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Economic &
R e v i e w
FEDERAL RESERVE BANK OF ATLANTA

FARMERS

JUNE/JULY 1986

What's Ahead?

DOLLAR INDEX

S&Ls

Reflecting Global Trade

Choosing to Diversify




S i l

President
Robert P. Forrestal
Sr. Vice President and
Director of Research
Sheila L Tschinkel
Vice President and
Associate Director of Research
B Frank King

Economic
Review

Financial Institutions and Payments
D a v i d D. W h i t e h e a d , R e s e a r c h O f f i c e r
L a r r y D. W a l l
Robert E

Goudreau

Macropolicy

Robert E Keleher, Research Officer
T h o m a s J. C u n n i n g h a m
M a r y S. R o s e n b a u m
Jeffrey A Rosensweig
J o s e p h A. W h i t t , J r .

Regional Economics

G e n e D. S u l l i v a n , R e s e a r c h O f f i c e r
W i l l i a m J. K a h l e y
Joel R Parker
W. G e n e W i l s o n

Visiting Scholars
Russell Boyer
William Hunter

Public Information and Publications
B o b b i e H. M c C r a c k i n , D i r e c t o r

Public Information

L a r r y J. S c h u l z ,
Public Information Coordinator
Linda Donaldson

Editorial

Harriette Grissom, Publications Coordinator
Melinda Dingler Mitchell
Ann L Pegg

Graphics

E d d i e W. L e e , J r .

Typesetting, Word Processing
Cheryl B Birthrong
Belinda W o m b l e

Distribution

George Briggs
Vivian Wilkins
Ellen G e r b e r

The E c o n o m i c Review seeks to inform the public
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ISSN 0 7 3 2 - 1 8 1 3




V O L U M E LXXI, N O . 6, J U N E / J U L Y 1 9 8 6 , E C O N O M I C R E V I E W

Table of Contents
Outlook for the Farmer

k

Robert P. Forrestal
American farmers have a long row to hoe as they struggle
to cope with low prices, shrinking export markets, and
heavy debt burdens.

A New Dollar Index:
Capturing a More Global Perspective

12

Jeffrey A Rosensweig
An Atlanta Fed economist develops an index of the
dollar's foreign exchange value that provides a broad
reflection of this country's trading patterns.

Changing Thrifts:
What Makes Them Choose Commercial Lending?
n

24

n

Robert E. Goudreau and Harold D. Ford
JLL

Banking legislation during the last decade has extended
the options open to thrifts. What makes some diversify
while others do not?

Statistical Summary

40

General, Employment, SMSA, Construction

FEDERAL RESERVE BANK O F ATLANTA




3




the Farmer

4 JUNE/JULY 1986, E C O N O M I C REVIEW

Robert P. Forrestal
According to this analysis, agricultural recovery depends on new strategies to contend
with oversupply and the industry's ability to
survive in today's global markets
Low incomes, declining asset values, and shrinking markets are symptoms of the hard times
facing many American farmers. Delinquency,
liquidation, and bankruptcy rates have risen
during the 1980s. Agricultural equity in constant dollars has fallen by about 40 percent
since the beginning of the decade, and farm
equity now yields a negative rate of return.
Nationwide, about 5 percent of all farmers
went out of business during the year ending in
June 1985, and by now another 4 to 5 percent
have probably suffered the same fate. Farmers'
net income fell 20 percent from 1984 to 1985,
and this declining trend is expected to continue
as low prices stemming from large crop volume
further press net incomes downward. Not surprisingly many farm lenders are also experiencing considerable difficulty. Drought could
force into bankruptcy many southeastern
farmers w h o have been maintaining financially
strained operations.
H o w did U.S. agriculture, favored by a strong
record of productivity and distinct comparative
advantages, find itself in such difficulties? Current agricultural problems can be traced to a
boom-bust pattern in the 1970s, when farmers
first responded to dramatic increases in demand
which then faltered, causing commodity prices
to fall sharply. Farmers then suffered the consequences of overproduction. Demand rose
initially as the result of crop failures in the
Soviet Union that absorbed virtually the entire
U.S. farm stockpile in a single year. Then drought
descended on the United States, causing shortfalls in major crop production and further
spurring demand. Around this time the sudden,
apparently permanent depletion of anchovies
off the coast of Peru also created a worldwide
market for an alternative protein source for
animal feed. This need was met largely through
increased soybean production. As farm profits

The author
is president
of the Federal
R e s e r v e Bank of
Atlanta.
This article was the basis for a speech delivered
by
Mr. Forrestal
in July 1986
to the Southern
Legislative
Conference
in Fort Worth,
Texas.

FEDERAL RESERVE BANK OF ATLANTA




rose, farmers and investors began to bid vigorously for land, triggering sharp price increases.
Optimism, fed by high crop prices, continued
through the 1970s. Land and equipment were
purchased with the help of liberal borrowing at
bargain interest rates.
In the early 1980s, however, the farmers
situation reversed. Growing government deficits combined with tight monetary policy raised
real interest rates and, subsequently, the value
of the U.S. dollar. The resulting 20 percent
decline in U.S. exports, aggravated by recession
and increased foreign competition, took a great
toll on agricultural prosperity. Moreover, the
slowdown in inflation, which was a boon to the
nation generally, exacerbated the farmer's
plight In the late 1970s farmers had high and,
as it turned o u t mistaken inflationary expectations that encouraged them to incur ever higher
debt burdens. W h e n inflation began to abate
dramatically, farmers could no longer rely on
price increases to ease the burden of future
loan repayments. Slowing inflation helped to
start a slide in the price of the farm land that
stood behind many farm loans, further limiting
the options of heavily indebted farmers.
Farmers w h o have experienced the most
severe financial problems in the 1980s are
largely those w h o undertook sizable debt near
the end of the boom period. W h e n crop prices
fell, the debt service requirements of these
farmers soared far above their stagnant incomes. Many have had to sell some of their
assets to pay off loans. For numerous farmers,
moreover, even this medicine has proven ineffective to cure their ills: rapid declines in
farm land and machinery prices have frustrated
their efforts to reduce debt loads by selling
assets. Following the virtual tripling of farm
land values in the previous decade, prices
began a downward adjustment in 1981 at a
time when returns on competing investments
such as bank deposits and government bonds
rose substantially. Farmers w h o wished to extricate themselves from financial difficulty by
selling assets found markets weak or nonexistent
In contrast those farmers w h o were not
heavily indebted have maintained their net
income with the aid of government programs
for the major crops. Although both cash flow
and net income for these farmers has fluctuated
from year to year, the general levels have not
5

changed much since 1980. Thus, farmers with
little or no debt saw their real incomes rise
greatly during the farm boom of the 1970s and
remain above the pre-boom level even during
the recent period of low crop prices.
Dimensions of the Problem. To understand
why farmers' problems have advanced to this
stage, we need to look at certain factors peculiar
to agriculture O n e involves farm cost structures. Fixed costs constitute a high proportion
of total costs in farming, and in most cases
returns from additional output exceed the
variable costs of production. To minimize losses,
therefore, farmers will continue producing as
long as returns exceed out-of-pocket costs at
the margin (and creditors forbear). Thus, reducing farm supplies remains difficult

Despite their positive intent
both price support and set-aside
programs postpone adjustments
to underlying market realities.
Aside from this cost feature, however, a more
fundamental f a c t o r — e x t e n s i v e government
support—has contributed to the dismal prospects farmers face today. Despite their positive
intent both price support and set-aside programs postpone adjustments to underlying
market realities. Just like protectionist measures
on behalf of the steel, textile, or auto industries,
these efforts only defer changes that are inevitable if companies are to survive in today's
global markets. Although the goal of farm programs is to preserve or maintain farmers' income
levels above a reasonable minimum, the price
mechanisms involved tend to create excess
supplies. Given the extent of these supports,
which are typically not limited to farmers at the
lower income scale but available more or less
across the board, it is not surprising that output
generally exceeds demand, keeping prices under downward pressure
Since the trend in farm profits is likely to
remain flat farm assets are drawing a lower
price Asset values in 1986 are predicted to
drop 25 percent below their $1 trillion-plus
peak in 1981, primarily due to falling land
values. Although the decline in asset values has
6




increased the rate of return on farm assets to its
highest level since 1979, the return is still not
competitive with alternative investments. Consequently, farm asset values will probably slip
further.
Lower land prices are n o t then, just a temporary result of financial stress. Rather, they
represent a major long-term adjustment to the
changed farm outlook. This decline has by no
means been uniform, however, either from
region to region or within individual states.
While the average decline in Illinois exceeded
25 percent last year, Texas land, for example,
appreciated by 10 percent In Georgia, land
values fell 50 percent or more in areas of
concentrated row-crop production; at the same
time, values increased on the periphery of
metropolitan areas and in the hilly regions
where broiler production is profitable.
The decline in land values has led to a
continuing reduction in farmers net worth,
which stood at $605 billion in 1985 compared
with $833 billion in 1980. Since land values are
expected to drop further, the trend in falling
net worth will probably continue, especially in
the Midwest and Plains states. Plummeting net
worth has created immense problems for some
farmers and lenders in cases where total debt
exceeds the value of collateral.
A study completed in 1985 by the U.S.
Department of Agriculture classified commercial farmers into four basic groups—good, fair,
stressed, and vulnerable—according to various
measures of financial condition. Farmers in
good financial condition experienced a favorable combination of returns and equity cushion. A farmer classified as good may have held
relatively heavy d e b t but he also would have
had returns sufficiently high to service that
d e b t Farmers in the group with little debt had
returns that were positive At the other extreme, a farmer with highly adverse returns and
a thin equity cushion was considered vulnera b l e In general, the higher the debt-to-asset
ratio, the less likely a good classification, but
the conditions varied widely among individual
farmers with similar debt structures. For example, even among the heavily indebted operators,
a substantial proportion operated profitably
enough to stay out of the stressed and vulnerable categories. Conversely, some of the lightly
indebted operators were listed as financially
stressed or vulnerable because their farming
operations were unprofitable
JUNE/JULY 1986, E C O N O M I C REVIEW

Overall, 70 percent of commercial farm operators were rated in good financial condition.
These farmers held 65 percent of the operatorowned farm assets of commercial farmers and
owed 51 percent of the group's farm d e b t At
the other pole, 10 percent of commercial farm
operators were considered vulnerable This
group held 10 percent of the operator-owned
assets of commercial farmers and owed 23
percent of their total d e b t W i t h the continuing
deterioration in farmers' financial conditions,
those listed as vulnerable in 1985 are probably
in serious financial trouble now, and those
previously classified as stressed will face increasing difficulties over the next few years
unless they can either improve their returns or
reduce their debt service burden.
A large gap opened between farm loan interest rates and the typical yield produced by
farm assets in 1980, giving indebted farmers a
strong incentive to reduce d e b t Adverse income and land price developments prevented
many from making this adjustment however,
and their debt position deteriorated further.
Total farm d e b t which had risen every year
since 1945, peaked in the summer of 1983.
The subsequent decline in farm debt can be
traced to lenders' reluctance to provide funds,
the unwillingness or inability of some farmers
to use debt financing, and an increasing incidence of foreclosures and write-offs.
Farm debt in 1985 was approximately $198
billion, slightly below the peak in 1983, and
showed shifts in the relative shares of real
estate and non-real-estate d e b t The 1970s'
trend toward expanding real estate debt has
reversed, leaving 1985's real estate debt estimated at $99 billion, a $3.4 billion decline from
1984's level. In the meantime, however, Commodity Credit Corporation debt (loans on farm
products) has risen, keeping aggregate debt
relatively unchanged from 1984.
The recent decline in farm debt may mark
the beginning of a long-term adjustment to a
lower level of indebtedness. This adjustment
will probably continue until the debt of individual borrowers falls well below the market
value of their assets and earnings can service
debt loads. Furthermore, experience in the
post-1930s era suggests t h a t once established,
cautious attitudes toward credit use may persist
for some time.
Farm Creditors. Given the financial plight of
many farmers, the unfavorable outlook for
FEDERAL RESERVE BANK O F ATLANTA




agricultural lenders is not surprising. The distress of most lending institutions relates directly
to the proportion of agricultural loans. Commercial banks have the strongest loan portfolios, followed by the Farm Credit System
(FCS) and the Farmers Home Administration
(FmHA). Although agricultural loans and FCS
security holdings represent only 3 to 4 percent
of the total assets of the commercial banking
system, the situation is more serious in states
where agricultural loans make up a large share
of commercial lending at most banks. Banks
throughout the Plains and Cornbelt regions are
experiencing high delinquency ratios and rising
losses on agricultural loans.
The disparity between the conditions of
agricultural and nonagricultural banks helps to

Lower land prices are not just
a temporary result of financial
stress. Rather, they represent a
major long-term adjustment to
the changed farm outlook
illustrate the farm lenders' crisis. As of September 1985, delinquency ratios for agricultural
b a n k s — d e f i n e d as those with around one-fifth
or more of their assets in farm loans—stood at
6.9 percent compared with 4.6 percent for
nonagricultural banks. Nonperforming loans at
agricultural banks were 4.7 percent versus 2.7
percent at other banks. The rate of return on
assets of agricultural banks was 0.5 percent in
1985 compared with about 0.7 percent earned
by banks of comparable size. The number and
proportion of problem agricultural banks has
increased dramatically, especially in the Plains
states, where three-fourths of the nation's 241
bank failures occurred b e t w e e n 1983 and
1985. (Incidentally, only t w o agricultural bank
failures were recorded in Sixth Federal Reserve
District states during this period.)
Because of its complete dependence on
agriculture, the Farm Credit System stands in a
potentially serious position marked by substantial losses. The Farm Credit Administration
Act of 1985 was designed to maintain the
soundness of the FCS; it authorized financial
assistance, rechartered the FCS Capital Corporation to allow the purchase of loans and
7

property from all FCS entities, and strengthened
the regulatory role of the Farm Credit Administration. Internally, the FCS has taken steps to
shore up potential weaknesses in its operations.
For example, it is enforcing more stringent
accounting standards to help identify debt
problems earlier. Assets are revalued as soon as
a problem is recognized, and provisions for
losses are made sooner. Mergers of individual
associations, now common, have helped achieve
greater efficiency and maintain financially
strong associations. Whether these measures
will succeed remains to be seen. Preliminary
second quarter figures are not encouraging,
but these could reflect the new, more strict
accounting requirements.

Most lenders have shown
forbearance and adjusted loan
terms to make farmers' debts
more manageable.
Net earnings for Federal Land Banks (FLBs)
and Production Credit Associations (PCAs),
major components of the FCS, were both
negative during all four quarters of 1985; for
the 12-month period ending in December, the
losses amounted to $678 million for PCAs and
$2,077 million for FLBs. Provisions for losses
are rising dramatically, as are charge-offs. In the
same period, charge-offs totaled $480 million
for PCAs and $460 million for FLBs. Property
acquired via foreclosures and deeds in lieu of
foreclosure is valued at $185 million for PCAs
and $722 million for FLBs.
As the lender of last resort, the FmHA carries
the most troubled loan portfolio of all. It has
approximately twice as many borrowers with
either negative cash flows or debt-to-asset
ratios exceeding 70 percent as the FCS and
commercial banks. During the 1980s, its delinquency ratio rose from 17 to 36 percent of
total loans and from 5 to 23 percent of outstanding principal. Demands on the FmHA may
increase as troubled farmers and lenders turn
to the agency for help. To aid farmers, the
FmHA has set up the Farm Credit Initiative,
consisting of a Debt Set-Aside Program and a
Debt Adjustment Program, specifically designed
8




to protect borrowers w h o have a chance of
eventually working out of their debt problems.
For life insurance companies, whose role in
agricultural finance is primarily to lend against
farm real estate, agricultural delinquency ratios
as of June 1985 stood at 6.5 percent of total
loans and 15 percent of total loan dollars. This
figure compares unfavorably with delinquencies of 1.2 percent of total loans and 1.1
percent of total loan dollars for nonfarm mortgages held by insurance companies. This adverse experience has motivated insurance
companies to curtail any new lending to agriculture.
Lenders and borrowers are trying desperately
to avoid foreclosures. Farmers are attempting
to reduce financial burdens by selling assets
and cutting costs wherever possible. Most
lenders have shown forbearance and adjusted
loan terms to make farmers' debts more manageable. In some instances, however, foreclosure is inevitable. As of June 1985, the farm
foreclosure rate stood at 6 percent of the total
value of loans. The dollar amount of farm
foreclosures during 1984 totaled nearly $300
million; during just the first half of 1985, it
amounted to almost $250 million. W i t h the
recent lifting of the moratorium against FmHA
foreclosures, future reports will surely show
increases.
Property acquired through foreclosure tyj>
ically has not been sold at drastically reduced
prices. Insurance companies in particular usually
hold out for reasonable prices on such property.
Since farm mortgages represent a relatively
small part of the portfolio of most insurance
companies, they can afford to hold farm real
estate for extended periods. In contrast most
agricultural banks lack resources to hold large
inventories of property because the share of
farm assets in their portfolios is much higher. If
a farmer can obtain operating capital, the
lender will often lease the foreclosed property
back.
U.S. Farm Outlook. Is any relief in sight for
U.S. farmers and their creditors? Despite the
passage of farm legislation supporting prices
and consequently bolstering the incomes of
farmers, overall prosperity does not appear
likely to return soon. Indeed, such support
programs seem to aggravate problems over the
long run. The chief difficulty remains an oversupply of products in the face of reduced
export market shares for grains, soybeans, and
JUNE/JULY 1986, E C O N O M I C REVIEW

c o t t o n — t h e products that have d e p e n d e d
most on foreign demand in recent years. Farm
products displaced from international markets
have flooded domestic markets and storage
facilities as well, depressing prices. By taking
the edge off these market effects, government
aid programs have unfortunately caused many
farmers to delay necessary adjustments.
Developments in grain production exemplify
this problem. Market prices of grains recently
averaged 10 to 29 percent below year-ago
levels, which were already depressed compared
with prices at the beginning of the decade.
These problems do not confront farmers universally, though. Those participating in government programs are not bearing the full
brunt of the most recent price declines. Producers w h o agree to idle a portion of their
acreage, for instance, qualify for income maintenance payments. In addition, they will be
eligible for C o m m o d i t y Credit Corporation
(CCC) price support loans on crops grown on
remaining acreage. To move commodities into
international markets at competitive prices,
the CCC will allow these loans to be repaid at
less than the face a m o u n t The market's anticipation of an export subsidy on crops harvested
in the fall has been a major factor in the price
declines during 1986. Unfortunately for those
producers selling products on current markets
and those not participating in the government's
acreage retirement program, incomes from
product sales have declined further because of
lower agricultural support prices.
Crop reduction programs are beset by similar
flaws. The survey of planting intentions for this
season suggests that many farmers will participate in acreage retirement during 1986. Major
crop acreage could shrink as much as 5 percent
for feed grains (corn, oats, barley, and sorghum),
6 percent for food grains ( w h e a t rice, and rye),
3 percent for oilseeds (soybeans, cottonseed,
peanuts, sunflower, and flaxseed), and 9 percent for cotton. Total production, however,
may not decline significantly. Farmers can select which land to idle and presumably will
choose the least productive acres. Attractive
income support payments that rise in direct
proportion to output (up to a certain maximum
limit) also encourage farmers to increase yields.
This means larger, more efficient farms are
likely to fare best under current farm legislation.
In contrast with major grain crops, livestock
production (except dairy cattle) better reflects
FEDERAL RESERVE BANK O F ATLANTA




market realities. Shifting consumer demand
helped poultry producers expand their market
share and thus aggravated depressed prices for
hogs and cattle. Hog prices nonetheless rose
during June and July from unusually low levels,
due to reduced production. Because producers
were unable to cover total costs during 1984
and 1985, the inventory of hogs and pigs
dropped by March 1985 to its lowest level
since 1976. Returns to pork producers will
continue being held back by low levels of
production and large supplies of competing
meats, even though prices probably will increase in coming months.
Livestock markets are being affected peripherally by a federal b u y o u t program for dairy

