12,119 74.50 21.5 5.76 185 + 5 + 6 -16 +19 +28 +19 Agriculture Farm Cash R e c e i p t s - $ mil. (Dates: FEB, FEB) 258 Broiler P l a c e m e n t s (thous.) N.A. Calf Prices ($ per cwt.) 69.90 Broiler P r i c e s (<fc per lb.) 26.0 Soybean Prices ($ per bu.) 7.65 Broiler Feed Cost ($ per ton) 245 N.A. 68.00 29.5 7.28 250 227 N.A. 72.00 23.0 5.75 185 +14 - 3 +13 +33 +32 Agriculture F a r m Cash Receipts - $ mil. (Dates: FEB, FEB) 315 Broiler P l a c e m e n t s (thous.) 6,292 Calf Prices ($ per cwt.) 66.80 Broiler Prices (<fc per lb.) 27.5 Soybean Prices ($ per bu.) 7.45 Broiler Feed Cost ($ per ton) 215 6,118 67.00 30.5 7.28 215 319 6,137 73.30 23.0 5.68 189 - 1 + 3 - 9 +20 +31 +14 Agriculture F a r m Cash Receipts - $ mil. (Dates: FEB, FEB) 278 Broiler P l a c e m e n t s (thous.) 1,351 Calf Prices ($ per cwt.) 65.00 Broiler Prices ($ per lb.) 25.0 Soybean Prices ($ per bu.) 7.50 Broiler Feed Cost ($ per ton) 215 1,336 61.90 27.5 7.28 225 295 1,374 75.10 19.5 5.68 185 - 6 - 2 -13 +28 +32 + 16 Notes: Personal Income data supplied by U. S. D e p a r t m e n t of C o m m e r c e . Taxable Sales are reported as a 12-month cumulative total. Plane Passenger Arrivals are collected f r o m 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. D e p a r t m e n t of Agriculture. Farm Cash Receipts data are reported as cumulative for the calendar year through the month shown. Broiler p l a c e m e n t s are an average weekly r a t e . The Southeast data represent the total of the six s t a t e s . N.A. = not available. The annual percent change calculation is based on most recent data over prior year. J u n e 1981, E C O N O M I C REVIEW Table 2. Changes in Production and Value of Winter Vegetable Crops from Year to Year Percentage Change from Year Earlier Production Total Value 1979 Florida (also U.S.) 47 Florida U.S. 60 -12 Florida U.S. 21 18 Florida (also U.S.) 8 Florida (also U.S.) 29 Florida (also U.S.) 32 Florida U.S. - 66 1 Florida (also U.S.) 11 Florida (also U.S.) 15 Florida (also U.S.) 32 U.S. 1 U.S. 21 U.S. -12 U.S. 66 U.S. 66 Florida Total U.S. Total 30 4 1980 1979 Snap Beans - 6 17 Cabbage - 7 148 20 34 Celery 4 21 0 23 Sweet Corn 4 11 Eggplant - 2 67 Escarole/Endive -16 23 Lettuce 5 107 6 59 Green Peppers -19 29 Tomatoes 44 49 Strawberries 24 33 Spinach 35 40 Broccoli - 2 39 Carrots 8 22 Cauliflower - 5 63 Artichokes - 9 71 All Winter Vegetables 9 51 8 43 1980 7 -68 -53 -15 -19 10 - 2 -45 -41 - 44 -13 10 26 38 11 -21 16 13 -14 -21 Source: USDA, Vegetables, 1980 Annual Summary: Acreage, Yield, Production, and Value, December 1980. Table 2, reveals that t h e r e is n o c o n s i s t e n t pattern in t h o s e changes for e i t h e r Florida or t h e U n i t e d States. Total c r o p values increased sometimes w h e n p r o d u c t i o n increased and sometimes w h e n p r o d u c t i o n d e c l i n e d . For t h e c o m b i n e d total of all w i n t e r vegetables, b o t h q u a n t i t y and revenue increased in 1979, b u t revenue fell w h e n q u a n t i t y increased f u r t h e r in 1980. vegetables changed (the curve shifted t o t h e right) especially in 1979, causing c o n s u m e r s t o take larger quantities at higher prices. Several major factors c o u l d have caused t h e shift in t h e total d e m a n d curve. Stock of processed vegetables can change, a f f e c t i n g t h e availability of p r o d u c t s that are i m p o r t a n t substitutes for most fresh vegetables. I m p o r t s of vegetables can and d o change radically f r o m o n e year t o another, a f f e c t i n g t h e total supplies available for c o n s u m p t i o n . Incomes and preferences of c o n s u m e r s can change a n d cause significant shifts in d e m a n d for fresh vegetable items. Unusual w e a t h e r does n o t have a u n i f o r m impact o n all vegetable c r o p s , so that w h e n o n e c r o p is severely d a m a g e d , a close substitute may have been relatively unscathed. The result w o u l d be that a reduct i o n in t h e q u a n t i t y of a vegetable w o u l d n o t p r o d u c e a consistent price response f r o m o n e p e r i o d to another. The exact effect of t h e r e d u c t i o n in Florida's w i n t e r vegetable crops in 1980 remains d i f f i cult t o p r e d i c t . Florida's p r o d u c t i o n typically accounts for a b o u t 40 percent of t h e total U.S. supply. If 30 percent of Florida's crops w e r e d e s t r o y e d , t h e total U.S. supply w o u l d be r e d u c e d by 12 to 15 percent. If t h e r e w e r e little or no i m p o r t e d vegetables a n d if stocks of processed vegetables w e r e l o w , eventual price increases c o u l d range b e t w e e n 35 and 45 percent. Preliminary reports indicate that i m p o r t s are, in fact, d o w n f r o m a year ago a n d that supplies of processed vegetables are l o w because of t h e w e a t h e r p r o b l e m s in 1980. A l t h o u g h dramatic price increases for vegetables in retail markets had n o t yet o c c u r r e d in February, it is highly likely that s u b s e q u e n t reports w i l l reveal additional price increases. BE —Gene D. Sullivan It w o u l d appear that t h e d e m a n d f o r w i n t e r FEDERAL RESERVE BANK OF ATLANTA 21 Atlanta Study Finds C h e c k Growth Has Slowed The Atlanta Federal Reserve Bank, with co-sponsorship of the American Bankers Association, the Bank Administration Institute and the Federal Reserve System, is now completing a major study of the check collection system. The findings are based on a month long survey in June 1979 of 343 commercial banks (both members and nonmembers of the Federal Reserve System) and all 48 Federal Reserve System check processing facilities. As one of its major findings, the study estimates the number of checks written in 1979. This article summarizes some of the study's preliminary findings on checks written, checks processed, volume flow and some major trends in the check collection system during the 70s. Current schedules call for the detailed findings from this research to be available this summer through the American Bankers Association and the Bank Administration Institute. A future Economic Review article will apply the study's findings to payments systems trends in the 1980s. The A t l a n t a study's estimates of checks w r i t t e n a n d annual g r o w t h rates d i f f e r e d significantly f r o m s o m e of t h e earlier forecasts. Chart 1. A. D. Little Check Volume Forecast 1970-1979 39.5 T h e m o s t w i d e l y used projections for check g r o w t h during t h e 1970s w e r e based o n a 1970 study by A. D. Little, Inc. The f i n d i n g s estimated that 21.5 b i l l i o n commercial checks w e r e w r i t t e n in 1970 a n d p r o j e c t e d that 39.5 b i l l i o n checks w o u l d be w r i t t e n in 1979, a 7 p e r c e n t a v e r a g e annual g r o w t h rate (Chart 1). 21.5 billion checks in 1970 I 1970 22 I I I I I I I I I I 1979 JUNE 1 9 8 1 , E C O N O M I C REVIEW F o l l o w - o n surveys in 197174 by t h e Federal D e p o s i t Insurance C o r p o r a t i o n (FDIC) confirmed the 7 percent annual g r o w t h rate. But t h e FDIC surveys f o u n d that A. D. Little had o v e r e s t i m a t e d the n u m b e r of checks w r i t t e n in 1970 and thus o v e r p r o j e c t e d the n u m b e r s for each year in the d e c a d e . The Atlanta staff revised t h e A. D. Little v o l u m e estimate of 21.5 b i l l i o n checks for 1970 t o 18.5 b i l l i o n (based o n an estimate of 24.3 b i l l i o n for 1974). A s s u m i n g a c o n t i n u ing 7 p e r c e n t g r o w t h rate, t h e Atlanta staff p r o j e c t e d a volu m e of 34 b i l l i o n checks for 1979 (Chart 2) f r o m t h e 1974 FDIC estimate. The Atlanta Fed study, based o n a n a t i o n w i d e survey in June 1979 of 343 c o m m e r c i a l banks, estimated that 32 billion checks w e r e w r i t t e n in 1979 (7.5 b i l l i o n b e l o w A. D. Little's p r o j e c t i o n a n d 2 b i l l i o n b e l o w t h e FDIC p r o j e c t i o n ) . Using t h e m o d i f i e d 1970 estimate, t h e FDIC estimate for 1974, a n d t h e Atlanta estimate f o r 1979, t h e A t l a n t a s t a f f d e t e r m i n e d that t h e annual g r o w t h rate fell f r o m a b o u t 7 to 5 p e r c e n t in t h e last half of t h e decade (Chart 3). Chart 2. FDIC Check Volume Forecast 1970-1979 billions of checks 3 4 . 0 18. — based on f ^ ^ 24.3 billion checks in 1974 I I I 1 9 7 0 I I I 1 9 7 4 billions of - 2 0 I 1 9 7 9 checks 3 2 . 0 3 0 2 4 . 3 ^ ^ ' ^ ^ I 1 9 7 0 I 3 0 Chart 3. Atlanta Fed Check Volume Estimate, 1970-1979 " 1 8 . 5 b a s e d FEDERAL RESERVE BANK O F ATLANTA I - on - 2 0 32.0 billion checks in 1979 I I I I I I I I 1 9 7 9 23 Chart 4. Billions of Checks Processed, 1970 and 1979 4 8 . 1 1 9 7 0 T h e Atlanta Fed study estim a t e d that 48.1 b i l l i o n checks w e r e processed in 1970 versus 18.5 b i l l i o n w r i t t e n (a check is o f t e n p r o c e s s e d by m o r e t h a n o n e bank as it moves f r o m t h e check receiver back t o t h e c h e c k w r i t e r f o r c o l l e c t i o n ) . In 1979, an estimated 76.7 b i l l i o n checks w e r e p r o c e s s e d , a 59.5 p e r c e n t increase in 10 years, or a b o u t 6 p e r c e n t a year (Chart 4). D i v i d i n g the n u m b e r of checks processed by t h e n u m ber of checks w r i t t e n provides an estimate of t h e average n u m b e r of banks processing a check. In 1970, each check w r i t t e n was processed by an average of 2.6 banks; by 1979, that statistic had d r o p p e d to 2.4 banks. The slight d e c l i n e of 0.2 banks per check represents i m p r o v e d efficiency for t h e check c o l l e c t i o n system. It also means that had e f f i c i e n c y n o t i m p r o v e d , an additional 6.5 b i l l i o n processings w o u l d have o c c u r r e d in 1979 (Chart 5). 