The chief difficulty remains
an oversupply of products in the
face of reduced export market
shares for grainssoybeans,,
and cotton
cattle that is increasing beef supplies and
consequently lowering prices. Prices for beef
cattle and calves recently averaged from 10 to
16 percent below last year's already low levels.
The dairy industry is burdened with milk
products far exceeding market needs. Although
government purchases of dairy products support producers' incomes, unused supplies have
grown so large that dairy farmers have been
offered the option of selling whole herds to the
government to remove the total producing unit
from the dairy industry for at least five years.
The government is also subsidizing exports of
dried milk powder to dispose of accumulated
supplies. Dairy farmers' incomes are likely to
shrink or at best stay the same until supplies
more closely match market needs.
Broiler producers appear to be in a favorable economic position. The shift in consumer
preferences from red meats to chicken and fish
has helped broiler producers enjoy an expanding market leading to increased o u t p u t Market prices for broilers recently averaged 7
percent above levels a year ago; at the same
time, feed costs fell by 10 percent thanks to
the drop in grain and soybean prices. Turkey
producers generally shared in the good fortune
9

Egg prices recently have moved up sharply,
but the gains mostly reflect shrinking output in
response to last year's unprofitable prices.
Agriculture in the Southeast What is the
picture for southeastern farmers? Overall, prospects for agriculture in this region are mixed.
Farmers responded to poor 1985 returns, continued weak prices, and a comprehensive farm
program by greatly reducing acreage this
growing season. Approximately t w o million
acres are being removed from production of
major crops, and much of this acreage will lie
idle in compliance with provisions of the federal farm programs. Although nearly half this
acreage is in Georgia, every Sixth District state
shows less planting for 1986. Since the peak
year of 1982, District farm land planted with

Policies should include
carefully designed incentives that
encourage farmers to operate
their farms as businesses
major crops has fallen by 30 percent Because
much of the idled land is only marginally
productive, average yields have generally improved markedly during the few normal crop
years in this decade. This summer's severe
drought is the worst in a series of recurrent
droughts that have reduced harvests during dry
years.
In terms of specific crops, soybean acreage
has declined steadily since 1980 when southeastern farmers planted 15.2 million acres.
Soybean prices fell consistently below total
production costs for many of the region's farmers
in 1985 and acreage has been nearly halved;
this season only eight million acres were planted.
A drop of about one million acres in the
region's corn land since the late 1970s has
been more than offset by an increase of over
one million acres in grain sorghum, another
feed grain that can be produced at lower cost
and is more resistant to drought However,
even the number of grain sorghum acres could
fall by half a million acres from last year. Less
southeastern land is being planted this year in
all other major crops as well, as farmers comply
with farm programs or reduce acreage in an
attempt to cut losses.
10




With the possible exception of wheat market
prices for crops are likely to hover near the
price support level for the balance of this year.
Based solely on market price, most farmers
expect little if any profit in 1986. Although
heavy regional participation in national farm
programs could provide additional income to
farmers, substantially lower yields due to drought
will limit the farm program's capacity to avert
losses. In sum, crop producers in the Southeast
have little reason for cheer.
Georgia and Carolina farmers are bearing the
worst of the drought and severe heat wave that
have been afflicting most of the Southeast
Although predicting how severely harvests will
be affected is difficult conservative estimates
in mid-July placed losses for Georgia alone at
$200 million. The situation in other parts of
the Sixth District has not been so severe; still, if
dry weather persists, areas now only marginally
touched by drought could begin to suffer.
Louisiana, most of Mississippi, and western
Tennessee have not endured the long-term
drought that affects Georgia and Alabama Soil
moisture in those states has been adequate for
most crops, though the effects of the lingering
hot spell and shortage of rainfall may begin to
take a toll if dry conditions continue. Eastern
Tennessee is excessively dry and surging temperatures endanger the corn crop. Rainfall in
Florida is normal or even slightly above average,
but some rivers are running low because of
drought in the states to the north.
There are, however, signs that crop prices
may finally turn around. Large production declines in the Southeast for food grains, oilseeds,
and cotton may make modest price increases
possible in the future. A smaller crop of soft red
winter wheat and a pickup in demand for this
variety should permit some rise in prices in the
next 12 months. Increased cotton use may also
raise prices slightly by next year. Overall, southeastern farm c o m m o d i t y prices are likely to
rise slightly, enhancing farm income where
drought has not curtailed productivity.
The decline in operating costs since last year,
particularly for fuel and interest expenses, is
another cause for optimism. While lower crop
prices have offset much of the benefit from the
cost i m p r o v e m e n t the southeastern agricultural sector is at least in a potentially favorable
position if and when commodity prices rebound.
Conditions in the region's livestock and
poultry industries parallel those of the nation.
JUNE/JULY 1986, E C O N O M I C REVIEW

Pork and beef production fell substantially
from the first half of 1985, and continued
declines in animal inventories suggest production may drop even further. Poor returns and
low prices plagued both sectors over the past
12 months.
Although crop farmers are suffering most
from the drought, cattle producers, too, will
face losses. Herds are being sold on depressed
markets or sustained at additional expense
through purchased feed. Cattle producers in
the Southeast are unlikely to rebuild herds for
some time to come, and beef supplies will
probably decline over the next t w o or three
years. Ordinarily, cattle producers w o u l d be in
the expansion phase of the production cycle,
but the dairy herd buy out and changing consumer tastes in meat may prolong herd liquidation and delay the price increases needed to
stimulate production.
The recent sharp increase in pork prices
could initiate an expansion of operations, but
the trend over a long period of time has been to
diminish production. Swine inventories may
not regain the levels of the late 1970sLfor years.
Substantial losses during this extended down
cycle may permanently reduce the importance
of pork production in the Southeast
In the broiler industry, a bright spot in southeastern agriculture, favorable prices and low
feed costs increased profits. Continued moderate expansion and growing competition with
other meat producers should make a successful
year, although there is some risk of overproduction, which w o u l d lower market prices.
Drought is affecting poultry moderately, with
damages stemming mainly from poor weight
gains. About a half a million chickens have died
from the heat While the $5 million loss reported
by industry representatives will be felt substantially in communities especially hard-hit by
heat it should not seriously affect the profitability of the industry as a whole.

caused oversupplies during recent years, prompting an industry adjustment Less supply, combined with continued low feed costs, should
help improve industry profits this year.
Conclusion. The outlook for agriculture, both
nationally and to a lesser extent in the South, is
clouded by excess supplies and a series of
problems associated with this surfeit including
low prices and a heavy burden of d e b t These
problems can be surmounted, but they will not
be corrected overnight or solved with painless
remedies. To succeed, strategies for improvement must address the fundamental problem
of oversupply. For example, policies should
include carefully designed incentives that encourage farmers to operate their farms as businesses, and as businesses capable of competing
in international markets. Measures intended to
provide relief to distressed farmers should
target just these groups, not all farmers or those
with disproportionately large and already efficient farms as some programs currently do.
These programs should not only provide shortterm relief b u t in the case of marginally successful farmers, may also have to provide training and incentives to facilitate moves into
specialty crops or livestock, or even into other
economic activities.

Southeastern egg production, which is increasingly concentrated in Georgia began declining in
the late 1970s and has fallen substantially since
then. Consumer health concerns over egg consumption and the loss of foreign markets have

Board of G o v e r n o r s of t h e F e d e r a l R e s e r v e System. " T h e Farm
Credit Situation a n d t h e Status of Agricultural Banks," a s t u d y
by t h e staff of t h e B o a r d of G o v e r n o r s W a s h i n g t o n : B o a r d of
Governors, F e b r u a r y 1 9 8 6 .
U.S D e p a r t m e n t of Agriculture, E c o n o m i c R e s e a r c h S e r v i c e
"Agricultural Finance, O u t l o o k a n d Situation R e p o r t " M a r c h
1986.

FEDERAL RESERVE BANK OF ATLANTA




American agriculture is blessed by tremendous natural advantages, and farmers have an
enviable record of productivity gains. Such
assets, together with a keener appreciation of
markets, can help farmers meet the challenges
they face today and regain the financial stability
and prosperity commensurate with their contribution to our economy.

REFERENCES

11

n recent years, this country's import and

I

export activity has shifted substantially. The
U.S. trade deficit has grown, not only with
European nations and Japan but with developing
East Asian countries and Canada as well. Imports
have increased at an annual c o m p o u n d e d rate
of 13 percent over the last decade, whereas
exports have risen at only 7 percent In 1975,
the United States recorded a trade surplus of
$2 billion; but by 1985 the balance had deteriorated to show a deficit of over $148 billion.
Asian nations have consistently accounted for
a notable portion of U.S. trade; in the past
decade, however, Asia's share of total U.S.
trade has risen by 11 percentage points, from
21 percent in the mid-1970s to over 32 percent
in 1985. Although Japan accounts for fully half
of all U.S. trade with Asia other Asian nations
such as South Korea Hong Kong, Singapore,
China and Taiwan now claim a significant 15.7
percent share.
Many people in the United States now look
to the decline of the dollar to ease some of the
country's trade problems. The dollar's depreciation, however, is gauged by indexes based
largely on European and Japanese currencies.
Its value has in fact fallen little in relation to the
currencies of some important U.S. trading partners, including Canada and East Asian nations
other than Japan. The U.S. dollar has actually
risen compared with the Canadian dollar. Standard dollar indexes may n o t then, provide a full
picture of the U.S. trade situation.
For U.S. lumber and paper industries vying
with Canada textile and apparel manufacturers
competing with the Far East and vegetable
producers contending with Mexican imports,
the rapid decline of the dollar's value according
to standard dollar indexes may not result in a
larger portion of the market Domestic companies with rivals in areas other than Europe
and Japan will probably continue facing weak
international demand for their products and
substantial competitive pressure within the
United States.
A new index of the dollars value developed
at the Atlanta Fed accounts for changing patterns of trade by incorporating the important
influence of Canada and Asia Our methods
weight these key trading regions to reflect
The author
Research

is an international
Department

12




economist

in the Atlanta

Feds

A NEW DOLI

more fully current U.S. trade patterns. W e have
also added regional sub-indexes to monitor the
dollars divergent moves in various crucial trading regions of the world. Monitoring a few subindexes can provide a more comprehensive
view than looking at only one index, yet offers
more synthesis than following the dollar's 225
exchange rates, which include multiple rates
for many countries. The overall dollar index
averages regional sub-indexes, which are weighted according to their shares of trade, import
plus e x p o r t with the United States in 1984.
Despite their growing role in U.S. trade,
Asian nations with the exception of Japan are
o m i t t e d in other c o m m o n l y used indexes.
JUNE/JULY 1986, E C O N O M I C REVIEW

LAR INDEX:
The value of the dollar according to standard
indexes does not fully reflect the growing
importance of U.S trade with Canada and
Asia The "Atlanta Fed Dollar Index" offers a
more encompassing view.

impact of the falling dollar. By updating the
weights to reflect more recent trade patterns
and including more Asian nations, the Atlanta
Fed index portrays an average value of the
dollar based on our current trade. For example,
the Atlanta Fed index places the greatest weight
on Canada which claims the largest total share
of U.S. t r a d e
In a comparison of the Atlanta Fed index with
those developed by the Federal Reserve Board
staff (the Board index) and Morgan Guaranty
Trust (the Morgan index), the Atlanta Fed
dollar shows less variation than the dollar as
measured by other indexes, moves differently
in various world regions, and has declined far
less, even after correcting for its lower variability,
than the others since its early 1985 peak. 1

Constructing the Atlanta Fed Index

Moreover, relative to many of its other trading
partners, the United States ran large bilateral
trade deficits with these countries in 1985:
Taiwan placed third, Hong Kong fifth, and
South Korea ninth in size of trade deficit (Table
1). Of course, trade deficits do not necessarily
follow the same pattern as trade flows, upon
which currency indexes are based, as a comparison of the ranks in Tables 1 and 2 reveals.
Nonetheless, a dollar index that does not
include the persistently weak currencies of
these nations may lead to overly sanguine
expectations about the potential for improvement in the U.S. trade balance and overly
pessimistic expectations about the inflationary
FEDERAL RESERVE BANK O F ATLANTA




The Atlanta Fed dollar index was constructed
to portray the dollar's current trade-weighted
value. Sub-indexes were also developed to
track the divergent movements of the dollar in
various regions of the world. These are reported
for Europe, Canada, the Asian Pacific plus
Australia, and Asia excluding Japan. A cursory
look at Chart 1 reveals that the various subindexes and the overall Atlanta Fed index
behave differently from the Board index in the
1980s. Of paramount interest is the lack of a
downturn in the Canadian and Asian-excludingJapan (Asian-nj) sub-indexes.
The Board index parallels the European subindex closely, whereas the Atlanta Fed overall
index blends the patterns that appear in the
Asian, Canadian, and European sub-indexes. A
look at the composition of the Atlanta Fed
index contrasting its weights to those of the
indexes developed by the Federal Reserve
Board staff and Morgan Guaranty Trust explains
the disparity. 2
The Board index includes the nine countries
that join the United States in t h e " G 1 0 " group
of ten advanced nations, plus Switzerland. The
Morgan index is based on 15 of the Organization for Economic Cooperation and Development (OECD) nations. The Board index, then,
represents eight European countries plus Canada and Japan. Morgan Guaranty encompasses
the same ten, plus Australia and four additional
European nations. Both these indexes include
only advanced industrial nations, and thus
omit some major U.S. trading partners.
13

Table 1. U.S. Bilateral Trade Deficits
($ Billions)

1

Country

1984

1985

Japan*

36.80

49.75

Canada*

20.39

22.18

Taiwan**

11.08

13.06

Germany, W *

8.73

12.18

Hong Kong**

5.84

6.21

Mexico

6.28

5.76

Italy*

4.13

5.76

Brazil

5.63

5.01

South Korea**

4.04

4.76

United Kingdom*

2.83

4.30

France*

2.48

3.86

Venezuela

3.44

3.43

All others

11.61

12.21

123.28

148.47

Total U.a
Trade Deficit

f
Deficit is U.S. i m p o r t s i n c l u d i n g c o s t insurance, a n d f r e i g h t
m i n u s U.S e x p o r t s free o n b o a r d
* C o u n t r y i n c l u d e d in t h e A t l a n t a F e d Index a n d in p r o m i n e n t
indexes.
" C o u n t r y i n c l u d e d in t h e A t l a n t a F e d Index but not in m o s t
prominent indexes

Source: I n t e r n a t i o n a l M o n e t a r y Fund, Direction
of Trade
Statistics;
U.S. D e p a r t m e n t of C o m m e r c e , Survey of Current
Business

The Atlanta Fed dollar index was constructed
to comprise about twenty of the largest U.S.
trading partners. It could not, however, include
countries with severe inflation rates or those
heavily reliant on "black" or "parallel" foreign
exchange markets, since their rates would distort a nominal dollar index. 3 O n this basis,
Mexico, Brazil, Venezuela, and Indonesia were
excluded from the nominal index reported
here. 4 Eighteen countries were finally selected:
nine European, six Asian, plus Australia Canada
and a Mideast representative—Saudi Arabia
Weights used in the Atlanta Fed index reflect
total trade in 1984, substantially updating
weights in the other t w o indexes (Morgan
1980, Board 1972 to 1976). Choosing weights
14




from only one year is reliable if that year was
not distorted by large transitory shocks to trade
patterns, and 1984 is not considered an unusual year. The updates also capture the shift in
U.S. trade from the Atlantic toward the Pacific
Like Morgan, but unlike the Board, the Atlanta
Fed index is based on a bilateral weighting
scheme. A country's weight in a bilateral index
is the share of its total trade (sum of exports
and imports) with the United States in relation
to the total trade of the United States with the
18 included countries. Table 2 reports the
countries included and the weights assigned to
their currencies in the three dollar indexes
studied here. Our weights are similar to Morgan's but markedly different from those in the
Board index.
The Board index is an example of a multilateral trade-weighted index. Multilateral weights
are based on a country's share of total world
trade rather than its share of U.S. trade only.
This method allows for third country effects,
which bilateral weights ignore. For example,
suppose Belgium does not. trade with the
United States, but is a major exporter to a third
market in which the United States also competes. In a bilateral index, Belgium's currency
would not be weighted, and Belgium's importance as a competitive force would be lost
Belgium's currency w o u l d be included in a
multilateral i n d e x — a desirable property of the
multilateral approach. However, multilateral
indexes also have some significant undesirable
properties that led us to select bilateral weights
for the Atlanta Fed index.
Morgan Guaranty offers a compelling critique
of multilateral indexes, pointing out that multilateral weights can place undue emphasis on
countries that happen to trade primarily with
each other. This means that multilateral indexes
can be significantly but arbitrarily influenced
by national boundaries. If a country is divided
into t w o parts, the share of world trade comprised by the sum of the t w o parts will be
greater than the initial share of the whole
because all the commerce between the parts
now becomes "international trade" 5 If Georgia,
for example, were split off from the United
States, but no barriers were erected against
goods flows between Georgia and the other
states, the extensive trade between Georgia
and the other 49 states w o u l d become international trade. Georgia w o u l d then have a significant portion of total world trade and would
JUNE/JULY 1986, E C O N O M I C REVIEW

Chart 1. Movement of the Dollar on Board and Atlanta Fed Indexes,
Compared With European, Asian, and Canadian Sub-indexes*

*Weights derived from the Atlanta Fed's aggregate index.
Source: C o n s t r u c t e d w i t h d a t a f r o m t h e B o a r d of G o v e r n o r s a n d t h e I n t e r n a t i o n a l M o n e t a r y F u n d

figure prominently in a multilateral index for
Austria—even if Austria and Georgia did not
trade directly.
The problem of divisible national boundaries
is not merely a theoretical one. Even carefully
constructed multilateral indexes can lead to
weights that barely reflect U.S. trade patterns.
Belgium and the Netherlands, for example, are
separate countries that have a sizable trading
relationship. This feature leads to large totals in
international trade and subsequently to large
weights in multilateral indexes for each of
these countries. If the political division were
not made and the t w o were considered part of
the Benelux Economic Union of Belgium, the
Netherlands, and Luxembourg, then the Benelux weight would be much smaller, because
FEDERAL RESERVE BANK OF ATLANTA




trade between Belgium and the Netherlands
would be internal to Benelux. The present
political division, which affects the entire European C o m m o n Market, leads to unfortunate
anomalies in multilateral indexes. For example,
in the Board index the Benelux countries
receive a total weight greater than Japan's and
over 60 percent greater than the weight assigned to our largest trade partner, Canada 6
Multilateral and bilateral schemes both have
advantages then; we chose bilateral weights,
however, because of their particular capacity
to reflect U.S. trade patterns. Further, the main
advantage claimed for multilateral weights, that
they account for third-country divergence or
substitution possibilities, may be a largely
theoretical one that does not apply in practice
15

Table 2. Weights of Nation's Currencies in Various Dollar Indexes
(Percent)
Country

Atlanta
Fed

Federal
Reserve Board

Morgan/
OECD

(Weighting Year)

(1984)

(1972-76)

(1980)

Canada

28.80

Australia
Japan
Austria
Belgium
Denmark

1.95
21.30
—

2.18
—

9.1
—

13.6

30.3
2.4
23.2

—

0.4

6.4

3.5

—

0.6

France

3.69

13.1

5.9

Germany, W.

6.82

20.8

10.9

Italy

3.27

9.0

4.1

Netherlands

3.01

8.3

3.0

Norway

—

0.6

Spain

1.32

—

1.4

Sweden

1.26

4.2

1.7

Switzerland

1.46

3.6

2.8

11.9

—

United Kingdom

6.91

Saudi Arabia

2.43

—

—

9.2

Taiwan

4.96

—

—

Hong Kong

3.03

—

—

South Korea

4.06

—

—

Singapore

1.98

—

—

China

1.62

—

—

Sources: F e d e r a l R e s e r v e Board, Federal Reserve Bulletin; M o r g a n G u a r a n t y Trust C o m p a n y , World Financial Markets;
D e p a r t m e n t of C o m m e r c e Survey of Current Business; I n t e r n a t i o n a l M o n e t a r y Fund, Direction of Trade
Statistics.

The present political fragmentation of Europe
coupled with the economic integration achieved
by the European Economic C o m m u n i t y (EEC)
leads to commerce which, though it is essentially internal, is measured as international
trade. This leads to large multilateral weights
on Europe. A multilateral index can be improved
if intra-EEC trade, especially agricultural trade,
is considered as not fully open to wider international competition and thus subtracted from
trade totals. Otherwise, the heavy weights a
multilateral scheme places on Europe arise
16




U.S

from the combination of political fragmentation
and economic integration in Europe rather
than indicating true United States and thirdcountry substitution possibilities. 7
Weights in the Atlanta Fed index are generally
close to Morgan's, since both are bilateral
indexes. Differences stem from an update of
the weights from 1980 to 1984 and from our
use of total trade rather than the shares of trade
in manufactured goods used by Morgan. Finally,
the individual countries in the Morgan index
receive greater weight because fewer countries
JUNE/JULY 1986, E C O N O M I C REVIEW

are used in constructing i t Morgan excludes
non-Japan Asia, and thus necessarily allocates
greater weight to Japan, Canada, and Europe
Since Morgan includes some small European
countries such as Austria that are not in the
Board index or in the Atlanta Fed index, it gives
especially heavy weight to Europe. The Morgan
index then is somewhere between the Atlanta
Fed's index and the Board's in its weighting of
Europe relative to Pacific nations.
Chart 2 shows the weights each index gives
to world regions and compares those weights
to recent U.S. trade patterns. All the indexes
somewhat overweight the regions included
because they exclude regions like Africa and
Latin America due to inflationary conditions or
multiple exchange rate practices that would
distort the indexes.
Only the Atlanta Fed index includes a Mideast representative, in this case, Saudi Arabia
Oil is priced in dollars, and so exchange rates in
oil exporting nations may not greatly influence
their exports. This means that the exchange
rate of an oil-exporting country should be
included in a dollar index only if the country
imports significant amounts from the United
States. Since Saudi Arabia is a substantial importer of U.S. goods, this trade may be influenced by the Saudi Arabian bilateral exchange
rate against the dollar. 8
The major difference among the three indexes, as portrayed in Chart 2, is the weighting
of Asia and Asia-nj as opposed to the weighting
of Europe. The Board index places over threefourths of its weight on Europe, even though
Europe accounts for less than one-fourth of
total U.S. trade. O n the other hand, the Board
index places low weights on Asia and Canada
relative to their importance in U.S. trade. Although the Morgan index allots substantial
weight to Canada and Japan, it does not weight
Asia-excluding-Japan (though it weights Australia). Thus it places significantly more weight
on Europe than indicated by current U.S. trade
flows. The Atlanta Fed dollar index, then, most
closely matches U.S. trade patterns by world
regions.
The Atlanta Fed index uses year-average
1980 values as its base period so that numbers
over 100 reflect dollar appreciation since 1980.
Weights are based on shares of total U.S. trade
with the 18 countries as reported by the International Monetary Fund in Direction
of Trade
Statistics and supplemented by U.S. Commerce
FEDERAL RESERVE BANK OF ATLANTA




Chart 2. Weights of Major World Regions in
Dollar Indexes and U.S. Trade

Morgan/OECD

1

E x p o r t s p l u s i m p o r t s in 1 9 8 4 . S o u r c e : Survey of Current
Business, U.S. C o m m e r c e D e p a r t m e n t D e c e m b e r 1 9 8 5 ,
pp. 3 6 6 - 6 7 .
2
A c t u a l l y Pacific Region, s i n c e it i n c l u d e s A u s t r a l i a Morg a n ' s w e i g h t o n this r e g i o n is b a s e d s o l e l y o n A u s t r a l i a
3
M a i n l y Latin A m e r i c a a n d A f r i c a
Source: S a m e as T a b l e 2.

17

Department data where needed (for Taiwan).
Like the Morgan and Board indexes, the Atlanta
index uses a geometric averaging technique.
Monthly data on the new index and the subindexes has been created for the period beginning with the advent of generalized floating
exchange rates in 1973, and daily data has
been developed for recent years. The component sub-indexes were constructed in a manner
analogous to the overall index, using the same
relative weights but renormalizing so that percentage weights on countries in each subindex total 100.
Australia, China, Taiwan, South Korea, Hong
Kong, and Singapore constitute the Asian-nj
c o m p o n e n t Canada stands alone, as does
Saudi Arabia (Saudi Arabia is representative of
the slightly depreciating dollar standard common in the Gulf.) Japan is added to Asian-nj for
the Asian index, and the remaining nine countries form the European sub-index. Chart 1
provides a picture of the varied behavior of the
sub-indexes.

Critical Contrasts W i t h Other Indexes
The Board index has declined considerably
more than the Atlanta Fed index since its peak
in early 1985, and rose more steeply from the
mid-1980 trough to reach that peak, as shown
in Chart 1. The Board index shows more variation than the other indexes because it places
only a small weight on Canada Weight on
Canada dampens dollar movements in the
other indexes because the Canadian dollar
varies relatively little against the U.S. dollar,
except for a gradual depreciating trend.
Even after adjusting for this greater variability
in the Board's index by using different scales,
the recent decline of the dollar in the Board
index, as shown in Chart 3, is dramatic Although
a high correlation between the t w o indexes is
evident behavior does differ, particularly around
major turning points. The dollar is relatively
weak in the Board index when it is weak in
Europe, namely in 1980 and since the summer
of 1985. The strength of the dollar in Europe in
early 1985 moved the Board index relatively
higher, but the strength of the dollar in Japan in
the second half of 1982 generated a relatively
higher Atlanta Fed index.
After adjusting for the greater variability in
the Board index, the overall fit between the
t w o indexes is fairly close. However, Chart 1
18



Chart 3. Comparison of Atlanta Fed and Board Indexes
(1980 = 100)
Board index

Atlanta Fed Index

145

185
175 +
165

Atlanta Fed index shows
dollar's value higher
Board index shows
dollar's value higher

155

140
135
130

$ peak in Japan

125

145

120

135

115

125

110

115

105

105

100

$ trough
- in Europe

95

95
1980

1981

1982

1983

1984

1985

1986

shows that the Board index essentially reflects
the dollar's performance in Europe, but not in
Canada or Asia Table 3 tests this observation
by listing correlation coefficients between percent changes in the various indexes and the
Atlanta Fed sub-indexes. Table 3 also shows
that each index contains different information,
since correlations between any t w o are less
than perfect Data used are monthly averages
for May 1973 through February 1986. 9
The changes in the Morgan and Atlanta Fed
indexes correlate highly, not a surprising result
since they both use bilateral weights derived
from more recent trade flows. The main difference between these t w o indexes is that the
Atlanta Fed index includes Asian nations other
than Japan, causing it to correlate more closely
with the Asian and Asian-nj sub-indexes. The
Morgan index matches better than the Board's
with these sub-indexes because it places more
weight on Japan and includes Australia No
index correlates well with Canada (the coefficients lack significance and are low), but the
Atlanta Fed index fits it best In addition,
relatively low correlations between the overall
indexes and the Asian-nj and Canadian subindexes indicate that sub-indexes provide useful additional information.
Overall, the Atlanta Fed index correlates
highly with the Board index; however, it differs
enough to add some useful insights, as succeeding sections will demonstrate. The poor fit
J U N E / J U L Y 1986, E C O N O M I C R E V I E W

Erratum in Table 3, p. 19
Ratio of correlation with Europe to correlation with Asia for Atlanta
Fed should read:




1.0390

Table 3. Correlation Coefficients Between Percent Changes of Various Dollar Indexes
(Monthly averages, May 1973-February 1986)

Morgan
Guaranty
Board

Atlanta
Fed

European*

Asian*

Asian
excluding
Japan*

.960

.952

.987

.756

.603

.204
(.0112)

.986

.923

.834

.623

.342

.908

.874

.679

.351

.663

.563

.181
(.3217)

Morgan
Atlanta Fed
European*

Canadian*

.180
(.0254)

Asian excluding
Japan*
* Atlanta Fed sub-indexes of the dollar. Asian includes Australia

All correlations are significant at the .0001 level except for those with significance levels noted in parentheses below the
correlation.

Summary Statistics

Morgan

Atlanta
Fed

.6490

.6996

.7107

1.3060

1.1070

1.3090

Board
Average of correlation with
Europe, Asia, and Canada
Ratio of correlation with
Europe to correlation with Asia

of the Board index with the non-European subindexes shows, as has been pointed o u t that
one index cannot provide a clear view of the
dollar's value in various world regions. Confirming previous observations, summary statistics at the b o t t o m of Table 3 indicate that the
Board index correlates much more highly with
Europe than with the other crucial r e g i o n Asia The summary statistics also show the high
mean correlation of the Atlanta Fed index with
suthindexes for major regions, and its more
nearly equal correlations with Asian or European
sub-indexes. Finally, the highest correlation in
all of Table 3 is between the Board index and
the European sub-index, which suggests that
the Board index virtually acts as a proxy for the
dollars value in Europe.
FEDERAL RESERVE BANK O F ATLANTA




Econometric Evaluation Shows
Divergences
Econometric evaluation best reveals the relationships among the three overall indexes
considered here. It also details those points at
which the indexes diverge. Chart 1 suggests
that the Board index is more variable than the
Atlanta Fed index, but Chart 3 shows a fairly
close fit after some adjustments for the dollars
greater movements in the Board index. This
feature of the Board index, that it shows more
variability in the dollar than d o other indexes, is
clear from an ordinary least squares regression
of the Board index on the Atlanta Fed index.
The residuals (errors in predicting the Board
19

index using the Atlanta index) are highly serially
correlated, indicating persistent divergences
from the average relationship. These divergences suggest that additional information is
provided by the Atlanta Fed index.
Table 4 summarizes the regressions of both
the Morgan and the Board indexes onto a
constant index as well as the Atlanta Fed index.
Natural logarithms of monthly average data are
used, so that the coefficients on the Atlanta
Fed index represent the elasticity of the prominent indexes with respect to the new one. The
results substantiate the greater dollar swings in
the major existing i n d e x e s — a result of the
heavy weighting of volatile European currencies.
In contrast the Atlanta Fed index incorporates
the relative stability of the dollar in the Pacific
nations, Saudi Arabia, and Canada, and thus
does not result in such large dollar movements.
The large (bilateral) weights on Canada tend to
dampen variability in the Morgan and Atlanta
Fed indexes, a feature missing from the Board
index with its small (multilateral) weight on
Canada
The greater variation of the dollar in the
Board index compared with the Atlanta Fed
index is a full 54 percent (elasticity is 1.54). The
high weight on Canada's currency, the value of
which closely follows the U.S. dollar, gives the
Morgan index a magnification of only 9.5 percent
relative to the Atlanta Fed index. The overall fits,
as measured by the R-square statistic, are quite
close, reflecting the high correlation between
any indexes measuring a trade-weighted level of
the dollar. The miniscule Durbin-Watson statistics in Table 4 point to the high degree of serial
correlation, or persistent deviations from an
average relationship between indexes.
Analysis of the residuals sheds further light
on the information provided by the new index.
Periods of continuously large residuals, either
all positive or negative, indicate phases when
the new index provides significantly different
signals of the dollars value. Large positive
residuals show that the existing index portrays
relatively more dollar strength than does the
Atlanta Fed i n d e x — e v e n after correcting for the
differences in variability discussed above.
Consistently large negative residuals suggest
that the existing index provides a relatively low
estimate of the dollars value Examining the
sub-indexes helps explain why overall indexes
diverge. For example, since the Atlanta Fed
index gives more weight to Asia and less to
20




Europe than do the other indexes, the dollar
will be relatively strong in the Atlanta Fed index
when it is strong in the Asian relative to the
European sub-index.
Turning first to the Board index, a few periods
of residuals around five percent ( + or-) appear.
In April and May of 1973, when the floating
rate era began, the Board index reported the
dollar's value over 5 percent higher than implied
by an average relation to the Atlanta Fed index,
as the dollar depreciated faster in Asia and
Canada than in Europe. The greater strength of
the dollar in Europe versus Asia or Canada also
meant the Board index exceeded its average
relation to the Atlanta Fed index by over 5
percent every month in the first half of 1974.
Conversely, when the dollar became extremely
weak in Europe from late 1979 until the fourth
quarter in 1980, negative residuals varied from
5 to 7 percent The dollar had reached a trough
in October 1978 in Japan, and after that fell
sharply only in Europe, not in Canada or Asia
The relatively weak dollar value in the Board
index during early 1980 confirms the picture in
Chart 3: basically, the dollar moves in the
Board index relative to other indexes as the
dollar moves in Europe.
The strong rise of the dollar in Europe to a
peak in early 1985 is reflected in the Board
index, which took on a slightly higher value
relative to the Atlanta Fed index in winter 1984
to 1985. However, the sharp decline of the
dollar in Europe from March 1985 onward
reversed the relation between the Board and
the Atlanta Fed indexes. The Board index
reports a relatively steep decline of the dollar
since February 1985 and currently measures
the dollar's value at almost 5 percent below the
value implied by its average relation to the
Atlanta Fed index.
The residuals from a regression of the Morgan
index on the Atlanta Fed index are similar to
those for the regression using the Board index,
because the Morgan index also weights Europe
heavily at the expense of Asia-excluding-Japan.
However, the residuals are smaller, because
Morgan's weights are bilateral and thus similar
to the Atlanta Fed weights. Hence, these t w o
indexes diverge by less when the dollar moves
differently in Japan or Canada than in Europe.
Persistent differences of only about 2 percent
occur, and they are explained solely by European versus Asian, and not by Canadian, values
of the dollar.
JUNE/JULY 1986, E C O N O M I C REVIEW