24 1 9 7 9 I 7 6 . 7 59.5% increase Chart 5. Average Number of Banks Processing a Check, 1970 and 1979 Number Number of Checks -r- of Checks Processed Written Number of Banks Processing a Check 1970 io-m " billion 18.5 billion 2.6 banks 1979 ^6.7 billion 32.0 billion 2.4 banks 4 8 1 JUNE 1 9 8 1 , E C O N O M I C REVIEW Chart 6. Check Processing Work Load, in Billions of Checks, 1970 and 1979 Another significant f i n d i n g was that the Federal Reserve System picked up a greater share of the check processing w o r k load d u r i n g the decade. Commercial banks processed 40.9 billion checks in 1970 and 61.6 billion in 1979, a 50.6 percent increase. Federal Reserve Banks processed 7.2 billion checks in 1970 and 15.1 billion in 1979, a 109.7 p e r c e n t increase. In 1970, t h e Fed handled 15 percent of t h e w o r k load; by 1979, the Fed handled 20 percent (Chart 6). By 1979, commercial banks w e r e r e l y i n g less on local clearings and less on correspondents and other banks. The Fed increased its role as a source and disposition point (Chart 7). Commercial Banks + 50-6% "]40.9 '70 bil. checks 61.6 '79 Federal Reserve I 7.2 '70 109.7% + bil. checks 15.1 billion '79 Chart 7. Check Volume at C o m mercial Banks, 1967 and 1979 Incoming: Outgoing: -Bank CustomersI On-Us^l 48.3% 54.8 E 16.ir I 11.21ZJ 21-31 26.1 1 [ 12.71 — q 1 Locai Banks FRBs Correspondents and Others 141.1% _ U 51.3 t r i 1.5 119.7 20.8 B22.0 j I J18.4 115.2 1967 BAI Study 1979 Fed Study FEDERAL RESERVE BANK O F ATLANTA 25 M o r e d e t a i l e d data f o r large banks show t w o intermingled patterns: 1. D o l l a r v a l u e p e r c e n t a g e was larger t h a n v o l u m e f o r items sent t o large c o r r e s p o n d e n t s in o t h e r cities. 2. D o l l a r v a l u e p e r c e n t a g e was smaller t h a n v o l u m e f o r items sent t o small banks d o w n s t r e a m . Data f o r t h e large banks also show a dual sorting tendency — high v o l u m e , low dollar v a l u e t o t h e Fed, a n d l o w v o l u m e , h i g h d o l l a r v a l u e t o large c o r r e s p o n d e n t s . T h e significance of this t r e n d is that t h e Fed a p p a r e n t l y has a b s o r b e d m u c h of the w o r k once h a n d l e d via l o c a l c l e a r i n g arrangements or by corres p o n d e n t banks. Summary • The annual growth rate of checks written declined during the 70s. The rapid g r o w t h stage of t h e c h e c k as a p r o d u c t is a p p a r e n t l y beginning to slow d o w n . • Check processing did not break down. A. D . Little c o r r e c t l y f o r e c a s t e d that t h e c h e c k c o l l e c t i o n syst e m w o u l d survive t h e 70s 26 without drowning paper w o r k . in • The Fed's Regional Check Processing Centers (RCPCs) were a mixed economic blessing. The d e c l i n e f r o m 2.6 t o 2.4 banks processing each check represents improved efficiency for the c h e c k c o l l e c t i o n system. But it c a m e at t h e e x p e n s e of d i s s o l v e d local c l e a r i n g a r r a n g e m e n t s a n d reduced correspondent processing. M a n y checks o n c e cleared locally are n o w s h i p p e d t o and f r o m a Fed RCPC f o r o v e r n i g h t p r o c e s s i n g . T h e Fed also incurred significant new expenses for processing l a r g e r v o l u m e s in t i g h t t i m e frames and f o r shipp i n g c h e c k s t o and f r o m RCPCs. T h u s , a m i x e d blessing occurred. O n l y a detailed study would d e t e r m i n e w h e t h e r or n o t a net b e n e f i t a c c r u e d . • Volume and dollar value flows changed significantly. Rising costs led many banks to send m o r e c h e c k s t o t h e Fed, w h i c h did not charge for check processing. Commercial banks developed m o r e sophisticated float mana g e m e n t systems t o take a d v a n t a g e of h i g h i n t e r e s t rates. Bank c u s t o m e r s a d o p e d cash m a n a g e m e n t techniques (e.g. lock boxes) w h i c h t e n d e d t o k e e p c h e c k p a y m e n t s in g e o g r a p h i c areas s e r v e d by a b a n k a n d its cust o m e r s a n d o u t of n a t i o n a l correspondent networks. C o m m e r c i a l b a n k s also became m o r e restrictive in t h e i r c h e c k c a s h i n g p o l i c i e s , w h i c h led t o a g r e a t e r p r o p o r t i o n of o n - u s i t e m s in v o l u m e s accepted over the counter. • The checkless or paperless society did not materialize in the 70s. A v i a b l e c h e c k collection system still exists. T h e g r o w t h rate in the n u m b e r of checks w r i t t e n appears t o have s l o w e d d o w n in t h e last half of t h e 1970s. If so, t h e initial i n d i c a t i o n of a maturing p r o d u c t may have been given. A l t h o u g h the study does n o t i n c l u d e a forecast f o r t h e 1980s, a f u t u r e a r t i c l e in t h e Economic Review will apply the findings, along with other demographic and e c o n o m i c t r e n d s , t o a p a y m e n t s syst e m forecast. JUNE 1 9 8 1 , E C O N O M I C REVIEW Water Allocation in the East by Clyde F. Kiker According to Clyde Kiker, Associate Professor of Food and Resource Economics at the University of Florida, water allocation in the East is not working effectively. After reviewing the evolution of water doctrine in the East, Dr. Kiker proposes an alternative plan which would maintain a water authority's power to manage the overall supply but would also make possible private transactions among water users. The p o p u l a r press has recently discovered the i m p o r t a n c e of w a t e r t o o u r e c o n o m y . Rapid increases are n o t e d in t h e quantities of w a t e r used by c o m m u n i t i e s , industry, a g r i c u l t u r e and h o u s e h o l d s . O f t e n , t h e press paints a p i c t u r e of i m p e n d i n g t r o u b l e . In t h e w o r d s of Newsweek, for e x a m p l e , " D r o u g h t , waste and pollution threaten a water shortage whose impact may rival t h e energy crisis." 1 r e d u c e d w a t e r q u a l i t y has o n d o w n s t r e a m users, o n recreational use and o n natural habitats. A l o n g w i t h u n d e r s t a n d i n g t h e uses of water, w e are b e c o m i n g aware of t h e sources a n d h i g h l y variable n a t u r e of o u r w a t e r supply. Severe d r o u g h t s a f f e c t i n g t h e availability of w a t e r seem t o be o c c u r r i n g w i t h increased frequency. The press is a l e r t i n g us t o a real p r o b l e m . A resource w e have generally taken f o r granted is in fact v e r y i m p o r t a n t t o o u r e c o n o m i c activities a n d is also l i m i t e d . People are b e c o m ing aware of t h e i m p o r t a n c e of water used in their h o m e s a n d of t h e a m o u n t of w a t e r req u i r e d f o r p r o d u c t i o n of f o o d and manufact u r e d g o o d s . We r e c o g n i z e t h e i m p a c t W h a t is n o t discussed in t h e press and w h a t most p e o p l e have v i r t u a l l y no u n d e r s t a n d i n g of is h o w o u r society decides w h o is e n t i t l e d to r e m o v e w a t e r f r o m t h e natural system. G i v e n that a s u p p l y of w a t e r is to be p r o v i d e d t o private users for e c o n o m i c p u r p o s e s , h o w can that s u p p l y be d i v i d e d a m o n g the p e o p l e w h o desire water? If d e m a n d for w a t e r is steadily increasing a n d t h e s u p p l y is relatively f i x e d , h o w d o w e d e c i d e w h o w i l l receive permits t o t h e l i m i t e d s u p p l y and to w h a t q u a n t i t y of w a t e r w i l l t h e h o l d e r be entitled? If a user 'Examples of recent articles are: " T h e B r o w n i n g of America," Newsweek, February 23,1981, p. 26-37; "Water, O u r Most Precious Resource," National Geographies, A u g u s t 1980, p. 144-179; and "There's Trouble in Paradise," Sports Illustrated, February 9,1981, p. 82-96. FEDERAL RESERVE B A N K O F A T L A N T A 27 wishes t o e x p a n d his business activity a n d requires a d d i t i o n a l water, h o w w i l l he be able t o o b t a i n t h e necessary entitlements? For most resources o u r society assigns private p r o p e r t y rights w h i c h a l l o w market trading of these resources. For e x a m p l e , mineral rights t o coal are r e c o g n i z e d and private f i r m s are e n t i t l e d to r e m o v e coal f r o m its natural l o c a t i o n a n d sell it in an o p e n m a r k e t . Water, o n t h e o t h e r h a n d , has b e e n v i e w e d diff e r e n t l y ; private e n t i t l e m e n t s t o its use are far f r o m clear. In many cases p e o p l e w h o are n o w u s i n g w a t e r s i m p l y assume t h e y w i l l be able to use it in t h e f u t u r e . This may or may n o t be t r u e . In reality, private e n t i t l e m e n t s to w a t e r are u n c e r t a i n at this t i m e . Individuals m a k i n g capital i n v e s t m e n t d e c i s i o n s i n v o l v i n g water s h o u l d d o so cautiously. Their access to water may change in t h e near f u t u r e . W h a t is o c c u r i n g is that Eastern water allocat i o n i n s t i t u t i o n s are n o t w o r k i n g effectively. 