Table 4. Econometric Relation Between Dollar Indexes
Dependent
Variable

Constant

Atlanta Fed
Index

Board Index

-2.43
(-23.1)

Morgan Index

-0.42
(-11.3)

R2

D-W

1.540
(68.9)

.9688

.06

1.095
(140.1)

.9923

.10

O r d i n a r y least s q u a r e s r e g r e s s i o n s are used, a s are natural l o g a r i t h m s of all i n d e x e s
t-statistics a r e in p a r e n t h e s e s All a r e s i g n i f i c a n t at t h e .01 leveL
D-W is t h e D u r b i n - W a t s o n statistic.
Sample: April 1 9 7 3 to F e b r u a r y 1 9 8 6 , m o n t h l y a v e r a g e s 1 5 5 o b s e r v a t i o n s

Due to the relative strength of the dollar in
Europe versus its strength in Asia in early 1974,
the Morgan index stated the dollar's value at
about 2 percent above its average relationship
with the Atlanta Fed index. This pattern was not
repeated until early 1985, and even then the
residual stayed under 2 percent In only t w o
major periods does the Morgan index place the
dollars value firmly below that predicted by
the Atlanta Fed index. First, in 1980, the weak
dollar in Europe, (as opposed to its strengthening value in South Korea and Hong Kong, for
instance) caused the Morgan index to report a
relatively low global dollar value. The residuals
were negative, with a magnitude exceeding 1.5
percent in almost every month during 1980.
After reaching -2.1 percent in August (the
dollar trough in Europe) they remained near-2
percent until the end of 1980.

relative to the Atlanta Fed index since the latter
part of 1985.
Further econometric work, which details dynamic relationships between indexes, showed
that certain Atlanta Fed sub-indexes had power
in leading or predicting the Board index. The
most surprising result was the significant predictive power our Asian sub-index had for the
Board index. This seems to be related to major
turning points of the Japanese yen against the
dollar, since Japan is a major component of the
Asian sub-index. The dollar b o t t o m e d out
against the yen in October 1978 as compared
with July 1980 according to the Board index;
the dollar peaked in Japan in October 1982
versus February 1985 on the Board index. 10
However, this is somewhat of an anomaly that
calls for further research.

Heavy emphasis on European currencies,
against which the dollar has declined rapidly
since March 1985, leads the Morgan index, like
the Board index, to report a steeper dollar
decline than the Atlanta Fed index since that
time. This was most apparent after March and
September of 1985, when the dollar changed
little against the Asian-nj group but fell substantially against the European and Japanese
currencies. The result of the analysis showed
that the Morgan index states a dollar value at
least 2 percent below its average implied value

Summary and Implications

FEDERAL RESERVE BANK OF ATLANTA




The new Atlanta Fed dollar index and its
component sufc>indexes help to provide a
more comprehensive global portrayal of the
dollar's value by updating weights and considering countries that reflect shifts in U.S. trade
toward industrializing Asian nations.
This study merely introduces and documents
the new Atlanta Fed dollar index and subindexes. Further work is called for, including a
real exchange rate index that accounts for
21

highly inflationary major U.S. trade partners
like Brazil and Mexico and an analysis of the
predictive effect of the new indexes on various
trade balances. 11 Nevertheless, the Atlanta
Fed index's unique characteristics may make it
a useful tool for many types of analysis.
The new research reported here provides an
index with less variability globally than in prominent indexes. Furthermore, although the dollar
moves somewhat disparately around the world,

1

existing indexes are more sensitive to its value
in Europe Finally, the Atlanta Fed index suggests that the dollar has declined less since
early 1985 than is commonly reported. Negative implications for the U.S. trade balance
emerge, especially since the United States has
large and growing deficits in regions like Canada
and Asia-excluding-Japan where the Atlanta
Fed sub-indexes show virtually no dollar depreciation.

A third l e a d i n g i n d e x d e v e l o p e d b y t h e I M F u s e s a structural,
m o d e l - b a s e d a p p r o a c h . W h i l e it is useful, it is t o o c o m p l e x f o r
ready u n d e r s t a n d i n g a n d calculation, a n d d e p e n d s o n several
critical a s s u m p t i o n s F u r t h e r m o r e , its c o v e r a g e is similar to
that of t h e M o r g a n i n d e x Thus, t h e n e w i n d e x a n d s u b - i n d e x e s
are c o n t r a s t e d o n l y t o t h e M o r g a n a n d B o a r d i n d e x e s
2
S e e David D e e p h o u s e ( 1 9 8 5 ) or M i c h a e l T. B e l o n g i a ( 1 9 8 6 )
for m o r e d e t a i l e d d e s c r i p t i o n s of existing c u r r e n c y i n d e x e s
a n d t h e t h e o r y b e h i n d various w e i g h t i n g s c h e m e s
3
D e s p i t e its b l a c k m a r k e t w e provisionally i n c l u d e C h i n a in o u r
i n d e x W e believe its f l o a t i n g effective rate a d e q u a t e l y reflects its c u r r e n c y ' s v a l u e Any d i s t o r t i o n i n t r o d u c e d is s l i g h t
since t h e w e i g h t o n C h i n a is o n l y . 0 1 6 2 ; t o o m i t C h i n a o n t h e
o t h e r hand, is to o v e r l o o k a g r o w i n g i n f l u e n c e o n U.S. t r a d e
C h i n a w i t h its c o n t i n u i n g c u r r e n c y d e p r e c i a t i o n , is e s p e c i a l l y
c r u c i a l to t h e U.S. textile a n d a p p a r e l i n d u s t r i e s
4
W e are i n c o r p o r a t i n g t h e m in t h e A t l a n t a F e d real (differential
inflation adjusted) effective dollar i n d e x w h i c h is c u r r e n t l y
being developed
5
S e e M o r g a n Guaranty, World Financial Markets, A u g u s t 1 9 8 3 .
®Bilateral w e i g h t s m a y h a v e a f u r t h e r a d v a n t a g e o v e r multilateral in s h o r t - r u n policy analysis, in t h a t t h e y p r o b a b l y
c a p t u r e t h e s h o r t - r u n e f f e c t s of c h a n g e s in t h e dollar o n U.S
trade a n d inflation. T h e r e a s o n for t h i s is t h a t i m m e d i a t e
effects d e p e n d o n w h e t h e r w e t r a d e w i t h t h e country. T h e
p o t e n t i a l t h i r d - c o u n t r y e f f e c t s w h i c h multilateral w e i g h t s att e m p t to reflect a r e a longer-run issue. However, t h e practical

p r o b l e m s w i t h multilateral w e i g h t s m e n t i o n e d h e r e imply t h a t
bilateral w e i g h t s might also better capture t h e long-run e f f e c t s
(Craig Hakkio, a n e c o n o m i s t at t h e K a n s a s C i t y Fed, a n d Frank
King, A s s o c i a t e D i r e c t o r of R e s e a r c h f o r t h e A t l a n t a Fed,
contributed these insights)
7
O n e c o u l d m a k e t h e s a m e a r g u m e n t w i t h regard to Canad i a n - U S t r a d e particularly in t h e a r e a of a u t o m o b i l e s t h e
trade a n d p r o d u c t i o n of w h i c h are g o v e r n e d largely by f o r m a l
a g r e e m e n t s In this s e n s e C a n a d a a n d t h e U n i t e d S t a t e s are
o p e r a t i n g partially a s an e c o n o m i c unit e v e n t h o u g h t h e y are
i n d e p e n d e n t politically. T h u s t h e C a n a d i a n w e i g h t in t h e
A t l a n t a Fed i n d e x m a y be o v e r s t a t e d However, w e believe a n y
distortion h e r e is s m a l l relative to that i n d u c e d by E u r o p e ' s
w e i g h t in a multilateral i n d e x b e c a u s e t h e n u m b e r of political
units is small a n d t h e s c o p e of f o r m a l e c o n o m i c i n t e g r a t i o n is
far less w i d e
" T h e s e t r a d e f l o w s may also be i n f l u e n c e d by t h i r d - c o u n t r y
e f f e c t s That i s Saudi imports f r o m t h e United States may be
d e t e r m i n e d by t h e dollar's value relative t o t h i r d c o u n t r i e s
such a s J a p a n a n d E u r o p e a s w e l l a s its value in S a u d i A r a b i a
»An u p d a t e d s a m p l e t h r o u g h M a y 1 9 8 6 y i e l d s a l m o s t i d e n t i c a l
results
10
E c o n o m e t r i c a n d o t h e r t e c h n i c a l d e t a i l s c a n be f o u n d in
A t l a n t a F e d W o r k i n g P a p e r 8 6 - 7 o n this s u b j e c t by t h e p r e s e n t
author. ( W o r k i n g p a p e r s c a n b e o b t a i n e d u p o n r e q u e s t of t h e
Research Department)
11
This w o r k is c u r r e n t l y in p r o g r e s s

A r t u s J a c q u e s R, a n d A n n e K McGuirk. "A Revised V e r s i o n of
t h e Multilateral E x c h a n g e Rate Model," IMF Staff
Papers,
voL 2 8 , n o 2 ( J u n e 1981), p p 2 7 5 - 3 0 9 .

Federal R e s e r v e B o a r d of G o v e r n o r s " I n d e x of t h e W e i g h t e d A v e r a g e E x c h a n g e Value of t h e U.S D o l l a r Revision,"
Federal Reserve Bulletin, A u g u s t 1 9 7 8 , p 7 0 0 .
Koch, Paul D., J. A Rosensweig, a n d J o s e p h A W h i t t Jr. " T h e
D y n a m i c R e l a t i o n s h i p B e t w e e n t h e Dollar a n d U.S P r i c e s
An Intensive Empirical Investigation," Federal Reserve Bank
of A t l a n t a W o r k i n g P a p e r 86-5, J u l y 1 9 8 6 .
M o r g a n G u a r a n t y Trust C o m p a n y of N e w York, I n t e r n a t i o n a l
E c o n o m i c s D e p a r t m e n t World Financial
Markets,
August
1 9 7 6 , M a y 1 9 7 8 , A u g u s t 1 9 8 3 , a n d various earlier i s s u e s

B e l o n g i a M i c h a e l T. " E s t i m a t i n g E x c h a n g e Rate Effects o n
E x p o r t s A C a u t i o n a r y Note," Federal Reserve B a n k of S t
L o u i s Review, v o l 68, no. 1 ( J a n u a r y 1986), p p 5 - 1 6 .
Deephouse, David "Using a Trade-Weighted Currency Index"
Federal R e s e r v e Bank of A t l a n t a Economic Review, voL 7 0
( J u n e / J u l y 1985), p p 3 6 - 4 1 .

22




JUNE/JULY 1986, E C O N O M I C REVIEW

Take Note!
a sampler of recent articles in
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Regional Economic Updates
Atlanta Fed Dollar Index
Thrift Diversification
Foreign Investment in the Southeast'
plus
a statistical summary page in each
issue
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conditions, trends, and forecasts for the
region's industries and general economy.
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FEDERAL RESERVE B A N K O F A T L A N T A




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23




Changing Thrifts:
What Makes Them
Choose
Commercial
Lending?
Robert E. Goudreau
and
Harold D. Ford
This study suggests that organizational characteristics, not markets, are the keys to
determining whether or hot a thrift will
diversify.
New federal and state laws passed during the
last decades expand the commercial and consumer loan power of thrift institutions, granting
them liberalized lending and investment authority roughly parallel to that of banks. This
change may mean increased competition between banks and thrifts. Although most thrifts
have not aggressively taken advantage of their
new powers, this legislation, if fully used, could
enable them to function basically as commercial banks (see Box 1).
Because shorter-term commercial and consumer loans often afford higher yields than
mortgages, the number of diversification-seeking institutions is expected to grow. In this
newly deregulated environment thrift managers will have to choose among several options.
One of these is simply to stay the same.
Indeed, substantial diversification into consumer and commercial lending may not be the
typical choice. Thrift institutions may decide
instead to remain highly specialized in residential real estate. Other management groups may
The authors
are, respectively,
a senior
economic
specializing
in financial
institutions
and an intern
Atlanta
Feds Research
Department

analyst
in the

25 JUNE/JULY 1986, E C O N O M I C REVIEW

decide to operate basically as mortgage bankers, originating mortgages and then selling them
in the secondary market These thrifts could
earn origination and servicing fees, thereby
reducing interest rate risk and improving cash
flow. Other thrifts might elect a residential and
commercial real estate orientation, diversifying
only moderately into consumer and non-realestate commercial lending Some thrifts, however, could opt essentially to transform themselves into commercial banks by dramatically
enlarging holdings of both consumer and commercial loans.
What will influence thrifts' decisions about
how far to extend the use of their new powers?
Are thrifts more likely to expand commercial
loan holdings in highly concentrated markets?
Is thrift lending stymied in markets populated
by commercial banks that are heavily committed to business lending? Are thrifts apt to
book commercial loans in rapidly growing markets? Will thrifts become prominent business
lenders in markets where collectively they
hold an ample share of total deposits?
From an organizational perspective, large or
diversifying thrifts might be more inclined to
enter the commercial lending arena than smaller thrifts that continue to specialize in mortgage
lending. The profitability of an institution could
also have a notable effect on its commercial
lending behavior. State-chartered thrifts may
be more likely to act on the new legislation
than federally chartered thrifts, or vice versa
Changes in the potential scope of thrift
activity leading to increased competition between banks and thrifts could have a marked
impact on antitrust decisions by regulators and
the courts. If market shares of both types of
depository institutions are considered in reviews of acquisitions and mergers, more consolidations might be permitted among banks,
thrifts, or banks and thrifts. 1
Strategic planners in the financial services
industry must also account for the impact of
expanded thrift powers. Besides contributing
to stepped-up consolidation activity, heightened business lending competition between
banks and thrifts could benefit commercial
borrowers because rival institutions w o u l d
probably offer lower loan rates, more lenient
loan terms, and expanded services.2
The study that follows provides a statistical
analysis to help determine which market conditions and organizational characteristics affect
FEDERAL RESERVE BANK O F ATLANTA




a thrift association's potential for becoming an
active participant in the commercial lending
arena W e analyzed data for Texas and Florida
states that moved early to broaden commercial
lending authority for their state-chartered associations, and for the United States. Texas and
Florida granted new authority for their S&Ls in
1972 and 1980, respectively. In the United
States, all federally chartered savings and loan
associations (S&Ls) received non-real-estate
commercial loan powers (henceforth, commercial loans or business loans) in late 1982
under the congressionally approved Garn-St
Germain Depository Institutions Act of 1982
(Garn-St Germain). 3 Market characteristics were
examined to determine if evidence exists that
thrifts seize opportunities for profits in markets characterized by high concentration, strong
demand, brisk growth and a notable thrift
presence.
W e looked at S&Ls' organizational characteristics as well to see if size and decisions to
diversify tend to promote commercial lending.
Further, we wanted to ascertain whether the
profitability of thrifts facilitates business lending
or inhibits i t Finally, we tried to determine if an
S&L's charter type influences its business lending behavior. 4 Since some states moved earlier
and decisively to liberalize thrifts' commercial
lending powers, the business lending behavior
of associations chartered in those states could
differ significantly from that of their federally
chartered counterparts. O n the other hand, if
federally chartered S&Ls across the nation
moved forcefully after passage of Garn-St Germain in enlarging business loan portfolios, their
business lending behavior could be discernibly
different from the country's state-chartered
S&Ls.5

Empirical M o d e l
The model used here is designed to provide
statistical evidence that will help answer questions about what prompts thrifts to diversify
into commercial lending. Because increased
commercial lending by thrifts means growing
competition between thrifts and b a n k s — a development that affects government regulators,
courts, and strategic planners—it seemed worthwhile to augment existing knowledge about
thrifts' use of their new authority (Box 2). This
(continued

on page

28)

25

Box 1
T h e C h a n g i n g Role of T h r i f t s
For many decades, thrifts operated
in a predictable fashion. In the late
1970s and early 1980s, however,
altered economic circumstances and
the erosion of profitability forced thrift
industry participants and lawmakers
to rethink the fundamental role that
thrifts would play in our economy.
Thrifts by legislative design have
been the nation's mainstay for housing finance After the early 1930s
thrifts gathered low-yielding shortterm savings deposits which they
lent chiefly on higher-yielding longterm mortgages that were typically
retained in an institution's loan portfolia This manner of conducting business proved profitable, provided
short-term rates did not rise above
previously offered long-term rates
for extended periods
Nevertheless thrifts were not free
from serious problems The extension
of Regulation Q (Reg Q) interest rate
ceilings on time and savings deposits
to S&Ls and mutual savings banks in
September 1966, along with a sustained advance in interest rates beginning in the latter half of the 1960s
led thrifts into successive episodes
of disintermediation—the siphoning
off of funds from depository institutions. When market rates paid on
alternative money market instruments such as Treasury bills climbed
above Reg Q ceilings, money flowed
away from banks and thrifts typically
to government debt securities causing severe liquidity problems for depository institutions Weighty encounters with disintermediation abated
when Reg Q ceilings were effectively
eliminated on June 1, 1978. Regulatory agencies then allowed banks
and thrifts to offer the six-month
money market deposit account, which
had a $10,000 minimum balance requirement and an interest-rate ceiling that moved with changes in the
average yield on new issues of sixmonth Treasury bills In effect, savers
were offered a market yield on a riskfree instrument
The money market account was
developed mainly in response to financial conditions in 1977 and 1978,