2 These i n s t i t u t i o n s e v o l v e d u n d e r c o n d i t i o n s of large w a t e r s u p p l i e s , l i m i t e d w i t h d r a w a l s and m i n i m a l c o n f l i c t s ; t h e y c a n n o t resolve t h e p r e s e n t level of c o n f l i c t . A n e w era of changes is u p o n us. Some states, such as Florida, have e n c o u n t e r e d p r o b l e m s earlier t h a n o t h e r states a n d have b e g u n d e v e l o p i n g n e w ways of resolving a l l o c a t i o n c o n f l i c t s . H o w successf u l have these n e w allocative approaches been in Florida a n d w h a t are t h e i m p l i c a t i o n s for o t h e r states? Eastern W a t e r Law — C o m m o n Law D o c t r i n e s Eastern water doctrines d e v e l o p e d f r o m English c o m m o n law. Water in areas w i t h a b u n d a n t supplies was c o n s i d e r e d c o m m o n p r o p e r t y , t h e p r o p e r t y of no o n e t o be shared by everyone. Individual states evolved slightly d i f f e r e n t d o c t r i n e s t h r o u g h case law, b u t all w e r e based o n c o m m o n law precepts. 3 The legal d e v e l o p m e n t s have f o c u s e d o n t h e source of t h e w a t e r supply. For surface A l t h o u g h b o t h the Eastern and Western states are e x p e r i e n c i n g p r o b l e m s and change, this article w i l l c o n c e n t r a t e o n water entitlements in t h e Eastern states — those east of and i n c l u d i n g M i n n e s o t a , Iowa, M i s s o u r i , Arkansas and Louisiana. The f o u n d a t i o n s of Western water law and institutions d i f f e r greatly f r o m those of t h e Eastern states. For more i n f o r m a t i o n o n the W e s t e r n situation, see M a r v a n D u n c a n and A n n Laing, " W e s t e r n Water Resources: C o m i n g Problems and the Policy Alternatives," Economic Review, Federal Reserve Bank o f Kansas City, February 1980, pp. water, t h e " r i p a r i a n " d o c t r i n e e n t i t l e d o w n e r s of land a d j o i n i n g a lake or stream (riparian land) to t h e full natural f l o w w i t h o u t change in quality or quantity. The p u b l i c was e n t i t l e d t o use the water for f i s h i n g , navigation a n d o t h e r c o m m o n uses. Taken literally, t h e d o c t r i n e p r e c l u d e d r e m o v i n g water or d e p o s i t i n g any f o r e i g n substance i n t o t h e water. The d o c t r i n e has been m o d i f i e d t h r o u g h t h e process of case law in state c o u r t s u n t i l c u r r e n t l y t h e user may make " r e a s o n a b l e u s e " of t h e water. Q u a n t i t y and quality changes are usually " r e a s o n a b l e " for any p u r p o s e unless they i n t e r f e r e w i t h the " r e a s o n a b l e " use of o t h e r riparian l a n d o w n e r s or p u b l i c uses. As in all c o m m o n law, conflicts are settled by civil litigation. N o n - r i p a r i a n l a n d o w n e r s have no right t o w i t h d r a w water. Rights to t h e use of g r o u n d w a t e r w e r e based o n t h e English c o m m o n law d o c t r i n e w h i c h c o n s i d e r e d t h e water b e l o w an i n d i v i d ual's land t o be absolutely o w n e d by t h e lando w n e r . He c o u l d extract it or o t h e r w i s e i n t e r f e r e w i t h its natural m o v e m e n t w i t h o u t accountability t o others w h o m i g h t be affected. The right to water was based o n a rule of capture, and allocation was based s i m p l y o n t h e a m o u n t o n e c o u l d p u m p . This d o c t r i n e w o r k e d w e l l w h e n there was little d e m a n d for g r o u n d w a t e r supplies. Two o t h e r d o c t r i n e s relating to g r o u n d w a t e r evolved as greater use (and t h e resulting c o m petition) d e v e l o p e d : t h e reasonable use doct r i n e and t h e correlative rights d o c t r i n e . The reasonable use d o c t r i n e specified that t h e l a n d o w n e r c o u l d make any reasonable use of t h e g r o u n d w a t e r o n t h e land f r o m w h i c h it was r e m o v e d . Water c o u l d n o t be taken and used o n lands o t h e r than those f r o m w h i c h it was p u m p e d . However, virtually all on-site uses w e r e c o n s i d e r e d reasonable. Again, t h e l a n d o w n e r was given a right t o d e v e l o p g r o u n d w a t e r and land w i t h o u t regard to t h e effects i m p o s e d o n o t h e r users. A l l o c a t i o n was a c c o m p l i s h e d t h r o u g h capture s i m p l y by Two excellent references for details o n Eastern water law and administrative w a t e r law are F. E. M a l o n e y , et al., Water Law and Administration, University o f Florida Press, 1968 a n d F. E. M a l o n e y et al., A Model Water Code, University of Florida Press, 1972. 1 28 J U N E 1 9 8 1 , E C O N O M I C R E V I E W p u m p i n g . The correlative rights d o c t r i n e , o n the other h a n d , r e q u i r e d l a n d o w n e r s t o app o r t i o n t h e c o m m o n g r o u n d w a t e r supply. T h e water rights of an i n d i v i d u a l w e r e measured in relationship to t h e rights of o t h e r l a n d o w n e r s . "Reasonableness," in this case, was t h e balancing of rights of affected l a n d o w n e r s . C o n f l i c t a c c o m p a n y i n g increased use of b o t h surface a n d g r o u n d w a t e r has exposed the i n a d e q u a c y of c o m m o n law d o c t r i n e s for allocating water. Private w a t e r users are in a q u a n d a r y a b o u t t h e q u a n t i t y and security of their e n t i t l e m e n t . T h e need f o r greater certainty has p r o m p t e d many Eastern states t o c o n s i d e r s t a t u t o r y law as a basis for allocating entitlements. 4 In essence, t h e statutory approach establishes administrative regulation of water w i t h d r a w a l s by a state agency. Florida's administrative w a t e r law is a p r e m i e r e x a m p l e . It establishes an a d m i n i s t r a t i v e system that many o t h e r Eastern states are o b s e r v i n g w i t h keen interest. A d m i n i s t r a t i v e W a t e r Law The e x p e c t e d result f r o m t h e statutory app r o a c h is that all w a t e r users w i l l b e n e f i t by having greater assurance of t h e water supplies t h e y n e e d . The a d m i n i s t r a t i v e system retains the c o n c e p t that w a t e r is c o m m o n p r o p e r t y t o be shared by all, b u t n o w interprets this t o mean that t h e state's waters are t o be h e l d in trust by t h e state f o r t h e b e n e f i t of its citizens. In t h e w o r d s of t h e Florida Water Resources Act of 1972, " . . . all waters in t h e state are subject t o r e g u l a t i o n . . . " 5 U n d e r m o s t a d m i n i s t r a t i v e w a t e r law systems, r e g u l a t i o n is h a n d l e d by an administrative agency w i t h i n state g o v e r n m e n t , generally a d e p a r t m e n t of natural resources or e n v i r o n mental r e g u l a t i o n . The heart of r e g u l a t i o n is a p e r m i t t i n g system a d m i n i s t e r e d by t h e agency or g e o g r a p h i c a l l y d e f i n e d w a t e r authorities. Private w a t e r users are r e q u i r e d t o have per- ••Presently most Eastern states use c o m m o n law doctrines as the basis f o r private w a t e r e n t i t l e m e n t s . F l o r i d a Water Resources Act o f 1972, Florida Statutes 373.013 et. seq. FEDERAL RESERVE B A N K O F A T L A N T A mits t o m o d i f y any aspect of t h e natural water system and t o r e m o v e w a t e r f r o m a natural source. The a u t h o r i t y is r e s p o n s i b l e for bal a n c i n g p u b l i c and private interests in w a t e r a n d f o r r e s o l v i n g , if n o t p r e v e n t i n g , conflicts a m o n g w a t e r users. To date, t h e general p r i n c i p l e s u n d e r w h i c h the water authorities operate the administrative system have b e e n u p h e l d in t h e c o u r t s a n d it is likely that t h e system w i l l c o n t i n u e t o be used. Increasing p r o b l e m s w i t h t h e system, h o w e v e r , have h e i g h t e n e d interest in alternative a l l o c a t i o n a p p r o a c h e s . Alternative Allocation Approaches U n d e r t h e a d m i n i s t r a t i v e systems, private users are granted p e r m i t s to w i t h d r a w w a t e r f o r a specific t i m e p e r i o d . In Florida, this is up t o 20 years b u t c o u l d be less. The q u a n t i t y of w a t e r a user can w i t h d r a w u n d e r his p e r m i t is established by t h e w a t e r authority. The intere s t i n g q u e s t i o n here is h o w does t h e a u t h o r i t y d e c i d e w h o receives p e r m i t s a n d h o w m u c h w a t e r can be w i t h d r a w n ? Technical A p p r o a c h The c r i t e r i o n most o f t e n used is based o n technical i n f o r m a t i o n and is referred t o here as " t h e technical a p p r o a c h . " For e x a m p l e , t h e q u a n t i t y of c r o p irrigation w a t e r a l l o w e d t o be w i t h d r a w n is based o n t h e d i f f e r e n c e b e t w e e n t h e q u a n t i t y of water a c r o p specialist says is n e e d e d and t h e w a t e r available f r o m precipit a t i o n ; t h e q u a n t i t y of d o m e s t i c w a t e r supply is based o n some per capita use estimate; a n d t h e q u a n t i t y of industrial water is based o n some estimates of p r o d u c t i o n needs. This leads to situations in w h i c h l o w e r valued uses may be allocated m o r e w a t e r than higher valu e d uses. For example, in Florida, pasture irrigation may be allocated t w i c e as m u c h water per acre as citrus even t h o u g h t h e returns t o citrus far exceed those of pasture. 6 6 For m o r e specific examples of t h e rules and regulations used u n d e r a technical a p p r o a c h , see, Permit Information Manual — District Rules, Regulations, and Legislation, V o l u m e II, South Florida Water M a n a g e m e n t D i s t r i c t , West Palm Beach, Florida. 29 As in t h e c o m m o n law approaches, these inconsistencies create f e w p r o b l e m s w h e n w a t e r is n o t scarce. But w h a t happens w h e r e t h e r e is not s u f f i c i e n t w a t e r t o m e e t all needs? A water shortage plan is p u t i n t o effect. But h o w does t h e w a t e r a u t h o r i t y d e c i d e h o w m u c h water each p e r m i t h o l d e r w i l l be all o w e d to w i t h d r a w ? This is n o t clear. W h a t is clear is that p r o b l e m s are created for private users because t h e y are n o t sure just h o w t h e y w i l l fare in this allocation. Again, u n c e r t a i n t y pervades their decision m a k i n g . shortage plan. Water users w o u l d again be u n c e r t a i n as to w h a t quantities of w a t e r t h e y w o u l d receive in t h e f u t u r e , a n d i n v e s t m e n t decisions w o u l d be increasingly d i f f i c u l t . There are areas in Florida w h e r e w i t h d r a w a l s f r o m t h e aquifer exceed t h e recharge. Every day, n e w e c o n o m i c activities begin a n d uncertainty a m o n g users increases. 8 The q u e s t i o n s t h e w a t e r a u t h o r i t y faces are: S h o u l d it c o n t i n u e t o give permits? W h a t if a request is m a d e for a p e r m i t in w h i c h t h e n e w use has a substantially higher e c o n o m i c value t h a n some present uses in t h e basin? W h i c h uses s h o u l d receive p e r m i t s and f o r w h a t quantity? If w e c a n n o t f i n d a s o l u t i o n t o t h e d y n a m i c aspects of e n t i t l e m e n t allocation, w e may face substantial e c o n o m i c i n e f f i c i e n c y in w a t e r use. Limited Economic Information Approach I have suggested a m o d i f i c a t i o n t o t h e technical approach. 7 T e r m e d t h e " l i m i t e d econ o m i c i n f o r m a t i o n a p p r o a c h , " this m e t h o d maintains t h e w a t e r agency's a u t h o r i t y t o grant p e r m i t s w h i l e basing t h e decision o n t h e water's e c o n o m i c value. This a p p r o a c h recognizes that w a t e r has greater value in s o m e uses t h a n others and that t h e s u p p l y is limited. To apply t h e a p p r o a c h , t h e w a t e r a u t h o r ity must estimate e c o n o m i c values f o r various water uses. Water is allocated t o t h e various uses so that t h e e c o n o m i c value of t h e last unit of water used in an activity is equal t o that used in every o t h e r activity. In e c o n o m i c jarg o n , t h e " m a r g i n a l v a l u e " of w a t e r is equal in all uses. As in t h e technical a p p r o a c h , t h e p e r m i t s are granted for a m u l t i p l e year p e r i o d . Quasi-Market Approach I have o f f e r e d an alternative a p p r o a c h that has p o t e n t i a l for d e a l i n g w i t h t h e questions relating t o e c o n o m i c value in use a n d increasing d e m a n d t h r o u g h t i m e . T h e a p p r o a c h , called t h e " q u a s i - m a r k e t a p p r o a c h , " deviates substantially f r o m t r a d i t i o n a l a l l o c a t i o n m e t h o d s used in t h e East b u t is still consistent w i t h Eastern w a t e r law. 9 The p u b l i c w a t e r aut h o r i t y c o n t i n u e s t o play t h e d o m i n a n t r o l e , b u t private transactions a m o n g w a t e r users b e c o m e p o s s i b l e . T h e i n t e n t is t o maintain t h e w a t e r authority's d i s c r e t i o n t o manage t h e overall w a t e r supply, especially t h e decision b e t w e e n p u b l i c a n d private uses, b u t t o rem o v e its a u t h o r i t y t o d e c i d e w h a t q u a n t i t y of w a t e r e v e r y private use receives. A p r o b l e m can o c c u r u n d e r b o t h t h e t e c h n i cal and l i m i t e d i n f o r m a t i o n approaches. W h e n rapid e c o n o m i c g r o w t h is o c c u r r i n g in an area, n e w , possibly higher valued uses may be p r e c l u d e d f r o m o b t a i n i n g water. Since p e r m i t s t o t h e expected supply are granted f o r m u l t i ple year p e r i o d s , t h e r e may n o t be s u f f i c i e n t water t o m e e t t h e p r e v i o u s l y granted entitlements and n e w ones t o o . If t h e e n t i r e exp e c t e d supply w e r e allocated t o users, a n d permits c o n t i n u e d t o be granted t o n e w uses, w a t e r shortages w o u l d b e c o m e c o n t i n u o u s and all allocations w o u l d be made u n d e r a 7 For m o r e details see, C. F. Kiker and G. D. Lynne, "Water Allocations Under Administrative Regulations: Some Economic Considerations," Southern tournai of Agricultural Economics 8(2), December 1976, pp. 57-73. 30 U n d e r t h e a p p r o a c h , t h e administrative a u t h o r i t y allows sale of transferable " w a t e r certificates." Each certificate represents an e n t i t l e m e n t t o a specific f l o w of w a t e r that can be w i t h d r a w n f r o m a particular w a t e r basin. T h e certificates a p p l y o n l y t o a specific t i m e p e r i o d . D u r i n g this t i m e t h e certificates c o u l d be t r a n s f e r r e d b e t w e e n w a t e r users w i t h i n 8 An example is an area in the Southwest Florida Water Management District which includes Polk, Hardy, and Manatee counties. There are periods when withdrawals from the Floridan aquifer exceed recharge and salt water intrusion may result. 9 For more details see reference cited in footnote 7. JUNE 1981, E C O N O M I C REVIEW b o u n d s s p e c i f i e d by t h e administrative a u t h o r ity. T h e b o u n d s w o u l d be based o n h y d r o l o g i c and physical features of t h e w a t e r basin. At t h e e n d of t h e p e r i o d , t h e certificates w o u l d revert back t o t h e a u t h o r i t y . If t h e a u t h o r i t y d e e m s that t h e total s u p p l y of w a t e r b e i n g used by i n d i v i d u a l s does n o t i n t e r f e r e w i t h t h e p u b l i c uses, t h e certificates w o u l d be released back i n t o t h e m a r k e t . If t o o great a q u a n t i t y of water was b e i n g w i t h d r a w n , t h e a u t h o r i t y c o u l d r e d u c e t h e n u m b e r of w a t e r certificates released back i n t o t h e m a r k e t . Similarly, a larger n u m b e r c o u l d be released if t h e expected s u p p l y w o u l d be s u f f i c i e n t t o meet expected demand. Initially, t h e w a t e r a u t h o r i t y c o u l d either sell t h e certificates f o r a f i x e d a m o u n t or sell t h e m at a u c t i o n . F o l l o w i n g t h e initial sale, individuals w o u l d be free t o b u y a n d / o r lease certificates f r o m o t h e r i n d i v i d u a l s at any price t h e y c o u l d n e g o t i a t e . Water users w o u l d deal w i t h water in m u c h t h e same way t h e y deal w i t h o t h e r factors of p r o d u c t i o n . The g o i n g market price w o u l d reflect t h e initial price, t h e increased o p p o r t u n i t y costs f o r t h e water over t i m e a n d t h e r e m a i n i n g life of t h e certificates. The w a t e r a u t h o r i t y , t h r o u g h o b s e r v a t i o n of market t r a n s a c t i o n , w o u l d o b t a i n i n f o r m a t i o n on t h e o p p o r t u n i t y value of water. This inform a t i o n w o u l d be useful in t h e authority's overall p l a n n i n g process. There are, of course, p r o b l e m s w i t h this quasi-market approach. Selecting t h e t i m e d u r a t i o n for certificates is especially d i f f i c u l t . The o p t i m u m life for certificates w i l l d e p e n d on the types of use and t h e capital i n v e s t m e n t p r o b l e m s associated w i t h these uses. D e f i n i n g the available supply in a particular area is also a p r o b l e m , b u t o n e w i t h w h i c h all allocative systems must deal. There is also t h e p r o b l e m of individuals a t t e m p t i n g t o c o n t r o l large quantities of certificates and m a n i p u l a t e t h e market to their advantage. This c o u l d be m i n i m i z e d by r e q u i r i n g t h e water a u t h o r i t y t o m o n i t o r certificate transfer. Recent research in Florida provides insights i n t o potential o u t c o m e s w h e n d i f f e r e n t w a t e r allocation approaches are used. 10 We studied a central Florida river basin w h e r e w a t e r is used by h o u s e h o l d s , businesses and a g r i c u l t u r e . By h y p o t h e t i c a l ^ i m p o s i n g t h e technical and quasi-market approaches o n t h e area, w e w e r e able t o calculate the quantities of w a t e r and net benefits that w o u l d have o c c u r r e d had t h e t w o approaches been used. D u r i n g b o t h relatively high and l o w rainfall years t h e quasi-market p r o v i d e d higher net b e n e f i t s : f o u r percent higher in w e t years and n i n e percent higher in d r y years. C o m m e r c i a l businesses and h o u s e h o l d s fared better u