26



when interest rates escalated sharply
and persisted at elevated levels while
savings rates paid by depository institutions remained regulated Unregulated nonbank money market
mutual funds consequently grew robustly because of their favorable attributes: the payment of market interest rates, virtually instant liquidity,
and, eventually, free but limited checkwriting privileges Intense competition for funds caused an exodus of
regulated, relatively low-yielding savings from depository institutions The
six-month money market deposit
account was designed to stem these
outflows For depository institutions
this new account was successful in
attracting a substantial amount of
savings, but a large portion came
from the offering institutions' own
lower-yielding and still-regulated time
and savings deposits. The initial shift
to higher-yield, short-term savings
engendered an explosion in thrifts'
cost of funds that far outdistanced
sluggish advances in yields on total
assets 1 In June 1979 an additional
variable rate savings instrument was
authorized for depository institutions—the small-saver certificate It
had no minimum denomination, a
maturity of 30 months or more, and
ceiling rates based on the yield for 2
1/2-year Treasury securities, with
maximums of 11.75 percent at commercial banks and 12 percent at
thrifts
Although disintermediation loomed
less threatening in 1978 and 1979,
reduced profitability replaced disintermediation as the thrift industry's
primary problem; thrifts had to pay
market rates to avoid savings outflows Furthermore the outlook for
thrifts' cost of funds became uncertain when the Federal Reserve announced in October 1979 a change
in its method of conducting monetary
policy. In an effort to temper inflationary forces the Federal Open Market Committee voted to place greater
emphasis in daily operations on controlling the supply of bank reserves
(in turn, the money supply) and less
emphasis on confining short-term

fluctuations in the federal funds rate
(in turn, the general level of interest
rates). Consequently, market forces
would play the principal role in estab
lishing interest rate levels. Wider
fluctuations and generally higher interest rates then were likely.2 Overall
yields on thrifts' assets on the other
hand, would remain virtually level for
reasons attributable not only to the
difficulty of booking sufficient amounts
of new higher-yielding mortgages
but also to the numerous restrictions
on thrift asset powers Losses on
old loans were inevitable even i
f
new loans could be booked
Interest rate escalation continued
into the early 1980s along with heightened rate volatility. Record rates were
recorded in mid-1981. By then, the
profit picture for the thrift industry
had become unmistakably gloomy.
Specifically, net income for FSLICinsured associations plummeted from
$3.6 billion in 1979 to $0.8 billion for
1980. Red ink totals of $4.6 and $4.3
billion were posted for the industry in
1981 and 1982, respectively (Chart
1).3 Concurrently, the interest rate
spread (yield on assets less cost of
funds) for FSLIC-insured associations fell from 1.16 percentage points
in 1979 to 0.42 for 1980 (Chart 2).
Negative spreads of 0.76 and 0.41
percentage points were logged for
1981 and 1982, respectively.4

Chart 1. Net Income of
FSLIC-Insured S&Ls

-2

-

-3-

-4 - 5 1979

1980

1981

1982

S o u r c e : F e d e r a l H o m e L o a n Board, Combined
Financial
Statements,
FSLIC-lnsured
Institutions, W a s h i n g t o n , D.C, 1 9 7 9 - 1 9 8 2 .

JUNE/JULY 1986, E C O N O M I C

REVIEW

Clearly, thrift asset powers, as well
as liability powers for attracting deposits, had to be liberalized to allow
thrifts to lessen interest rate risk.
The first major congressional response to the plight of federally char
tered thrifts in the late 1970s and
early 1980s came in the form of the
March 1980 Depository Institutions
Deregulation and Monetary Control
Act (Dl DMCA).
In brief, DIDMCA authorized federally chartered thrifts to expand
consumer loans further, engage in
commercial real estate lending, invest in governmental and corporate
obligations and in service corporations, and to undertake trust activities
and accept NOW and NI NOW accounts, primarily from individuals
As thrift profitability, and indeed
the industry's viability, continued to
be threatened, Congress debated
and approved provisions of the Gartr
St Germain Depository Institutions
Act (Garn-St Germain), signed into
law in October 1982. Garn-St Germain allowed for a further expansion
of consumer and commercial real
estate loans, as well as expanded
authority to invest in corporate obligations It also granted thrifts the
power to invest in time and savings
accounts of other thrift institutions
and in intangible personal property,
as well as to engage in equipment
leasing. The Act extended NOW account acceptance to governmental

Chart 2. Percent Spread for
FSLIC-Insured S&Ls
(Yield on assets less cost of funds)
Percent

1979

1980

1981

1982

Source: Federal Home Loan Board of Cincinnati, Quarterly

Review,

1984.

FEDERAL RESERVE
 BANK OF ATLANTA


units and NINOW account acceptance to persons or organizations
that had established a business loan
relationship with the institution. 5
Importantly, Garn-St Germain allowed thrifts to make non-reahestate
commercial loans, direct or participating, up to 5 percent of total assets
before January 1, 1984 (7.5 percent
for savings banks) and thereafter up
to 10 percent of total assets This
provision authorized thrifts to make
relatively short-term commercial loans
yielding market rates of interest, in
addition to short-term, market-sensitive consumer loans allowed previously.6 Significant expansions of both
consumer and commercial loans by
thrifts clearly would help lower their
interest rate risk vulnerability. For
example, Garn-St Germain cleared
the way for S&Ls to grant line-ofcredit and inventory financing Associations also could make loans to
finance capital expenditures (including commercial transportation equipment) and mining oil, and gas operations They could extend loans to
service industries and other financial
institutions as well as grant agricultural loans, broker loans maritime
and aircraft loans, and loans to professional groups Furthermore, GarnSt Germain authorized thrifts to invest in small-business investment
companies up to 10 percent of total
asset« these investment companies
include those that grant governmentbacked loans for example, Small Business Administration loans to newly
established professionals, such as
physicians, dentists, attorneys, and
certified public accountants.
Prior to passage of these federal
laws various states had already expanded powers for their state-chartered thrifts Texas Maine, and Florida
in 1972, 1975, and mid-1980, respectively, broadened thrifts' consumer and commercial loan powers
considerably. Furthermore, these acts
expanded investment powers regarding government and corporate obligations Although Lone Star and
Sunshine State lawmakers did not
grant Texas- and Florida-chartered
thrifts the authority to invest in business investment companies general

parity provisions of those state laws
allowed state-chartered thrifts to
engage in any thrift activity permitted
by federal law. So, when federally
chartered thrifts obtained permission
to invest in such companies under
the October 1982 Garn-St Germain
Act, thrifts chartered in Texas and
Florida also received permission.
Maine-chartered thrifts received limited authority in 1975 to invest in
small-business investment companies that are located and do business
in Maine They also received competitive equality to invest in non-Maine
companies in October 1982 because
of Garn-St Germaia 7
The chief purpose of these laws
was to permit thrifts to diversify asset
and liability holdings to match competing maturities more closely. Lessening thrift vulnerability to the real
estate cycle was the major objective.
The intended results were a reduction
in thrifts' interest rate risk exposure,
stabilized earnings and enhanced
profitability.

NOTES
1
R o b e r t E G o u d r e a u (1984).
*Federal
Reserve
Bulletin,
"Announcements: M o n e t a r y Policy Actions," voL 6 5 ,
no. 1 0 ( O c t o b e r 1979), pp. 8 3 0 - 8 3 2 .
3
Combined
Financial
Statements,
FSUCInsured Institutions,
Federal H o m e L o a n
Bank Board, Washington, D.C, 1 9 7 9 , 1 9 8 0 ,
1981, a n d 1982.
^Quarterly
Review 1, T h e F e d e r a l H o m e
L o a n B a n k B o a r d of Cincinnati, 1 9 8 4 , p. 1.
' R o b e r t E G o u d r e a u (1984).
6
Commercial
loans
include unsecured
c o n s t r u c t i o n loans; mobile h o m e loans to
dealers to finance inventory (wholesale
m o b i l e h o m e loans); loans t o b u s i n e s s
d e v e l o p m e n t c o r p o r a t i o n s ; l o a n s for alteration, repair, o r i m p r o v e m e n t of o t h e r
t h a n one-to-four unit residential property;
chattel loans other than those reported
a s w h o l e s a l e m o b i l e h o m e loans t o commercial b o r r o w e r s ; l o a n s s e c u r e d by securities; a n d o t h e r m i s c e l l a n e o u s loans.
Consumer loans include loans o n savings
a c c o u n t s , h o m e i m p r o v e m e n t loans, edu c a t i o n a l loans, a u t o m o b i l e loans a n d
o t h e r c l o s e d - e n d c o n s u m e r loans, c r e d i t
cards and other open-end c o n s u m e r loans
a n d m o b i l e h o m e loans t o c o n s u m e r s
(retail m o b i l e h o m e loans).
Mortgage
loans i n c l u d e FHA-VA mortgages, conventional mortgages, mortgageb a c k e d securities, a n d m o r t g a g e participations
7

R o b e r t E G o u d r e a u (1984).

27

s t u d y uses y e a r - e n d 1 9 8 4 d a t a f o r Texas, Flori d a a n d t h e U n i t e d States In 1 9 8 4 , c o m m e r c i a l
l e n d i n g p o w e r s w e r e available t o b o t h f e d e r a l l y
a n d s t a t e - c h a r t e r e d associations in Texas a n d
F l o r i d a All f e d e r a l l y c h a r t e r e d S&Ls n a t i o n w i d e
operated under explicitly broadened commercial l e n d i n g p o w e r s t h a t year. Also, 1 9 8 4 w a s
t h e s e c o n d full y e a r o f r e c o v e r y f r o m t h e July
1 9 8 1 t o N o v e m b e r 1 9 8 2 recession, w i t h a
r o b u s t 6.4 p e r c e n t y e a r l y a d v a n c e in real gross
national p r o d u c t (GNP) for t h e nation. The
d a m p e n i n g e f f e c t s of o i l - g l u t c o n d i t i o n s in
Texas h a d also e a s e d a b i t b y t h e n . M o r e o v e r ,
b y 1 9 8 4 m a n a g e m e n t for b o t h federally a n d
s t a t e - c h a r t e r e d S&Ls ( e s p e c i a l l y f o r Texas- a n d

F l o r i d a - c h a r t e r e d associations) h a d a d d i t i o n a l
lead t i m e t o plan m o r e thoroughly, p r o c u r e
requisite p e r s o n n e l a n d e q u i p m e n t a n d devise
a p p r o p r i a t e m a r k e t i n g strategies b e f o r e e m b a r k i n g o n a n a c t i v e c o m m e r c i a l l e n d i n g program.
For Texas a n d F l o r i d a w e i n c l u d e d o n l y
t h o s e a s s o c i a t i o n s b a s e d in M e t r o p o l i t a n Statistical Areas ( M S A s ) . W e h y p o t h e s i z e d t h a t if
a n y " h o t b e d " o f S&L c o m m e r c i a l l e n d i n g activity e x i s t e d , it w o u l d b e in g r o w i n g areas o f t h e
Sun Belt states, p a r t i c u l a r l y in t h o s e states t h a t
h a d l i b e r a l i z e d legislation f o r t h e i r state-chart e r e d associations. A d i f f e r e n t t a c k w a s t a k e n
f o r t h e U.S. s a m p l e . W e u s e d a r a n d o m l y

Box 2
E v i d e n c e o n H o w T h r i f t s Have Used T h e i r N e w A u t h o r i t y
A number of recent studies analyze
how thrifts have used their broadened
powers thus far.1 General assessments of the impact of new powers
on thrifts indicate that for the most
part institutions have moved cautiously in exploiting the alternative
asset and liability potential provided
by legislation during the last two
decades In an effort to determine
how the changes brought about by
the 1980 Depository Institutions Deregulation and Monetary Control Act
(DIDMCA) would affect competition,
Alan McCall and Manferd Peterson
(1980) found that Maine-chartered
thrifts after being granted broadened authority in 1975, took advantage of new transaction account and
lending powers in competition with
commercial banks but made only
small advances in commercial lending A Florida-based study by Robert
Baker (1982) designed to indicate
how the Garn-St Germain Depository
Institutions Act (Garn-St Germain)
might affect federally chartered thrift
behavior nationwide showed that
thrifts took some steps toward using
liberalized deposit and loan powers
but suggested that any benefits from
the expanded powers would only be

28




realized in the long run. A study by
John Crockett and Thomas King
(1982) found that Texas-chartered
S&Ls remained firmly committed to
housing, despite the alternative opportunities provided by new legislation. This same study also revealed
that stock S&Ls tended to avail themselves of new powers more than mutual associations did. On the whole
Texas-chartered thrifts in these studies emphasized a few alternative asset powers rather than investing in
all of them equally.
A study by Robert Eisenbeis and
Myron Kwast (1982) analyzed the
benefits thrifts might reap from continuing to specialize in mortgage
lending as opposed to transforming
themselves into full-service competitors with commercial banks It indicated that real estate banks' (commercial banks that chose to specialize
in mortgage and real estate lending)
return on average assets equaled or
surpassed the return attained for the
control sample of commercial banks
and substantially exceeded the return
for S&Ls as a group Furthermore,
the earnings performance of the real
estate banks was achieved with a
portfolio balance of consumer loans

commercial loans and investments
that fell within the limits allowed for
federal S&Ls under Garn-St Germain.
New England thrifts which received
liberalized powers gradually, though
not uniformly, over the 1970s were
the first group of thrifts in the nation
with the potential to be the equivalent
of commercial banks and so can be
seen as harbingers of federally chartered thrifts nationwide Examining
December 1980 data on services
such as commercial mortgages Negotiable Order of Withdrawal (NOW)
accounts and personal transaction
accounts Constance Dunham (1982)
looked at how mutual savings banks
in 51 New England markets responded to their broadened powers She
found that diversification proceeded
at an uneven pace throughout the
New England region, with relative
shares in major commercial banking
services varying widely.
Comparing the use of new powers
by federally and state-chartered S&Ls
in Texas, Maine, Florida, and the
United States from 1980 to 1983,
Goudreau analyzed ratios for total
loans mortgage loans consumer
loans commercial loans liquid investments and investment in service

JUNE/JULY 1986, E C O N O M I C REVIEW

g e n e r a t e d g r o u p o f f e d e r a l l y a n d state-chart e r e d S&Ls. This r a n d o m s e l e c t i o n s h o w e d n o
p r e f e r e n c e f o r a n association's l o c a t i o n , m e t r o p o l i t a n or rural, o r t h e laws u n d e r w h i c h it
o p e r a t e d U.S. s a m p l e results, t h e r e f o r e , s h o u l d
m e a s u r e as a c c u r a t e l y as p o s s i b l e t h e t y p i c a l
S&L c o m m e r c i a l l e n d i n g e x p e r i e n c e n a t i o n w i d e
L o o k i n g at b o t h m a r k e t a n d o r g a n i z a t i o n a l
characteristics, w e u s e d T o b i t analysis t o assess
the impact of a market's commercial bank
c o n c e n t r a t i o n , b a n k s p e c i a l i z a t i o n in business
l e n d i n g ( a r e f l e c t i o n o f c o m m e r c i a l l o a n demand), deposit growth, and t h e presence of
o t h e r S&Ls o n a n association's c o m m e r c i a l
l e n d i n g behavior. W e f u r t h e r t r i e d t o d e t e r m i n e

corporations as a percent of total
assets, as well as NOW and Noninterest-Earning Negotiable Order of
Withdrawal (NINOW) accounts as a
portion of liabilities 2 The results indicated that on a statewide basis
pronounced balance sheet variations
occurred between federally and statechartered associations when a large
number of S&Ls chose to begin their
existence as state-chartered organizations or to convert to state-chartered institutions, as many did in
Texas and Florida These S&Ls apparently pursued state charters to
take advantage of the expanded
powers offered by state statutes In
all the geographic areas studied, both
federally and state-chartered S&Ls
showed increased liquidity, decreased
mortgage holdings, and slow expansion in consumer and commercial
loan holdings Neither federally nor
state-chartered S&Ls came remotely
close to approaching the limits allowed by federal and state laws on
the asset ratios most relevant to liberalized powers—consumer loans
commercial loans liquid investments
and investment in service corporations
An additional study by Goudreau
on the use of consumer and commercial loan powers by S&Ls in the
same geographic areas showed a