n d e r t h e " t e c h n i c a l a p p r o a c h " n o w used in t h e basin, w h i l e agriculture, in this case citrus, fared better u n d e r t h e quasi-market. G r o w t h is o c c u r r i n g in t h e basin, and as g r o w t h continues t h e r e w i l l be increased w a t e r shortage. U n d e r t h e present technical rules, c o m m e r c i a l businesses and h o u s e h o l d s w i l l fare better than agriculture. U n d e r a market o r i e n t e d a p p r o a c h , citrus g r o w e r s c o u l d b i d for supplies and c o m p e t e successfully. Conclusions The failure of c o m m o n law d o c t r i n e s t o resolve conflicts a m o n g water users has caused many Eastern states to e x p l o r e o t h e r o p t i o n s . Typically, states have c o n s i d e r e d administrative systems w h i c h use some f o r m of regulation t o manage w a t e r resources. Private water users are skeptical and d o u b t that increased regulation w i l l help t h e m . But t h e user w h o is b e i n g h u r t by c o m p e t i t i o n for t h e l i m i t e d supply or is u n c e r t a i n a b o u t his f u t u r e supply w i l l w e l c o m e some d e g r e e of g o v e r n m e n t i n v o l v e m e n t . Water users are likely t o accept administrative r e g u l a t i o n if t h e y believe t h e r e is a way for t h e m to participate in t h e allocation process. It is i n c u m b e n t u p o n those d e s i r i n g change to make t h e likely o u t c o m e s clear. For as w i t h most changes in r e s o u r c e ^ e n t i t l e m e n t s , n o t everyone w i l l b e n e f i t . E i 10 FEDERAL RESERVE B A N K O F A T L A N T A See Keri H. Taylor and Clyde F. Kiker, " E c o n o m i c Benefits of Alternative Water A l l o c a t i o n A p p r o a c h e s , " Paper N o . 80-2514, 1980, American Society of Agricultural Engineers, St. Joseph, M i c h i g a n . 31 Assessing E c o n o m i c Country Risk In June 1980, outstanding U.S. bank loans to non-oil exporting developing countries totaled about $70 billion. As a result, banks have heightened their efforts to evaluate the special risk (country risk) involved in international lending. Good country risk analysis requires, in effect, a projection of a country's future economy, including non-economic factors. International l e n d i n g by w e s t e r n industrialized c o u n t r i e s ' c o m m e r c i a l banks has e x p a n d e d dramatically in recent years. Net loans o u t s t a n d i n g rose almost f i v e f o l d f r o m $172 b i l l i o n in 1973 t o $810 b i l l i o n in 1980. A significant p o r t i o n of this l e n d i n g ($195 b i l l i o n at year-end 1980) is t o t h e non-OPEC d e v e l o p ing e c o n o m i e s . ' U.S. banks are v e r y active lenders to developing economies. Over the period December 1977 to June 1980, U.S. bank claims o n t h e non-oil exporting developing countries increased by $18 b i l l i o n , to total a b o u t $70 b i l l i o n ; this increase represents a healthy 13.6 percent annual average g r o w t h . 2 'These data are from the Bank of International Settlements (BIS) quarterly reports titled International Banking Developments and refer to the dollar value of the gross external assets of banks in the BIS reporting area (the Group of Ten countries and Switzerland, Austria, Denmark, Ireland) and the branches of U.S. banks in the principal offshore centers in the Caribbean and Far East. 2 These data refer to U.S. bank claims on foreigners by country of guarantor for 130 U.S. banking organizations with sizable foreign banking operations. Since 1977, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency have been conducting a semiannual activity survey of such banks' foreign lending. Survey results are made available to the public by the Board of Governors of the Federal Reserve System as a Federal Reserve press release. Country Exposure Lending Survey. The availability of these f u n d s is of increasing i m p o r t a n c e t o t h e n o n - o i l e x p o r t i n g d e v e l o p i n g e c o n o m i e s . In fact, external p u b l i c and p u b l i c l y g u a r a n t e e d d e b t of these develo p i n g e c o n o m i e s (as r e p o r t e d t o t h e W o r l d Bank) made available f r o m private financial institutions increased m o r e t h a n s e v e n f o l d f r o m 1973 to 1979, rising to $124 b i l l i o n in 1979. As a share of total p u b l i c external d e b t , b o r r o w i n g f r o m private financial institutions increased f r o m 16 p e r c e n t in 1973 t o 36 percent in 1979 (Table 1). Defining " C o u n t r y Risk" The e x p a n d e d i n t e r n a t i o n a l l e n d i n g by c o m m e r c i a l banks has b e e n a c c o m p a n i e d by an increase in t h e share of interest payments and p a y m e n t of p r i n c i p a l g o i n g t o private financial i n s t i t u t i o n s (Tables 2 and 3). In t u r n , banks have increased t h e i r analysis of b o r r o w ing c o u n t r i e s . (The largest U.S. banks may have large staffs e n g a g e d in this e f f o r t . ) The reason w h y banks analyze c o u n t r i e s is that i n t e r n a t i o n a l l e n d i n g , in contrast t o d o m e s t i c 1 32 J U N E 1 9 8 1 , E C O N O M I C R E V I E W Table 1 E X T E R N A L PUBLIC A N D PUBLICLY G U A R A N T E E D DEBT O U T S T A N D I N G ($ billions) 1973 1979 Percent PFI* PFI Total Total 97 developing countries 86.7 16.4 80 non-oil exporting countries 62.9 Latin America and Caribbean 27.4 Percent PFI PFI 18.9 297.6 123.6 41.5 9.9 15.7 194.0 70.3 36.2 10.1 36.9 111.3 70.8 63.6 'Private Financial Institutions Source: World Bank, World Debt Tables, Volume I. Table 2 DEBT SERVICE O N E X T E R N A L PUBLIC A N D PUBLICLY G U A R A N T E E D ($ billions) 1973 Total 97 developing countries 1979 Percent PFI* PFI Total PFI Percent PFI 10.8 3.1 28.7 48.6 28.8 59.3 80 non-oil exporting countries 7.3 1.8 24.7 26.4 13.2 50.0 Latin America and Caribbean 4.3 1.9 44.2 25.8 18.9 73.3 "Private Financial Institutions Source: World Bank, World Debt Tables, Volume I. Table 3 INTEREST PAYMENTS O N E X T E R N A L PUBLIC AND PUBLICLY G U A R A N T E E D D E B T ($ billions) 1973 Total 1979 Percent PFI* PFI Total PFI Percent PFI 97 developing countries 3.4 .9 26.5 18.3 10.6 57.9 80 non-oil exporting countries 2.5 .6 24.0 11.1 5.8 52.2 Latin America and Caribbean 1.4 .6 42.9 "Private Financial Institutions Source: World Bank, World Debt Tables, Volume I. 9.2 6.5 70.6 bank l e n d i n g , entails a s s u m i n g risk apart f r o m t h e quality of t h e c o m m e r i c a l or c r e d i t risk of t h e b o r r o w e r . This a d d i t i o n a l , u n i q u e risk of l e n d i n g i n t e r n a t i o n a l l y is called " c o u n t r y risk." C o u n t r y risk i n c l u d e s e c o n o m i c , p o l i t i c a l , or social factors w h i c h m i g h t make b o r r o w e r s e i t h e r u n w i l l i n g or u n a b l e t o repay t h e i r debts t o f o r e i g n lenders in a t i m e l y manner. Nationalization of f o r e i g n c o m p a n i e s , r e p u d i a t i o n of d e b t by a g o v e r n m e n t , wars, and r e v o l u t i o n s are examples of c o u n t r y risk. O t h e r examples w o u l d be inability t o o b t a i n t h e n e e d e d a m o u n t of a f o r e i g n c u r r e n c y t o service d e b t or g o v e r n m e n t c o n t r o l s o n f o r e i g n exchange transactions a n d capital m o v e m e n t s . I n s u f f i c i e n t or c o n t r o l l e d access t o f o r e i g n exchange, o f t e n p r e c i p i t a t e d by a balance of payments g o o d s a n d services d e f i c i t , or by capital f l i g h t , is o f t e n associated w i t h " e c o n o m i c " rather t h a n " p o l i t i c a l " or " s o c i a l " risk; in fact, these d i f f e r e n t risks are o f t e n interrelated. 3 T h e e c o n o m i c e l e m e n t of c o u n t r y risk is of o b v i o u s c o n c e r n t o lenders. It is, h o w e v e r , also a c o n c e r n t o t h e b o r r o w i n g d e v e l o p i n g e c o n o m i e s w h i c h n e e d t o m a i n t a i n a f l o w of resources f r o m abroad in o r d e r t o achieve e c o n o m i c d e v e l o p m e n t objectives. Increased e c o n o m i c risk spells a s l o w d o w n in t h e net f l o w of external capital t o sustain or increase that g r o w t h . C o u n t r i e s may, of course, b o r r o w for reasons o t h e r t h a n to fill a d o m e s t i c savingsi n v e s t m e n t gap. They may, f o r e x a m p l e , b o r r o w in o r d e r t o f i n a n c e c u r r e n t c o n s u m p t i o n . O r , t h e y may b o r r o w t o c o r r e c t a t e m p o r a r y weakness in t h e balance of t r a d e d u e t o bad w e a t h e r , an u n e x p e c t e d increase in i m p o r t prices, or a w o r l d recession. As a general p r i n c i p l e , t h e r e t u r n o n t h e b o r r o w e d f u n d s m u s t exceed t h e cost. In o t h e r w o r d s , b o r r o w i n g s h o u l d cause national i n c o m e t o g r o w . In a d d i t i o n , t h e stream of returns m u s t also generate e x p o r t revenues (or r e d u c e d i m p o r t spending) w h i c h w i l l p r o v i d e t h e f o r e i g n c u r r e n c y n e e d e d t o pay back t h e loan d u r i n g t h e life of t h e loan agreement. 4 3 lt is not clear which ot these risk categories is most important. On the one hand, the recent growth of literature on political risk suggests increasing concern with the international environment. On the other hand, experience suggests that countries are unlikely to repudiate debt and thus cut themselves off from international credit markets. "There are exceptions to these guidelines. For example, countries may want to smooth out their consumption stream over time (borrow more now in anticipation of future revenues) or they may want to and may be able to roll over debt principal. 33 FEDERAL RESERVE B A N K O F A T L A N T A Assessing Economic Risk Assessing e c o n o m i c c o u n t r y risk is n o t easy. Examining a variety of cost a n d m a t u r i t y profiles and t h e associated returns over t i m e f r o m i n v e s t m e n t projects requires, in e f f e c t , a p r o j e c t i o n of t h e f u t u r e e c o n o m y . T h e p r o b lem is f u r t h e r c o m p o u n d e d because t h e degree of d e b t - s e r v i c i n g d i f f i c u l t y is related to t h e availability of f u t u r e capital i n f l o w s f r o m a b r o a d , w h i c h is n o t solely d e t e r m i n e d by e c o n o m i c variables. 5 C o u n t r y risk assessors typically e x a m i n e t h e c u r r e n t and past e c o n o m i c s t r u c t u r e , just as a physician c o m p i l e s a medical history a n d takes m e a s u r e m e n t s w h e n e x a m i n i n g a patient. C o u n t r y risk analysts l o o k at t h e b a c k g r o u n d of t h e c o u n t r y — its q u a n t i t y a n d quality of physical a n d h u m a n resources. They l o o k also at its t e c h n o l o g i c a l base t o see h o w and w h y the c o u n t r y has c o m e t o its c u r r e n t level of d e v e l o p m e n t — at h o w it has been " n u r t u r e d . " Economic c o u n t r y risk analysis also entails t h e assessment of i n t e r n a l factors as w e l l as external d e v e l o p m e n t s w h i c h affect the domestic economy. Internal Factors General indicators of c u r r e n t d e v e l o p m e n t include: • level and rate of e c o n o m i c g r o w t h — GDP, real GDP/capita 6 • social characteristics — e d u c a t i o n level, infant m o r t a l i t y rate, fertility, literacy, income distribution • g o v e r n m e n t ' s e c o n o m i c policies — spending, taxes, deficits; m o n e y g r o w t h , c r e d i t policies, i n f l a t i o n ; e n v i r o n m e n t a l c o n trols, tariffs, quotas The basic rationale for e x a m i n i n g these internal indicators is that h i g h a n d g r o w i n g 5 6 The availability of capital will also depend on the political and social risk factors (and upon profitability conditions in other countries) which combine with economic risk to encompass "country risk." The requirements for assessing country risk are naturally even more complex than the assessment of economic risk. As Ingo Walter has written in an unpublished 1980 paper: "Given the nature of the problem, effective country risk assessment requires a true "renaissance man" (or woman), exceedingly intelligent, holder of multiple doctorates from respectable institutions in economics, political science, sociology, psychology and perhaps a few other fields as well, totally objective, with a great deal of common sense. In addition to being exceedingly well-traveled, he or she should be up-to-the-minute on developments in all countries of interest to the bank (and in other countries that might affect them), and be personally acquainted with key policymakers in each of them. Such individuals are not too easy to find." Paper presented at a conference on "Internationalization of Financial Markets and National economic Policy," Graduate School of Business Administration, New York University, April 10-11, 1980. GDP, or gross domestic product, refers to the sum of the values of goods and services produced within a nation's borders. 34 levels of e c o n o m i c a n d social a c h i e v e m e n t t o d a y — in t e r m s of real GDP per capita a n d e d u c a t i o n , for e x a m p l e — are c o r r e l a t e d w i t h past success in m a n a g i n g resources: t h e c o u n t r y has t h e skilled p e o p l e necessary for future economic growth. If t h e e c o n o m y also is w e l l - e n d o w e d w i t h natural resources, a solid t e c h n o l o g i c a l base, and d e v e l o p e d financial markets, t h e potential for c o n t i n u e d e x p a n s i o n is e v i d e n t . H o w e v e r , in o r d e r for this p o t e n t i a l to be realized, t h e g o v e r n m e n t ' s m a n a g e m e n t policies must be a p p r o p r i a t e . The q u e s t i o n is w h e t h e r t h e g o v e r n m e n t is e n c o u r a g i n g efficiency, investm e n t g r o w t h , and o t h e r desirable goals or w h e t h e r it is i m p e d i n g t h e m ; its answer has critically i m p o r t a n t i m p l i c a t i o n s f o r t h e country's g r o w t h prospects. External Factors Having e x a m i n e d t h e i n t e r n a l s t r u c t u r e of t h e e c o n o m y , t h e e c o n o m i c risk assessor t u r n s t o t h e external features. Ultimately, he w i l l begin t o f o r m u l a t e j u d g m e n t s a b o u t t h e ability of an e c o n o m y t o carry a d d i t i o n a l d e b t . Because of t h e f r e q u e n t c o n c e r n w i t h an e c o n o m y ' s ability to generate f o r e i g n exchange t o repay d e b t , e c o n o m i c risk analysts have t e n d e d t o evaluate v e r y carefully a country's external p o s i t i o n . They first analyze the balance of payments situation — t h e trade balance, t h e c u r r e n t a c c o u n t balance, a n d capital flows. 7 They also carefully analyze t h e country's f o r e i g n d e b t a n d its relationship to t h e balance of payments. Finally, c o u n t r y risk analysts e x a m i n e t h e level of i n t e r n a t i o n a l reserves and the availability of external credits. Their analysis emphasizes t h e following: • exports and i m p o r t s — absolute level and rate of g r o w t h ; diversity of e x p o r t s ; ability to reduce i m p o r t s • t o u r i s m and t r a n s p o r t a t i o n service receipts, i n v e s t m e n t i n c o m e , a n d transfer credits and debits • direct foreign investment and short-term capital f l o w s • external d e b t — p u b l i c a n d private, l o n g and s h o r t - t e r m , size, c o m p o s i t i o n and 7 The trade balance comprises merchandise import and export transactions while current account comprises transactions in goods, services, and unrequited transfers; the current account thus excludes transactions in financial assets and liabilities. The capital account covers the net acquisition of financial assets, some of which may be used to finance current or other capital account transactions. JUNE 1981, E C O N O M I C REVIEW g r o w t h ; debt-service, size, g r o w t h , and repayment schedule • i n t e r n a t i o n a l reserves The trade balance is e x a m i n e d t o see if exports are g r o w i n g in a healthy fashion a n d w h e t h e r t h e c o u n t r y is d e p e n d e n t u p o n , say, a principal c o m m o d i t y e x p o r t or has diversified exports. A n i m p o r t a n t aspect of i m p o r t s will be t h e c o m p o s i t i o n and g r o w t h of inelastic c o m p o n e n t s like energy a n d f o o d . O t h e r c o m p o n e n t s of t h e c u r r e n t account — t o u r i s t service receipts, i n v e s t m e n t d i v i d e n d s a n d interest, and private a n d p u b l i c transfers are examined for t h e i r g r o w t h , stability, and impact o n t h e c u r r e n t transactions balance. The analyst examines t h e capital account as it covers t h e net a c q u i s i t i o n of financial assets. The capital a c c o u n t can serve as an indicator of investor c o n f i d e n c e (if f o r e i g n d i r e c t investment g r o w t h is healthy) or c o n c e r n w i t h g o v e r n m e n t policies (if capital is b e i n g p u l l e d out). Debt a n d debt-service g r o w t h w i l l typically be e x a m i n e d in c o n n e c t i o n w i t h balance of payments d e v e l o p m e n t s a l o n g w i t h changes in reserves; t h e basic rationale of this procedure reflects t h e fact that o n e pays f o r past or c u r r e n t resource use w h i c h is in excess of c u r r e n t i n c o m e o u t of savings, by b o r r o w i n g , or f r o m o u t s i d e r i n v e s t m e n t . Ratios and Country Risk Assessment C o u n t r y risk analysts have d e v e l o p e d a set of s u m m a r y indicators t o p r e d i c t s h o r t r u n debt-servicing d i f f i c u l t i e s in advance. Analysts have t e n d e d to f o c u s o n ratios of variables associated w i t h t h e external side of t h e economy — exports, imports, debt, debt service and its a m o r t i z a t i o n a n d interest c o m p o n e n t s , i n t e r n a t i o n a l reserves, International M o n e t a r y Fund c r e d i t available, t h e c u r r e n t a c c o u n t balance (currently or c u m u latively), and so o n . A list of s o m e of these external i n d i c a t o r s and w h a t t h e y a t t e m p t t o summarize is given in Table 4. T h e heavy reliance o n ratios reflects a carry-over of financial analysis t e c h n i q u e s used t o assess the c r e d i t w o r t h i n e s s of c o m m e r c i a l borrowers. Ratios also are usually m o r e i n f o r m a t i v e t h a n variables discussed in absolute size. W h e n measuring long t e r m debt repayment capacity, o n t h e o t h e r h a n d , analysts t e n d t o look m o r e at o t h e r e c o n o m i c variables; in FEDERAL