FEDERAL RESERVE BANK O F ATLANTA




t h e e f f e c t s of a n S&L's size, c o n s u m e r l e n d i n g
s p e c i a l i z a t i o n , p r o f i t a b i l i t y , a n d charter. 6
W e g a u g e d an S&L's l e n d i n g b e h a v i o r b y t h e
p e r c e n t a g e o f c o m m e r c i a l loans in its t o t a l
assets. In brief, o u r tests relate m e a s u r e s o f
m a r k e t , o r g a n i z a t i o n , a n d c h a r t e r characteristics t o S&L business l e n d i n g b e h a v i o r .
Four measures o f m a r k e t characteristics w e r e
t e s t e d . C o m m e r c i a l b a n k s p r e s u m a b l y are a p t
t o b e less c o m p e t i t i v e in h i g h l y c o n c e n t r a t e d
m a r k e t s — t h o s e in w h i c h a s m a l l n u m b e r o f
b a n k s c o n t r o l a large p e r c e n t a g e o f m a r k e t
d e p o s i t s . C o n s e q u e n t l y , h i g h e r i n t e r e s t rates
o n loans, m o r e r e s t r i c t i v e l o a n t e r m s , a n d
possibly r e d u c e d quality service may b e t h e

restrained pace of diversification into
consumer and commercial loans,
even among institutions chartered in
Texas and Maine that had enjoyed
broadened powers for a number of
years 3 To measure recent momentum, the author found that mortgage
loans garnered 93 to 94 cents of
every dollar for loans extended by
the nation's federally and state-chartered institutions during the postrecession December 1982 to June
1983 period Mortgage lending clearly
remained the mainstay of the industry.
Consumer loans extended during that
period accounted for 5 to 7 cents of
every dollar and commercial loan
extensions were essentially zero
Nasser Arshadi(1985) attempted to
determine whether liberalized powers
for state-chartered S&Ls in Texas and
Florida produced performance and
behavior distinct from that of their
federally chartered counterparts Using canonical correlation analysis to
investigate separately the performance of the two types of chartered
institutions in each state, he attempted
to identify which asset, liability, size,
and institutional variables were important to S&L performance 4 Data for
December 1981, June 1982, and December 1982 suggested that Floridachartered S&Ls sought high liquidity,
as well as substantially reduced mort-

gage holdings and expanded conumer and business loans slowly. Compared to Florida-chartered S&Ls Texaschartered S&Ls invested heavily in
mortgages and accordingly held a
smaller proportion of their funds in
liquid assets Like Florida institutions
Texas S&Ls were conservative in their
consumer and commercial lending
Finally, performance analysis indicated
that while new services might have a
larger gross return, they are often
coupled with higher operating costs

Use of Commercial Lending
Powers
A number of variables appear to
affect thrifts' commercial lending
behavior. In a study using Probit anah
ysis and December 1980 data Constance Dunham and Margaret GuerinCalvert tried to determine why and
where thrifts are most likely to compete actively with commercial banks
in nontraditional commercial services
They found that some of the most
significant variables in estimating
thrift commercial lending behavior
were the ratio of commercial loans to
total assets at commercial banks
which can be viewed as the demand
for commercial loans in a particular
market and the extent of small business activity in a market. 5 Since

29

n o r m . W e e x p e c t a n S&L's c o m m e r c i a l l e n d i n g
to be positively related to market concentrat i o n , i n d i c a t i n g t h a t S&Ls h a v e m o r e i n c e n t i v e
t o e n t e r i n t o c o m m e r c i a l l e n d i n g in h i g h l y c o n c e n t r a t e d markets.7
T h e e x t e n t of c o m m e r c i a l b a n k specialization
in b u s i n e s s l e n d i n g can b e s e e n t o r e p r e s e n t
t h e d e m a n d f o r c o m m e r c i a l loans in a particular
m a r k e t To measure specialization, total comm e r c i a l loans at c o m m e r c i a l b a n k s are c o m p a r e d w i t h t o t a l assets a t c o m m e r c i a l b a n k s in
a p a r t i c u l a r S&L's m a r k e t If t h e ratio is high, w e
t a k e it t o m e a n c o m m e r c i a l b a n k s c o n s i d e r t h i s
t y p e of lending profitable and, accordingly,
c o m m i t a s u b s t a n t i a l p e r c e n t a g e o f t h e i r assets

commercial banks may not bother to
write business loans for small establishments, thrifts are presumed to
find small businesses more receptive
to their promotional efforts. The ratio
of commercial real estate loans to
total assets for individual thrifts and
total asset size were also significant
Apparently thrifts that have engaged
in commercial real estate lending
attained certain spillover benefits
such as exposure to and some limited
expertise in non-real-estate commercial lending as well as an existing
collection of potential commercial
loan customers and contacts. Finally,
large thrifts appeared more likely to
have the funds needed to absorb
commercial tending's high start-up
costs
A parallel study by the same authors on commercial lending trends in
New England found that from 1980
to 1982 mutual savings banks had
committed only a small portion of
their total resources to commercial
lending 6 Probing beneath the surface
however, the authors discovered a
marked diversity of commercial lending behavior among institutions They
also noted that some thrifts encountered higher commercial lending costs
than commercial banks because of
differing levels of institutional expertise, cost of funds, informational costs

30




t o c o m m e r c i a l loans. In this case, t h e a n t i c i p a t e d
i n f l u e n c e o f t h e v a r i a b l e is positive, s u g g e s t i n g
t h a t h e i g h t e n e d b u s i n e s s l o a n d e m a n d in a
m a r k e t results in h i g h e r b o o k i n g s o f c o m m e r cial loans b y thrifts.
G r o w i n g markets t e n d t o have m o r e n e w
business activity, i n c l u d i n g s m a l l b u s i n e s s form a t i o n s . Yearly m a r k e t d e p o s i t g r o w t h meas u r e d as t h e c h a n g e f r o m D e c e m b e r 1 9 8 3 t o
D e c e m b e r 1 9 8 4 can also act as a p r o x y f o r
u n t a p p e d c o m m e r c i a l loan d e m a n d , because
experienced commercial bankers may lend
o n l y t o t h e market's best customers. W h i l e this
p r o x y m a y n o t b e a l t o g e t h e r reliable, w e reas o n e d t h a t r a p i d l y g r o w i n g m a r k e t s are i n c l i n e d

and a "noncommercial" industry image that requires substantial advertising to change. Using Probit analysis on the more recent data to determine why a thrift does or does not
make commercial loans, the authors
found four significant variables: a
market's degree of commercial bank
concentration, the ratio of small businesses to total businesses in a market thrift asset size, and the ratio of a
thrifts commercial real estate loans
to total assets
Examining thrift commercial lending behavior in Pennsylvania from
1980 to 1983, Janice Moulton (1984)
found that by 1983 thrifts booked
almost 7 percent of all commercial
and industrial loans made by commercial banks and thrifts that year,
up sharply from the comparable 0.5
figure for 1980. Pennsylvania's savings banks increased their share of
statewide commercial and industrial
loans from 0.5 to 6.6 percent primarily
because of one large institution in
the Philadelphia area S&Ls experienced only slight growth in business
lending activity, extending a scant
0.2 percent of the state total in 1983.
On average, commercial banks' business loans represented 36 percent
of total loans, while savings banks
held 15 percent and S&Ls held less
than 1 percent The data also indi-

cated that Pennsylvania's larger savings banks and S&Ls tended to be
more active in commercial lending
In a fall 1984 survey for Illinois and
Wisconsin S&Ls, which are representative of associations nationwide
Christine Pavel and Dave Phillis
(1985) discovered that one-quarter of
the S&Ls surveyed engaged in commercial lending as of fall 1984 or were
planning to do so; the remaining threequarters had not made commercial
loans and had no plans to do so
About 16 percent of S&Ls in Illinois
and Wisconsin were actively making
commercial loans as of fall 1984, and
an estimated 20 percent intended to
do so by year-end 1985. However,
commercial loans accounted for only
0.6 percent of total assets by yearend 1983 for those associations engaged in commercial lending
One reason for the slow advance
in commercial loan holdings in most
areas of Illinois and Wisconsin was
that these institutions were not simply buying large commercial loans to
retain in their portfolios; rather, they
were actively writing commercial
loans, primarily for small local companies with annual sales of $50,000
to $1 millioa Over half the lenders
were making commercial loans to
construction companies, retailers,
and professionals The specific types

JUNE/JULY 1986, E C O N O M I C REVIEW

to have notable new business activity, particularly among smaller firms. Small business formations are typically higher in briskly expanding markets. If brisk small business activity and
untapped commercial loan demand characterize a particular market S&L commercial loan
extensions should be greater and the expected
influence of this measure should be positive.
It is commonly assumed that the stronger the
presence of S&Ls, the greater the chance that
these institutions will attempt to acquire their
"fair share" of the market's commercial lending
p i e 8 This means the greater the aggregate
market share for S&Ls, the more inclined these
institutions are to grant commercial loans.

of commercial products and services
that S&Ls had chosen to offer small
businesses included equipment lease
financing, construction loans, inventory financing, commercial mortgage
loans, and commercial checking accounts. The common characteristics
of S&Ls either making commercial
loans or planning to do so were familiarity with commercial mortgage lending the acceptance of commercial
demand deposits, and large size
Thrifts in metropolitan areas containing a large proportion of small

The organizational characteristics of thrifts,
as well as their markets, may influence the
decision to expand into commercial lending.
First the size of an S&L may affect whether it
extends commercial loans. O n e might expect
larger S&Ls to absorb more easily the high startup and marketing costs associated with establishing and operating a commercial loan departm e n t Larger associations generally can subsidize the expense of training their employees in
specialized lending, hiring people with the
requisite lending skills, purchasing equipment
and software, and boosting marketing efforts
to tap or expand their current customer base.
Since many of these costs are fixed, we expect

businesses and dominated by a few
commercial banks were also more
likely to engage in commercial lending.
Another study by Dunham (1985)
based on a survey assessing commercial lending activity among New
England thrifts during 1984 indicated
that savings bank commercial lending
in this region had grown rapidly from
an initially low base The average
annual rate of expansion in business
lending by these institutions exceeded 100 percent per year since 1980.

Growth has been strong since 1982.
By contrast total commercial lending
for thrifts and banks in New England
gained an average 16 percent per
year. At year-end 1984, savings banks
had booked over 6 percent of the
commercial loans made in the region
that year. Although larger thrifts (over
$100 million in assets) comprised
about half of the savings banks that
made no commercial loans, they accounted for almost all the thrifts that
invested more than 5 percent of their
assets in commercial loans

NOTES
1

Examples are Alan A McCall a n d M a n f e r d
O. P e t e r s o n (1980), R o b e r t B a k e r (1982),
J o h n C r o c k e t t a n d T h o m a s A King (1982),
Robert A Eisenbeis a n d Myron L Kwast
(1982), C o n s t a n c e R D u n h a m (1983),
R o b e r t E G o u d r e a u (1984), a n d N a s s e r
A r s h a d i (1985). M o r e specifically, s t u d i e s
by C o n s t a n c e R D u n h a m a n d M a r g a r e t
Guerin-Calvert (1983), J a n i c e M. M o u l t o n
(1984), Christine Pavel a n d Dave Phillis
(1985), a n d C o n s t a n c e R. D u n h a m ( 1 9 8 5 )
f o c u s o n t h e issue of thrift c o m m e r c i a l
lending. T h e a b o v e - c i t e d s t u d i e s view
thrift b e h a v i o r at s t a t e (Texas, Maine,
F l o r i d a Illinois, o r W i s c o n s i n ) , r e g i o n a l
( N e w England), o r n a t i o n a l levels.
2
S e e G o u d r e a u ( O c t o b e r 1984).
3
S e e G o u d r e a u ( D e c e m b e r 1984).
4
S e e A r s h a d i (1985). C a n o n i c a l c o r r e l a t i o n
analysis e x a m i n e s t h e r e l a t i o n s h i p s be-

FEDERAL RESERVE BANK OF ATLANTA




t w e e n t w o s e t s of v a r i a b l e s Variable
coefficients are obtained such that the
correlations b e t w e e n t w o s e t s of variables
are m a x i m i z e d In A r s h a d î s study, t h e
first set of v a r i a b l e s i n c l u d e s c r i t e r i o n
variables t h a t d e f i n e p e r f o r m a n c e ; f o r
example, net i n c o m e t o total a s s e t s a n d
total o p e r a t i n g i n c o m e t o total a s s e t s
The s e c o n d set i n c l u d e s p r e d i c t o r variables, s u c h as assets, liabilities, size, a n d
o t h e r institutional variables that m a y aff e c t p e r f o r m a n c e . For a d e t a i l e d discussion of c a n o n i c a l c o r r e l a t i o n analysis,
see M a u r i c e M. T a t s u o k a (1971).
5
T h e a u t h o r s u s e d Probit analysis, a nonlinear probability m o d e l t h a t is u s e f u l
w h e n t h e d e p e n d e n t variable r e p r e s e n t s
a c h o i c e b e t w e e n t w o alternatives, for

example, t h e d e c i s i o n t o e x t e n d a c o m mercial loan o r n o t In s u c h a case, t h e
d e p e n d e n t variable typically takes o n the
value of 1 if t h e d e c i s i o n is m a d e t o m a k e
t h e loan a n d 0 if t h e loan is not m a d e
B e c a u s e of t h e binary n a t u r e of s u c h a
p r o b l e m (the d e p e n d e n t v a r i a b l e is 0 or
1), t h e a s s u m p t i o n s of t h e ordinary least
s q u a r e s (OLS) r e g r e s s i o n m o d e l a r e violated. Probit t r a n s f o r m s t h e O L S regression model using the cumulative normal
a n d c u m u l a t i v e logistic p r o b a b i l i t y functions, respectively, t o t a k e a c c o u n t of t h e
binary d e p e n d e n t v a r i a b l e Thus, rather
than explain t h e extent of c o m m e r c i a l
lending, Probit p r o v i d e s i n f o r m a t i o n o n
t h e probability of a loan b e i n g m a d e F o r a
m o r e t e c h n i c a l d i s c u s s i o n of P r o b i t refer
t o P i n d y c k a n d R u b i n f e l d (1976).
a
S e e D u n h a m a n d G u e r i n - C a l v e r t (1983).

31

the ratio of commercial loans to assets to
increase at a rate faster than assets. Larger S&Ls
also can lend greater amounts under the fixed
percentage limitations imposed by regulators
for loans to individual borrowers. Many potential commercial borrowers may not even bother
to inquire at smaller S&Ls.9
A second organizational characteristic that
might influence an S&L's decision to diversify
into commercial lending is its record of consumer activity. W e reasoned that associations
which have already diversified into consumer
lending may be prone to expand their commercial loan holdings as well. It may be equally
plausible, though, that an S&L holding an abundant consumer loan portfolio may not have the
additional resources required to branch out
into commercial lending. Briefly, in the context
of diversification, are consumer loans complements to or substitutes for commercial loans? If
consumer loans are complements, the expected
influence of the coefficient is positive. If consumer loans are substitutes, the anticipated
influence is negative
The granting of expanded powers through
new legislation does not guarantee the use of
the new authority. Management's desire to
diversify and the institution's financial soundness are important The profitability of an
association could have a positive or a negative
influence on the decision to expand into business lending. Profitable associations might be
more inclined to diversify into commercial
lending because they are less concerned with
mere survival and its attendant cost-cutting
measures. With their futures more secure, blackink institutions are better able to implement
programs designed to reduce their interest rate
risk, stabilize earnings, and lessen vulnerability
to the real estate cycle. O n the other hand,
managers at profitable institutions may believe
they are doing something right and so decide
against diversifying into higher-risk commercial
loans. Furthermore, low-profit or red-ink institutions may be desperate and, consequently,
strive to increase holdings of higher-yielding
business loans. Profitability, then, is a variable
with an uncertain i m p a c t
The last potential influence tested is the
significance of a state or federal charter in
determining an S&L's propensity to grant commercial loans. In the equations for Texas, Florida
and the nation, a value of 1 is assigned to statechartered associations and zero to federally
32




chartered S&Ls. The anticipated influence for
this " d u m m y variable" in the Texas and Florida
equations is positive, meaning that state-chartered S&Ls in these t w o states took advantage
of their commercial lending powers more than
their federally chartered counterparts did during 1984. This result seems likely because
associations chartered in these states received
expanded powers in August 1972 and July
1980, respectively, well before commercial
loan powers were granted to federally chartered
thrifts in October 1982 under Garn-St Germain.
Moreover, scores of associations in these t w o
states converted from a federal to a state
charter or opened their doors as state-chartered
S&Ls, presumably to make use of liberalized
powers contained in state statutes. 10 For the
United States, the expected influence of the
variable is negative, indicating that state-chartered S&Ls nationwide failed to engage in
business lending to the same extent as their
federally chartered competitors.

Statistical Results
The statistical results of our analysis indicate
that markets are largely irrelevant in thrifts'
decisions about commercial lending. Organizational factors, particularly the size of an S&L
and the extent of its diversification into consumer lending, appear more important in determining whether or not expansion to commercial lending is an attractive proposition.
Market Variables. The commercial bank concentration variable (HHI) proved unimportant
in all three equations (Table 1). This study,
therefore, offers no evidence to support the
hypothesis that S&L entry into business lending
is more attractive in concentrated markets,
where commercial bankers presumably are
inclined to be less competitive
Specialization in commercial lending at banks,
representing business loan demand (CLTA),
indicates that the concentration of commercial
loans at commercial banks in a thrift's market
has no impact on thrift business lending. This
variable is insignificant in all three equations. A
clear-cut picture of how the annual rate of
growth in total market deposits (DEPG) influences thrifts' commercial lending is not available for all three geographic areas. Yearly market deposit growth is significant only in Florida
Finally, the overall importance of S&Ls in the
market measured by S&L total deposits to total
JUNE/JULY 1986, E C O N O M I C REVIEW

Table 1 . Commercial Loans as a Percentage of Total Assets
Regression Coefficients and t-statistics
Texas

Florida

United States

.150-04
(1.303)

-.236-05
(-0.332)

.403-06
(0.178)

Commercial Loans at Banks/
Total Assets at Commercial
Banks (CLTA)

.113
(0.679)

.416-01
(0.479)

-.194-01
(-0.569)

Annual Growth Rate of Total
Market Deposits (DEPG)

.580-03
(0.716)

.869-03
(2.040)**

.123-03
(0.467)

S&L Total Deposits/Total
Market Deposits (SLMD)

.496-01
(0.387)

-.982-02
(-0.223)

.303-02
(0.259)

S&L Total Assets in
Natural Logarithms (SLTA)

.487-02
(0.801)

.873-02
(3.114)***

.595-02
(3.497)***

S&L Consumer Loans/Total
Assets (SLCL)

.469-01
(0.439)

.400
(3.632)***

.134
(2.732)***

S&L Net Income/Average
Total Assets (NETIN)

.472-02
(0.526)

Charter Dummy Variable
(STATDM)
Constant Term

Independent Variables
Herfindahl-Hirschman
Index (HHI)

Expected Value of Thrifts'
Commercial Loans/Total Assets
for the Average S&L

.169-01
(1.739)*

-.421-02
(-0.896)

191-01
(1.018)

.234-01
(2.725)***

-.132-02
(-0.325)

-.143
(-1.435)

-.145
(-3.257)***

-.851-01
(-3.942)***

.0114

.0042

.0286

Log Likelihood Function

62.3

91.9**

120.6*

Number of Observations

104

94

204

36

40

130

68

54

74

Limit (Zero) Observations
Nonlimit Observations
t-Statistics a r e in p a r e n t h e s e s

9 0 P e r c e n t L e v e l of C o n f i d e n c e (*), 9 5 P e r c e n t Level of C o n f i d e n c e (**), a n d 9 9 P e r c e n t L e v e l of C o n f i d e n c e (***) u s i n g Two-Tail
Test
All d a t a are as of D e c e m b e r 3 1 , 1 9 8 4 e x c e p t for S&L N e t I n c o m e / A v e r a g e Total A s s e t s (NETIN) N E T I N c o n s i s t s of cumulative
net i n c o m e for a particular S & L a s of D e c e m b e r 3 1 , 1 9 8 4 over a v e r a g e total a s s e t s A v e r a g e total a s s e t s e q u a l s a n S & L s a s s e t s
o n J u n e 30, 1 9 8 4 p l u s a s s e t s on D e c e m b e r 3 1 , 1 9 8 4 d i v i d e d b y 2.

FEDERAL RESERVE BANK OF ATLANTA 34




market deposits (SLMD), is unimportant in all
three equations. None of the evidence suggests
that S&Ls operating in markets where they
collectively hold a substantial portion of total
deposits tend to garner a large share of that
market's commercial lending activity.
Institutional Characteristics.. A clear indication exists that S&L total asset size (SLTA)
influences moves by S&Ls into commercial
lending, as evidenced by the Florida and national equations. In both equations this variable
has a positive sign and is significant
As with association size, S&L consumer loans
to total assets (SLCL) shows positive coefficients
in the Florida and U.S. equations. The high
levels of confidence and positive signs indicate
that in the context of S&L diversification, consumer loans are complements to commercial
loans. By implication, S&Ls that decide to
diversify their loan portfolios increase both
consumer and commercial loan components.
However, our results suggest that S&L's return
on assets (NETIN) does not appear to affect
strongly thrift entry into or expansion in commercial lending.
The headstart Florida lawmakers gave to
their state-chartered S&Ls appears to have
been successful. However, no similar evidence
exists for Texas-chartered associations and the
nation's federally chartered S&Ls. The coefficient for the charter d u m m y variable in the
Florida equation is positive and significant
suggesting that the business lending behavior
of Florida-chartered S&Ls differed markedly
from the behavior of that state's federally
chartered associations. In other words, in 1984
Florida-chartered S&Ls used their expanded
commercial lending powers noticeably more
than their federally chartered counterparts.

to total assets at the typical MSA-based S&L in
our Texas sample is 2.86 percent This 2.86
percent exceeds the expected values of 1.14
and 0.42 percent obtained for Florida and the
United States, respectively. Such an occurrence
is not surprising because Texas-chartered associations had the benefit of broadened commercial lending powers for 12 years by 1984.
Eighty-one of the 104 S&Ls included in the
Texas sample are state-chartered. Thrifts in
Florida and the United States probably will
follow suit increasing their commercial lending
over t i m e

Additional Information
Statistical results for Florida and the United
States support other research in this area
though they are inconsistent with some of the
findings (Box 2). In their analyses of 1980 and
1982 data for mutual savings banks in N e w
England, Constance Dunham and Margaret
Cuerin-Calvert (1983a and 1983) discovered
that thrift commercial lending was noticeably
affected by thrift size and by a market's small
business activity. Janice M o u l t o n (1984) found
that Pennsylvania's larger savings banks and
S&Ls in 1983 were more actively involved in
commercial lending than that state's smaller
thrifts. Christine Pavel and Dave Phillis (1985)
discovered in their fall 1984 survey of Illinois
and Wisconsin S&Ls that large size and the
proportion of small establishments in a market
discernibly affect an association's commercial
lending decisions. In a survey regarding thrift
commercial lending in New England, Dunham
found that by year's end 1984 larger thrifts
comprised almost all the thrifts that had invested more than 5 percent of their assets in
commercial loans.

Expected Value Estimates
Expected value estimates indicate the extent
to which the results of a statistical analysis can
be presumed to apply to the average S&L The
estimates obtained imply that the longer thrifts
have had extended powers, the more they are
inclined to diversify, suggesting that S&Ls can
be expected to move more into commercial
lending over time. (Estimates of commercial
loans as a percent of total assets ( C O M M L ) , for
the "average" S&L are displayed in Table I.) 1 1
The expected value of commercial loans relative
34



Conclusions
This study's testing of S&L market, balance
sheet profitability, and charter characteristics
suggests a good case can be made for claiming
that large and consumer lending-oriented S&Ls
are more inclined to book commercial loans.
Larger associations are presumably better able
to handle the high start-up, marketing, and
credit rate risk expenses that come with establishing and maintaining business lending operations. Larger S&Ls can also lend greater
JUNE/JULY 1986, E C O N O M I C REVIEW

amounts on a percent-of-assets basis to individual borrowers. Consumer loans and commercial loans appear to be complements rather
than substitutes at S&Ls. While size facilitates
S&L entry into business lending, the expansion
to consumer or commercial loans clearly is a
management decision.
Although associations located in briskly expanding markets appear likely to engage in
business lending, markets generally were not a
strong factor. Commercial bank concentration,
the degree of bank specialization in commercial lending (which can be viewed as the
demand for commercial loans), and the concentration of S&Ls in a particular market did
not seem to influence thrifts' commercial lending activity. Only state-chartered S&Ls in Florida

FEDERAL RESERVE BANK O F ATLANTA




behaved differently compared with their federally chartered counterparts when making
commercial lending decisions in 1984.
In brief, this study suggests that regulators,
the courts, and strategic planners in their caseby-case decisions should pay particular attention to a thrift's asset size and consumer lending
specialization. Large, diversifying thrifts, in particular, should receive more w e i g h t Markets,
on the other hand, need not be considered as a
distinguishing characteristic 12 Overall, charter
seems irrelevant

Larry

D.

Hyche

Wall

provided

contributed

helpful

valuable

comments
research

and

John

W.

assistance

for

this

analysis.

35

Appendix I
The Statistical Model
Since passage of the Depository Institutions Deregulation and Monetary Control Act of 1980, the Garn-St
Germain Depository Institutions Act of 1982, and
various state laws, thrifts have adopted markedly
different attitudes toward commercial lending with
the result that some thrift institutions have become
heavily involved in commercial lending while many
others have not diversified into business loans at alL
This behavior and the inherent nature of lending
place a lower limit—zero—and a potentially large
upper bound on the dependent variable (commercial
loans/total assets) used in this study. If no commercial
loans are outstanding at an S&L the dependent
variable is zero Otherwise it takes on a positive value
Such a concentration at a lower limit violates ordinary
least squares assumptions and indicates that Tobit is
the more appropriate analytical technique For a
detailed discussion of Tobit refer to James Tobin
(1958).13
Most of the data used in this study were obtained
from reports of condition filed by FSLIC-insured institutions and from the Federal Reserve Board of Governors data base. The geographic areas examined
are Texas, Florida and United States Sample sizes
are: Texas—104, Florida—94, and the United States—
204. The United States sample was determined by
using a random number generator. S&Ls used in the
Texas and Florida samples include only associations
located in Metropolitan Statistical Areas Analysis was
performed on year-end 1984 data
The statistical method used in this study seeks to
determine the market conditions, S&L balance sheet
and profitability characteristics and charter designations that influence S&L commercial lending, which is
measured by the ratio of S&L commercial loans to total
assets Independent market condition variables are
the Herfindahl-Hirschman Index (HHI), the ratio of
commercial loans at commercial banks to total assets
at commercial banks (CLTA), the annual rate of change

36



in total market deposits of banks and S&Ls combined
(DEPG), and the ratio of S&L deposits to total deposits
for a particular S&L's market (SLMD). Independent
S&L balance sheet variables are association size
expressed in natural logarithms (SLTA) and consumer
loans as a portion of total assets (SLCL). The profitability variable is S&L net income divided by average
total assets (NETIN). The charter designation variable
is an independent dummy variable (STATDM) that
assigns a value of 1 to state-chartered associations
and a zero to federally chartered S&L's.
The equations used to determine the important
factors in S&L commercial lending behavior are of the
form:
COMML = a + ( b i * HHI) + ( b 2 * CLTA) + ( b 3 * DEPG) +
(b 4 * SLMD) + (b5 * In SLTA) + (be * SLCL) +
(b 7 * NETIN) + (b8 * STATDM) + e, where:
COMML = Ratio of commercial loans to total assets
at a sample S&L;
HHI = Herfindahl-Hirschman Index for a sample S&L's market;
CLTA = Ratio of commercial loans at commercial
banks for a sample S&L's market;
DEPG = Annual rate of change in total deposits
(banks and S&Ls combined) for a sample
S&L's market;
SLMD = Ratio of S&L deposits to total deposits
(banks and S&Ls combined) for a sample
S&L's market;
SLTA = Size of sample S&L measured by total
assets in natural logarithmic form;
SLCL = Ratio of consumer loans to total assets
for a sample S&L;
NETIN = Ratio of net income to total average assets
for a sample S&L;
STATDM = 1 for a state-chartered S&L 0 for a federally chartered S&L;
a = constant term;
e = error term.

JUNE/JULY 1986, E C O N O M I C REVIEW

Appendix II
T a b l e 1 a. Total C o m m e r c i a l Loans, F S L I C - l n s u r e d Savings a n d L o a n A s s o c i a t i o n s
R e g r e s s i o n C o e f f i c i e n t s a n d t-Statistics
Texas

Florida

United States

Herfindahl-Hirschman
Index (HHI)

4.089
(1.318)

-8.425
(-1.034)

-0.310
(-0.475)

Commercial Loans at Banks/
Total Assets at Commercial
Banks (CLTA)

40,464
(0.902)

66,683
(0.655)

-7,422
(-0.756)

Annual Growth Rate of Total
Market Deposits (DEPG)

207
(0.971)

1,113
(2.272)**

S&L Total Deposits/Total
Market Deposits (SLMD)

16,464
(0.486)

S&L Total Assets in
Natural Logarithms (SLTA)

10,071
(5.731)***

S&L Consumer Loans/Total
Assets (SLCL)

Independent Variables

-71,326
(-1.389)

62
(0.831)
49
(0.015)

24,640
(6.406)***

3,151
(6.029)***

26,772
(0.944)

557,220
(4.289)***

38,142
(2.728)***

S&L Net Income/Average
Total Assets (NETIN)

2,579
(1.074)

24,610
(2.105)**

-1,090
(-0.814)

Charter Dummy Variable
(STATDM)

4,902
(0.992)

20,051
(2.078)**

-601
(-0.515)

-146,790
(-5.149)***

-327,720
(-5.679)***

Constant Term

Expected Value of Commercial
Loans for the Average S&L
($ Thousands)

7,485.6

9,611.4

-40,539
(-6.161)***
1,093.7

Log Likelihood Function

-782.5**

-653.6***

-804.1 ***

Number of Observations

104

94

204

Limit (Zero) Observations

36

40

130

Nonlimit Observations

68

54

74

t-Statistics are in p a r e n t h e s e s
9 0 P e r c e n t L e v e l of C o n f i d e n c e (*), 9 5 P e r c e n t L e v e l of C o n f i d e n c e (**), a n d 9 9 P e r c e n t L e v e l of C o n f i d e n c e (***) u s i n g Two-Tail
Test
All d a t a a r e a s of D e c e m b e r 3 1 , 1 9 8 4 e x c e p t for S&L N e t I n c o m e / A v e r a g e Total A s s e t s (NETIN) N E T I N consists^of c u m u l a t i v e
net i n c o m e for a particular S & L a s of D e c e m b e r 3 1 , 1 9 8 4 o v e r a v e r a g e total a s s e t s A v e r a g e total a s s e t s e q u a l s a n S&L s a s s e t s
o n J u n e 3 0 , 1 9 8 4 p l u s a s s e t s o n D e c e m b e r 3 1 , 1 9 8 4 d i v i d e d b y 2.

FEDERAL RESERVE BANK OF ATLANTA




37

NOTES
1

l n t h e 1 9 6 3 P h i l a d e l p h i a National Bank-Girard T r u s t C o r n
E x c h a n g e merger, t h e S u p r e m e C o u r t e s t a b l i s h e d commercial b a n k i n g a s an i n d u s t r y offering a u n i q u e p r o d u c t a
line of c o m m e r c e s e p a r a t e a n d distinct f r o m t h a t p r o d u c e d
by a n y o t h e r suppliers of f i n a n c i a l s e r v i c e s In 1 9 7 4 , t h e
S u p r e m e C o u r t r e m a n d e d t h e M a r i n e B a n c o r p o r a t i o n (Washi n g t o n State) a n d C o n n e c t i c u t National B a n k c a s e s b a c k t o
District C o u r t s f o r f u r t h e r adjudication. The C o u r t r e a f f i r m e d
t h e single line of c o m m e r c e rule a n d r e j e c t e d t h e e x p a n s i o n
of t h e line of c o m m e r c e c o n c e p t to i n c l u d e p o t e n t i a l c o m p e tition f r o m savings a n d loan associations a n d mutual savings
b a n k s M o r e recently, District C o u r t s in 1 9 8 0 c o n s i d e r e d t h e
impact of thrifts in cases involving c o m m e r c i a l bank m e r g e r s
M e r g e r of T h e First S t a t e B a n k of C e n t r a l N e w J e r s e y a n d
t h e First National B a n k of S o u t h J e r s e y w a s a p p r o v e d a n d
i n c l u d e d b a n k i n g a l t e r n a t i v e s n a m e l y t h r i f t s in d e t e r m i n i n g
t h e resultant c o m p e t i t i v e n e s s of p o s t - m e r g e r m a r k e t s T h e
s a m e rationale a p p l i e d t o t h e 1 9 8 0 U t a h m e r g e r of t h e Z i o n s
First National Bank a n d T h e First National B a n k of Logan.
S e e D o u g l a s V. Austin, " T h e L e g a l a n d Legislative H i s t o r y of
t h e L i n e of C o m m e r c e in Banking," F e d e r a l R e s e r v e B a n k
of A t l a n t a Economic Review, voL 6 7 (April 1982), p p 12-19.

S i n c e t h e s e 1 9 8 0 c a s e s r e g u l a t o r s f r e q u e n t l y have inc l u d e d t h e effect of thrift c o m p e t i t i o n , b o t h a c t u a l a n d
potential, in t h e i r c o m p e t i t i v e a n a l y s e s of b a n k a c q u i s i t i o n
a n d m e r g e r c a s e s This i n c l u s i o n of thrift c o m p e t i t i o n has
resulted in a d d i t i o n a l a p p r o v a l s
T h e 1 9 8 2 Garn-St G e r m a i n A c t a u t h o r i z e d e m e r g e n c y
a c q u i s i t i o n s of thrifts b y c o m m e r c i a l b a n k s S e e Garn-St
G e r m a i n D e p o s i t o r y I n s t i t u t i o n s Act of 1 9 8 2 ; Public L a w 9 7 3 2 0 ; Title 1; S e c t i o n s 1 1 6 , 123, a n d 1 4 1 ; O c t o b e r 15, 1 9 8 2 .
Also s e e C o n s t a n c e D u n h a m , "Thrift I n s t i t u t i o n s a n d Commercial B a n k M e r g e r s " Federal Reserve Bank of Boston, New
England Economic Review ( N o v e m b e r / D e c e m b e r 1982), p p
45-62.
2
F o r a d i s c u s s i o n of h o w m e r g e r s a n d a c q u i s i t i o n s t h a t result
in f e w e r f i n a n c i a l i n s t i t u t i o n s c a n lead t o i n c r e a s e d c o m p e t i tion, see David D. W h i t e h e a d a n d J a n L u y t j e s " C a n Interstate
Banking Increase Competitive Market Performance? An
Empirical T e s t " F e d e r a l R e s e r v e Bank of A t l a n t a Economic
Review, voL 6 9 ( J a n u a r y 1984), p p 4 - 1 0 . In t h i s s t u d y , e v i d e n c e
is p r e s e n t e d t o s u p p o r t t h e h y p o t h e s i s t h a t i n c r e a s e d links
( m e e t i n g points) a m o n g c o m p e t i n g f i r m s t h a t o p e r a t e in
g e o g r a p h i c a l l y d i s p e r s e d m a r k e t s actually m a y s t i m u l a t e
c o m p e t i t i o n . W h i t e h e a d a n d L u y t j e s c o n c l u d e d t h a t in addition to t h e i n c r e a s e d c o m p e t i t i o n p r e s u m a b l y f o s t e r e d b y
i n c r e a s e d links a m o n g m u l t i m a r k e t f i r m s in various m a r k e t s
t h e lack of scale e c o n o m i e s f o u n d in t h e b a n k i n g industry c a n
m a k e e v e n relatively small c o m p e t i t o r s influential in g i v e n
m a r k e t s S e e G e o r g e J. Benston, G e r a l d A H a n w e c k , a n d
David B Humphrey, " O p e r a t i n g Costs in C o m m e r c i a l Banking,"
Federal R e s e r v e B a n k of A t l a n t a Economic
Review, voL 6 7
( N o v e m b e r 1982), p p 6 - 2 1 . T h e a u t h o r s f o u n d t h a t c o s t p e r
a c c o u n t for b a n k s larger t h a n $ 5 0 million in deposits increased
as b a n k size increased, w h i l e c o s t s d e c l i n e d w i t h size f o r
b a n k s w i t h less t h a n $ 2 5 million in d e p o s i t s
3
T h e s a m p l e of M a i n e S & L s is small ( f e w e r t h a n 1 0 institutions) a n d w a s not r e v i e w e d s e p a r a t e l y in this study. N e w
Y o r k - c h a r t e r e d thrifts r e c e i v e d c o m m e r c i a l l e n d i n g p o w e r s
in April 1 9 8 1 . N e w York w a s not a n a l y z e d s e p a r a t e l y in t h i s
study because that state's lawmakers granted expanded
b u s i n e s s loan p o w e r s t o t h e i r s t a t e - c h a r t e r e d thrifts only 1 Vi
years prior t o p a s s a g e of Garn-St G e r m a i a Additionally,
f e w e r t h a n 2 0 S&L's in 1 9 8 4 w e r e N e w York-chartered, a n d
N e w York is not a rapidly g r o w i n g S u n Belt State. O n e of t h e
p r o p o s i t i o n s this s t u d y s e e k s t o e x a m i n e is t h e a l l e g e d l y
i n c r e a s e d t e n d e n c y of MSA- a n d S u n B e l t - l o c a t e d thrifts to
e n g a g e in c o m m e r c i a l l e n d i n g
4