RESERVE BANK O F ATLANTA particular, t h e y f o c u s o n t h e g r o w t h of internal variables such as gross d o m e s t i c fixed i n v e s t m e n t , t h e marginal c a p i t a l - o u t p u t ratio as a p r o d u c t i v i t y measure, a n d such o t h e r ratios as capital i m p o r t s t o d o m e s t i c investm e n t , d o m e s t i c saving t o GDP, i n v e s t m e n t t o GDP, g o v e r n m e n t e x p e n d i t u r e s t o GDP, a n d so o n (Table 4). Ratios, used singly or in c o m b i n a t i o n in a checklist system, have m e t w i t h l i m i t e d success. Extreme c a u t i o n m u s t be used in i n t e r p r e t a t i o n , because a given ratio value may be high or l o w , d e p e n d i n g u p o n such factors as t h e size, e c o n o m i c s t r u c t u r e , a n d level of d e v e l o p m e n t of a c o u n t r y . The debt-service ratio, for e x a m p l e , is d e f i n e d as a m o r t i z a t i o n plus interest (generally o n p u b l i c and p u b l i c l y g u a r a n t e e d d e b t for s i m p l i f i c a t i o n purposes) as a ratio of exports of g o o d s a n d services. It serves as a measure of a c o u n t r y ' s b u r d e n of d e b t in terms of f o r e i g n exchange earnings a n d t h u s reduced i m p o r t capacity. Illustrative of d i f f i c u l t i e s w i t h ratios, h o w ever, t h e r e are a variety of p r o b l e m s associated w i t h t h e debt-service ratio w h i c h make it unadvisable t o rely o n it solely as a risk indicator. A c o u n t r y ' s r e p o r t e d d e b t service ratio c o u l d rise w h e n d e b t - m a n a g e m e n t is i m p r o v i n g or fall w h e n there is no i m p r o v e m e n t d u e to changes in available i n f o r m a t i o n . It ignores o t h e r f o r m s of f o r e i g n liabilities such as p r o f i t s o n f o r e i g n i n v e s t m e n t . In i n f l a t i o n a r y t i m e s , rising n o m i n a l e x p o r t prices a n d f l o a t i n g , volatile interest rates make i n t e r p r e t a t i o n of t h e ratio d i f f i c u l t . Because of b u n c h i n g of repayments, f l u c t u a t i n g e x p o r t s a n d o t h e r factors, t h e ratio also is o f t e n v o l a t i l e , rising a n d f a l l i n g sharply even f r o m year t o year. O t h e r ratios have similar idiosyncracies a n d r e q u i r e similar cautious i n t e r p r e t a t i o n . Conclusion International bank l e n d i n g has g r o w n dramatically since t h e o i l - p r i c e increases of 1973-1974. T h e g r o w t h of such l e n d i n g , particularly t o t h e d e v e l o p i n g e c o n o m i e s , has caused c o u n t r y risk t o be an issue w h i c h lenders, b o r r o w e r s , a n d regulators in t h e U.S. and o t h e r w e s t e r n e c o n o m i e s take seriously. Analysts of t h e e c o n o m i c d i m e n s i o n of c o u n t r y risk (in s i m p l i f i e d t e r m s , t h e ability t o repay f o r e i g n d e b t ) , take a holistic a p p r o a c h in evaluating a c o u n t r y ' s e c o n o m i c s t r e n g t h . 35 Table 4 Indicators and Ratios Frequently Used in Economic Risk Assessment INTERNAL Gross Domestic Product (GDP) — measure of the size of the economy GDP Composition — indicator of the overall structure of the economy Population — measure of the potential size of the market GDP/Population — measure of the level of economic development Savings/GDP — indicator of growth prospects attributable to domestic savings Investment/GDP — indicator of current commitment to future economic growth and productivity Capital/Output — marginal capital-output ratio measures productivity of new investment Government Spending/GDP — indicator of government involvement in the economy Public Sector Deficit/GDP — indicator of the financial management capabilities of the public sector External Public Debt/GDP — indicator of over all exposure to the international economy and long-term debt burden Money Supply Growth — measure of economic activity and stability of the currency Consumer Price index and/or Wholesale Price Index — measures of domestic inflation rate Unemployment Rate — measure of labor slack in the economy Their m e t h o d o l o g y is n o t u n l i k e t h e physician's w h o assesses t h e healthiness of his patients by p e e r i n g i n t o t h e patient's backg r o u n d and e n v i r o n m e n t in a d d i t i o n t o t a k i n g various m e a s u r e m e n t s of health. T h e o b j e c tive in c o u n t r y e c o n o m i c risk evaluation is t o assess t h e collective impact of a country's EXTERNAL Imports and/or Exports/GDP — measure of the openness of an economy Export Volume — indicator of growth of the external sector of the economy Exports/Imports — called the "coverage ratio"; indicator of economy's rate of growth Export Composition — indicator of vulnerability of foreign exchange earnings to price fluctuations Manufacturing Exports/Total Exports — indicator of diversity and stability of exports Oil Imports/Main Export — crude measure of the terms of trade of an economy Current Account Deficit/Exports — short term measure of possible balance of payments difficulties Total External Debt/Exports — long term indicator of country's liquidty Interest Payments/Exports — indicator of debt burden; reflects carrying costs of the external debt Total Service Payments/Exports — measure of external debt burden Amortization Payments/External Debt — measure of liquidity and (reciprocal) indicator of average maturity of debt Interest Payments/International Reserves — short-term measure of ability to meet debt servicing requirements International Reserves/Imports — measure of short-term liquidity International Monetary Fund (IMF) Credit Usage/IMF Fund Quota — measure of short-term liquidity evolving d o m e s t i c a n d i n t e r n a t i o n a l e c o n o m i c relationships o n t h e e c o n o m y ' s ability to carry a heavier d e b t b u r d e n . I d e n t i f i c a t i o n of potential d e b t - s e r v i c i n g p r o b l e m situations and assessment of e c o n o m i c risk requires a t h o r o u g h u n d e r s t a n d i n g of t h e i n t e r n a l and external w o r k i n g s of an e c o n o m y . —William 36 j. Kahley JUNE 1 9 8 1 , E C O N O M I C REVIEW Sources of Information for Country Risk Analysis Bankers evaluating c o u n t r y risk r e q u i r e up-to-date i n f o r m a t i o n sources o n c o u n t r i e s in w h i c h t h e y have o r are c o n s i d e r i n g having exposure. For such p u r p o s e s , consistent data series w i t h v e r y c u r r e n t data are r e q u i r e d ; bankers w i l l n o t be satisfied w i t h secondary, dated sources. Typically, banks u p d a t e t h e i r c o u n t r y risk analysis annually, a l t h o u g h countries u n d e r g o i n g significant c h a n g e require reappraisals m o r e f r e q u e n t l y . I n f o r m a tion needs i n c l u d e data o n p o p u l a t i o n , national i n c o m e , i n f l a t i o n , u n e m p l o y m e n t , domestic m o n e t a r y a n d fiscal c o n d i t i o n s , exports and i m p o r t s a n d o t h e r balance of payments accounts as w e l l as extensive i n f o r m a t i o n o n t h e c o u n t r y ' s external d e b t . O n t o p of this, i n f o r m a t i o n o n political and social factors is r e q u i r e d . Such political and social i n f o r m a t i o n is o f t e n s u p p l e m e n t e d t h r o u g h r e c u r r e n t travel t o t h e c o u n t r y in question by l e n d i n g o f f i c e r s as w e l l as t h r o u g h i n f o r m a t i o n o b t a i n e d f r o m representative offices or branches a n d subsidiaries w h i c h t h e bank may maintain a b r o a d . In o r d e r t o fill t h e r e q u i r e m e n t s of b a n k i n g and financial entities in c o u n t r y risk analysis, a limited select g r o u p of c u r r e n t i n f o r m a t i o n sources is r e q u i r e d . T h e sources of such data are p r i m a r i l y t h e I n t e r n a t i o n a l M o n e t a r y Fund, the U n i t e d N a t i o n s , t h e W o r l d Bank, t h e Bank for International Settlements, t h e U.S. Treasury and t h e Board of G o v e r n o r s of t h e Federal Reserve System. For w r i t t e n assessments o n i n d i v i d u a l e c o n o m i e s , t h e U.S. D e p a r t m e n t s of C o m m e r c e and State, t h e Inter-American D e v e l o p m e n t Bank, i n d i v i d u a l newsletters p u b l i s h e d by banks or p u b l i s h i n g houses a n d c o u n t r y risk rankings p u b l i s h e d by Euromoney and t h e Institutional Investor are also used. That's a b o u t it for t h e essential core. For banks, h o w e v e r , w a n t i n g t o supplement such sources w i t h data f r o m t h e individual c o u n t r i e s t h e m s e l v e s , t h e m o n t h l y , quarterly and annual r e c u r r e n t p u b l i c a t i o n s of the individual c o u n t r y ' s central b a n k , m o n e tary a u t h o r i t y a n d t h e s u p e r i n t e n d e n t of banks are r e c o m m e n d e d . The f o l l o w i n g is an anno- FEDERAL RESERVE BANK O F ATLANTA tated listing of basic i n f o r m a t i o n sources f o r c o u n t r y risk analysis. Data Sources on International Lending and Developing Economies' External Debt 1. The World Bank, World Debt Tables, External Public Debt of Developing Countries, Washington, D.C., annual, with recurrent supplements. This is the primary source of external public debt and debt servicing. 2. Bank for International Settlements, Maturity Distribution of International Bank Lending, semiannual, and The External Position of Banks in Group of Ten Countries and Switzerland, quarterly, Basle, Switzerland. This is the primary source for data on industrial economies' c o m m e r c i a l bank international claims and liabilities by country. 3. Comptroller of the Currency, Federal Deposit Insurance Corporation, Federal Reserve Board, Joint News Release, Country Exposure Lending Survey, Washington, D.C., semiannual. This is the primary source of data on consolidated U.S. bank lending internationally. The report consolidates parent, branch and Edge Act corporations of U.S. banks in regard to cross border and non-local currency claims. In a separate table, claims are reallocated to reflect claims guaranteed by residents of another country. 4. U.S. Treasury Department, Treasury Bulletin, Washington, D.C., monthly. This publication presents in great detail the foreign activity of banks and Edge Act corporations operating in the U.S. Branch and foreign subsidiary activity, however, is excluded. 5. Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release, "Geographical Distribution of Assets and Liabilities of Major Foreign Branches of U.S. Banks," (E11), Washington, D.C. quarterly. This statistical release details asset and 37 liability positions by country of customer of the major foreign branches of U.S. banks. 6. World Bank, Borrowing in International Capital Markets, Foreign and International Bond Issues, Publicized Eurocurrency Credits, Washington, D.C., semiannually. This publication provides comprehensive information on publicized Eurocurrency credits and foreign and international bonds. Data are presented by country and individual credit or bond issue and include the interest rate, the term, the various fees and the lead and co-manager banks. 7. Euromoney, London, monthly. Each month, Euromoney publishes a section on currently publicized syndicated loans, by borrowing entity. The amount of the credit, the interest rate, the term and the lead management group are included. Data Sources on Exchange Rates, International Reserves, Monetary and Fiscal Conditions, International Trade, Balance of Payments, National Income Accounts, Population and Unemployment 1. International Monetary Fund (IMF), International Financial Statistics, Washington, D C., monthly. This source is indispensable for country risk a n a l y s i s . U p d a t e d monthly, t h e I n t e r n a t i o n a l F i n a n c i a l S t a t i s t i c s (IFS) presents current and historical data in printed and tape form on individual IMF member countries. Data include series on exchange rates, international reserves, monetary aggregates, government finance, major and total exports, imports, balance of payments aggregates and national income accounts. 2. International Monetary Fund, Direction of Trade Yearbook, Washington, D.C., annual, updated monthly. This source, produced in written and tape form, provides current and historical data on the origin and destination of exports and imports of IMF member countries. 3. International Monetary Fund, Balance of Payments Yearbook, Washington, D.C., annual, with updates. The Balance of Payments Yearbook presents in printed and tape form the most detailed, consistent series available 38 of balance of payments data on IMF member countries. Details on the service account (which includes tourism inflows and outflows) as well as short-term and long-term capital movements are presented in historical series. 4. International Monetary Fund, Government Finance Statistics Yearbook, Washington, D.C., annual. The IMF also publishes this highly specialized yearbook which presents details on government tax and other revenues as well as government expenditures. 5. World Bank Atlas and World Development Report, Washington, D.C., annual. The World Bank Atlas, in pamphlet form, contains esti- 1 mates of population, Gross National Product (GNP) and per capita GNP in current U.S. dollars for most countries of the world. Growth ) rates for population and per capita GNP (in real terms) are shown. Data are shown graphically in map format with companion tables. A total of 185 countries and territories is listed, including many countries not listed in the IMF publications. The World Development Report is a more thorough source but covers fewer countries. 6. United Nations (U.N.), Monthly Bulletin of Statistics, New York, monthly. The U.N. publishes annually the Statistical Yearbook, which contains detailed tables with country economic data. Many of these tables are updated in the Monthly Bulletin of Statistics, such that this monthly source becomes more valuable for country risk analysis purposes. The tables on national income accounts present more detail on GNP composition than those available from the IMF. 7. International Labour Office, Yearbook of Labour Statistics, G e n e v a , Switzerland, annual. Data on employment and unemployment of developing economies are difficult to obtain. Even data found should not be used readily for intercountry comparisons. The Yearbook of Labour Statistics does present unemployment data that may prove useful. Some Descriptive Sources Useful in Country Risk Analysis 1. U.S. Department of State, Bureau of Public Affairs, Background Notes on Countries of JUNE 1 9 8 1 , E C O N O M I C REVIEW the World, updated periodically. This is a series of short, authoritative pamphlets on the countries and territories of the world written by officers of the U.S. Department of State's geographic bureaus. Each Background Note includes information on the country's land, people, history, government, political conditions, economy and foreign relations. Also included are maps, brief travel notes, lists of government officials and a bibliography. These pamphlets provide a brief, general introduction to conditions in a particular country. 2. U.S. Department of Commerce, Industry & Trade Administration, F o r e i g n E c o n o m i c Trends a n d T h e i r I m p l i c a t i o n s for t h e United States, updated annually. This is a continuing series of brief reports on 130 countries c o v e r i n g their current e c o n o m i c conditions and future trends as well as potential effects of these on U.S. business. Each report is prepared on the scene by U.S. foreign service officers, who pinpoint the economic and financial condition of the country and the m a r k e t i n g p r o s p e c t s for U . S . p r o d u c t s . Included in each report is a table of key economic indicators. 3. U.S. Department of Commerce, Industry & Trade Administration, Overseas Business Reports (about 50 reports published per year). This is a useful series of reports covering about 100 countries. Titles vary, such as "Marketing in (name of country)," "Doing Business in . . . , " "World Trade Outlook f o r . . . , " etc. Country information often includes industry trends, trade regulations, information on the tariff system, taxes, direct foreign investment, etc. 4. Inter-American D e v e l o p m e n t Bank (IDB), Economic and Social Progress in Latin America, Washington, D.C., annual. T h e IDB each year does country assessments of member countries. The analysis is well done but becomes quickly dated; the latest (1979) report details 1979 developments; it came out in fall 1980. 5. Business International Corporation, Business Latin America, New York, weekly. This publication carries up-to-date business and economic information useful to businessmen involved in Latin America. Periodically, "Business Outlooks" are prepared which assess a particular economy's performance the past year and project descriptively performance in the current year. 6. Barclays Bank Group, A B E C O R Country Report, London, irregular. In two pages, this series provides an assessment of an analyzed country's economic and social condition; while not in depth, the country reports do provide a brief perspective. 7. International Currency Review, London, bimonthly. This publication assesses the stability of exchange rates and evaluates the strengths of currencies throughout the world. Within its assessments, the journal evaluates government policies and current and anticipated economic and financial conditions. Country Risk Listings 1. Euromoney, London, monthly. Twice each year, E u r o m o n e y publishes c o u n t r y risk tables that are based on ranking the interest rate spreads and maturities of syndicated Euromarket loans to public sector borrowers. The tables include the number and value of Euromarket syndicated loans during the period analyzed and the Euromoney ranking. This country risk ranking depends on market perc e p t i o n s of t h e c o u n t r y in q u e s t i o n as evidenced by the terms of syndicated credits extended. 2. Institutional Investor, New York, monthly. Institutional Investor also publishes twice each year country risk tables. The rankings are based on input obtained from about 75 banks active in international lending, with greater weights placed on those banks with the largest worldwide lending and the more sophisticated country risk analysis. Each banker is asked to rate the creditworthiness of each country on a 0 to 100 scale. —Donald E. Baer 39 FEDERAL RESERVE BANK O F ATLANTA Federal Reserve Bank of Atlanta P.O. Box 1731 Atlanta, Georgia 30301 Bulk Rate U.S. Postage Address Correction Requested Atlanta, Ga. Permit 292 PAID
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