A d u m m y variable w a s used, a s s u m i n g e i t h e r a value of 0 or
1 to i n d i c a t e t h e a b s e n c e o r presence, respectively, of a
specific qualitative characteristic. For e x a m p l e f o r T e x a s
F l o r i d a a n d t h e nation, a f e d e r a l l y c h a r t e r e d a s s o c i a t i o n is

38




a s s i g n e d a value of z e r o a n d a s t a t e - c h a r t e r e d S & L is g i v e n a
value of 1. All z e r o v a l u e s a r e ignored, o n l y t h e 1 v a l u e s are
calculated. H e n c e , t h e t-statistic f o r t h e resultant r e g r e s s i o n
c o e f f i c i e n t t e s t s t h e i n f l u e n c e of a state c h a r t e r on an
association's c o m m e r c i a l l e n d i n g behavior.
5
l n 1 9 8 4 , S&Ls c h a r t e r e d in T e x a s Maine, F l o r i d a a n d N e w
York a c c o u n t e d for a p p r o x i m a t e l y 2 3 p e r c e n t of a g g r e g a t e
total a s s e t s for t h e nation's s t a t e - c h a r t e r e d S&Ls a n d 8
p e r c e n t of total a s s e t s for f e d e r a l l y a n d s t a t e - c h a r t e r e d
institutions c o m b i n e d
6
T h e m o s t a p p r o p r i a t e statistical t e c h n i q u e for m e a s u r i n g
t h e s e i n f l u e n c e s is T o b i t a n a l y s i s Theoretically, Tobit analysis is t h e p r e f e r r e d t e c h n i q u e for e s t i m a t i n g S&L c o m m e r cial l e n d i n g b e c a u s e t h e d e p e n d e n t variable has a l o w e r
l i m i t T h i s limit is z e r o a n d c o m m e r c i a l loan e x t e n s i o n s t a k e
on this value for a sizable n u m b e r of observations; t h a t i s
m a n y S & L s have c h o s e n to m a k e no c o m m e r c i a l l o a n s
C o n s e q u e n t l y , t h e s t a n d a r d a s s u m p t i o n s of o r d i n a r y least
s q u a r e s r e g r e s s i o n analysis are not s a t i s f i e d
' C o m m e r c i a l bank c o n c e n t r a t i o n is m e a s u r e d b y t h e Herfind a h l - H i r s c h m a n Index (HHI) f o r a particular a s s o c i a t i o n ' s
m a r k e t The H H I is t h e s u m m a t i o n of t h e s q u a r e d m a r k e t
s h a r e s for t h a t m a r k e t ' s c o m m e r c i a l b a n k i n g o r g a n i z a t i o n s
H i g h e r H H I s indicate increased c o n c e n t r a t i o a For e x a m p l e
if a m a r k e t c o n s i s t s of five c o m m e r c i a l b a n k s that have
r e s p e c t i v e m a r k e t s h a r e s of 30, 25, 20, 15, a n d 1 0 p e r c e n t
t h e H H I w o u l d be 2 2 5 0 , w h i c h is t h e s u m of 9 0 0 + 6 2 5 + 4 0 0
+ 2 2 5 + 100.
" F o r t h e s a k e of simplicity, t h e a p p l i c a b l e - m a r k e t f o r a
particular S&L is t h e M e t r o p o l i t a n Statistical A r e a in w h i c h it
is h e a d q u a r t e r e d A l t h o u g h a n u m b e r of S & L s o p e r a t e
b r a n c h e s in o t h e r M S A s it is r e a s o n a b l e to a s s u m e t h a t t h e
p r e p o n d e r a n c e of an S&L's activity t a k e s place in t h e
"headquarter MSA"
»Robert E G o u d r e a u ( D e c e m b e r 1984), p p 3 0 a n d 3 1 .
10
F r o m 1 9 7 2 to 1 9 8 4 , a b o u t 1 0 0 a s s o c i a t i o n s r e c e i v e d Texas
charters through either de novo formations or conversions
As of y e a r - e n d 1 9 8 4 , t h e r e w e r e a p p r o x i m a t e l y 2 2 0 Texasc h a r t e r e d S & L s Prior t o 1980, t h e r e w e r e 9 Florida-chartered
S & L s By J u n e 1 9 8 4 , r o u g h l y 5 0 a d d i t i o n a l s t a t e - c h a r t e r e d
a s s o c i a t i o n s b e g a n o p e r a t i n g in t h e S u n s h i n e State e i t h e r
by de n o v o f o r m a t i o n s or c o n v e r s i o n s Florida w a s t h e h o m e
for a b o u t 1 1 5 f e d e r a l l y a n d s t a t e - c h a r t e r e d S & L s in 1 9 8 4 .
" T h e log likelihood f u n c t i o n s f o r Florida a n d t h e U n i t e d S t a t e s
are s i g n i f i c a n t That i s t h e log likelihood f u n c t i o n for t h e
Florida e q u a t i o n tells us w e c a n s t a t e w i t h a 9 5 p e r c e n t level of
c o n f i d e n c e t h a t all of t h e r e g r e s s i o n c o e f f i c i e n t s in t h a t
e q u a t i o n a r e not e q u a l to z e r o In o t h e r w o r d s s o m e of t h e
c o e f f i c i e n t s are s i g n i f i c a n t a n d n o n z e r o (positive or negative). T h e U.S e q u a t i o n posts a 9 0 p e r c e n t level of c o n f i d e n c e
primarily b e c a u s e of t h e high s i g n i f i c a n c e of t h e log of total
assets a n d c o n s u m e r loans t o t o t a l a s s e t s v a r i a b l e s
The s i g n i f i c a n c e of t h e T o b i t log likelihood f u n c t i o n is
d e t e r m i n e d by o b t a i n i n g t h e d i f f e r e n c e b e t w e e n t h e log
likelihood f u n c t i o n for t h e u n c o n s t r a i n e d e q u a t i o n (the
entire regression, w h i c h in this c a s e i n c l u d e s t h e d e p e n d e n t
variable, a c o n s t a n t term, a n d all e i g h t i n d e p e n d e n t variables) a n d t h e log l i k e l i h o o d f u n c t i o n for t h e c o n s t r a i n e d
e q u a t i o n (a regression including only the d e p e n d e n t variable
a n d c o n s t a n t term). After d e t e r m i n i n g t h e a p p r o p r i a t e deg r e e s of f r e e d o m (the n u m b e r of i n d e p e n d e n t variables in
this equation), t h e d i f f e r e n c e b e t w e e n t h e u n c o n s t r a i n e d
a n d c o n s t r a i n e d e q u a t i o n s is c o m p a r e d w i t h t h e cutoff
values in a C h i - S q u a r e Distribution Table to d e t e r m i n e t h e
s i g n i f i c a n c e of t h e e n t i r e e q u a t i o a
12
Perhaps there is a n o t h e r interpretation of the market r e s u l t s
C o m m e r c i a l loan m a r k e t s m a y be so c o m p e t i t i v e t h a t S & L s
have no s t r o n g incentive t o e n t e r d e s p i t e a m a r k e t ' s high
c o n c e n t r a t i o a rapid growth, or S & L d o m i n a n c e Accordingly,
only S & L s t h a t have c o m m i t t e d to diversifying will a t t e m p t t o
b r e a k into t h e s e m a r k e t s A p p a r e n t l y large thrifts are b e t t e r
able a n d inclined to d o s o As t i m e p a s s e s a n d a d d i t i o n a l

JUNE/JULY 1986, E C O N O M I C REVIEW

thrifts diversify, p e r h a p s m o r e c o n v i n c i n g statistical evid e n c e r e g a r d i n g t h e i n f l u e n c e of various m a r k e t characteristics o n thrift b u s i n e s s l e n d i n g b e h a v i o r m a y be obtained
13
A D . W o o d l a n d ( 1 9 7 9 ) has p o i n t e d out that e v e n T o b i t
analysis h a s a t h e o r e t i c a l d r a w b a c k w h e n used, a s it is in t h i s
study, t o t e s t share v a r i a b l e s V a l u e s of s h a r e variables are
c o n s t r a i n e d b e t w e e n z e r o a n d one. Tobit analysis a s s u m e s
that t h e d e p e n d e n t variable has a multivariate n o r m a l
distribution, b u t t h e z e r o t o o n e c o n s t r a i n t a p p l i c a b l e t o
s h a r e s gives s o m e positive p r o b a b i l i t y t h a t d e p e n d e n t
variables m e a s u r e d by s h a r e s will not have t h a t distribution.

However, in s i m u l a t i o n s c o m p a r i n g results of m o d e l s t h a t
use t h e normal d i s t r i b u t i o n w i t h m o d e l s t h a t use t h e theoretically c o r r e c t Dirichlet distribution, W o o d l a n d f o u n d that
in p r a c t i c e t h e n o r m a l m o d e l " p e r f o r m s r a t h e r w e l l e v e n
w h e n t h e true m o d e l is n o t n o r m a l "
W e p e r f o r m e d t e s t s of t h e m o d e l u s i n g t h e t o t a l value of
c o m m e r c i a l l o a n s a s t h e d e p e n d e n t variable a n d t h e log of
total a s s e t s a s t h e size measure, a l o n g w i t h t h e s e v e n o t h e r
i n d e p e n d e n t v a r i a b l e s T h e s e results, r e p o r t e d in T a b l e 1A
( A p p e n d i x II), d i f f e r v e r y little f r o m t h o s e of t h e s h a r e m o d e l
r e p o r t e d in t h e text a n d in T a b l e 1.

REFERENCES
Arshadi, Nasser. " T h e I m p a c t of D e r e g u l a t i o n o n S&Ls: S l o w
Use of N e w O p p o r t u n i t i e s , " Journal of Retail Banking, vol.
7, no. 1 (Spring 1985), p p 4 1 - 5 0 .
Baker, R o b e r t " F l o r i d a S&Ls' Use of E x p a n d e d Powers,'
Federal R e s e r v e B a n k of A t l a n t a Economic Review, vol. 6 7 ,
n o 7 (July 1982), pp. 7 - 1 5 .
Crockett, John, a n d T h o m a s A King. " T h e C o n t r i b u t i o n of N e w
Asset P o w e r s t o S&L Earnings: A C o m p a r i s o n of Federala n d S t a t e - C h a r t e r e d A s s o c i a t i o n s in Texas," R e s e a r c h
W o r k i n g P a p e r N o 1 1 0 , T h e O f f i c e of Policy a n d E c o n o m i c
Research, Federal H o m e L o a n Bank B o a r d (July 1982).
Dunham, C o n s t a n c e . " R e c e n t D e v e l o p m e n t s in Thrift Commercial Lending," F e d e r a l Reserve B a n k of Boston, New
England
Economic
Review, N o v e m b e r / D e c e m b e r 1 9 8 5 ,
p p 41-48.
D u n h a m , C o n s t a n c e . " M u t u a l S a v i n g s Banks: Are T h e y N o w
or Will They Ever B e C o m m e r c i a l Banks?" Federal R e s e r v e
Bank of B o s t o a New England Economic Review, M a y / J u n e
1982, p p 51-72.
Dunham, C o n s t a n c e , a n d M a r g a r e t G u e r i n - C a l v e r t " D e t e r m i nants of Thrift Institutions' C o m m e r c i a l L e n d i n g Activity" in
Federal R e s e r v e B a n k of Chicago, Bank Structure
and
Competition,
p r o c e e d i n g s of a c o n f e r e n c e held in Chicago,
Illinois, M a y 1983(a).
Dunham, Constance, and Margaret Guerin-Calvert
How
Q u i c k l y C a n Thrifts M o v e into C o m m e r c i a l L e n d i n g ? "
Federal R e s e r v e B a n k of Boston, New England
Economic
Review, N o v e m b e r / D e c e m b e r 1983, p p 4 2 - 5 4 .
Eisenbeis, R o b e r t A " N e w I n v e s t m e n t P o w e r s f o r S&Ls:
Diversification or Specialization?" F e d e r a l Reserve B a n k
of A t l a n t a Economic
Review, v o l 68, n o 8 ( J u l y 1983), p p
53-62.
Eisenbeis, R o b e r t A , a n d M y r o n L K w a s t " T h e Implications of
Expanded Portfolio Powers on S&L Institution Performance,"
a p a p e r p r e s e n t e d at t h e W e s t e r n E c o n o m i c A s s o c i a t i o n
M e e t i n g s , S a n Francisco, 1 9 8 2 .
Gagnon, J o s e p h . " W h a t is a C o m m e r c i a l Loan?" F e d e r a l
Reserve B a n k of Boston, New England Economic
Review,
July/August 1983, p p 36-41.

FEDERAL RESERVE BANK OF ATLANTA 40




Goudreau, R o b e r t E " S & L U s e of N e w Powers: A C o m p a r a t i v e
S t u d y of State- a n d F e d e r a l - C h a r t e r e d Associations," Federal R e s e r v e B a n k of A t l a n t a Economic Review, voL 6 9 , n o
9 ( O c t o b e r 1984), p p 1 8 - 3 3 .
G o u d r e a u , R o b e r t E " S & L Use of N e w Powers: C o n s u m e r a n d
C o m m e r c i a l L o a n Expansion," F e d e r a l Reserve Bank of
A t l a n t a Economic Review, voL 69, n o 11 ( D e c e m b e r 1984),
p p 15-35.
Iman, R o n a l d L , a n d W. J. Conover. Modern Business
N e w York: J o h n W i l e y & Sons, Inc., 1 9 8 3 .

Statistics.

McCall, Alan A , a n d M a n f e r d O. P e t e r s o a " C h a n g i n g Regulat i o n in Retail B a n k i n g Services: T h e E v i d e n c e f r o m Maine,"
Journal
of Retail Banking
vol. 2 ( S e p t e m b e r 1980), p p
46-55.
Moulton, J a n i c e M. "Antitrust Implications of Thrifts' Expanded
C o m m e r c i a l L o a n Powers," Federal R e s e r v e B a n k of Phila d e l p h i a Business Review, S e p t e m b e r / O c t o b e r 1 9 8 4 , p p
11-21.
Pavel, Christine, a n d D a v e Phillis. " C a u t i o u s Play M a r k s S&L
A p p r o a c h to C o m m e r c i a l Lending," F e d e r a l Reserve B a n k
of Chicago, Economic
Perspective,
v o l 9, n o 3 ( M a y / J u n e
1985), p p 18-27.
Pindyck, R o b e r t S , a n d Daniel L Rubinfeld.
Econometric
Models and Economic
Forecasts. N e w Y o r k McGraw-Hill,
1976.
T a t s u o k a M a u r i c e M. Multivariate
Analysis. N e w York: J o h n
Wiley & Sons, I n c , 1 9 7 1 .
Tobin, James. " E s t i m a t i o n of R e l a t i o n s h i p s for L i m i t e d Dep e n d e n t Variables," Econometrica,
voL 26, n o 1 ( J a n u a r y
1958), p p 2 5 - 3 6 .
Trebing, M i c h a e l E " T h e N e w Bank-Thrift C o m p e t i t i o n : Will It
Affect B a n k A c q u i s i t i o n a n d M e r g e r Analysis?" F e d e r a l
Reserve B a n k of S t Louis, Review, vol. 63, n o 2 ( F e b r u a r y
1981), p p 3 - 1 1 .
Woodland, AD. "Stochastic Specifications and the
tion of S h a r e Equations," Journal of Econometrics,
(1979), p p 3 6 1 - 3 8 3 .

EstimavoL 1 0

ü
•

•

GENERAL
•

•

•

Personal Income
($bil. - S A A R )
T a x a b l e Sales - Sbil.
Plane P a s s . A r r . (000's)
P e t r o l e u m P r o d , (thous.)
Consumer Price Index
1967=100
Kilowatt Hours - m i l s .

Personal Income
(Sbil. - SAAR)
T a x a b l e Sales - $ b i l .
Plane P a s s . A r r . (000's)
Petroleum P r o d , (thous.)
Consumer Price Index
1967=100
Kilowatt Hours - mils.

Personal Income
(Sbil. - SAAR)
T a x a b l e Sales - Sbil.
Plane P a s s . A r r . (000's)
Petroleum P r o d , (thous.)
Consumer Price Index
1967=100
K i l o w a t t Hours - m i l s .

Personal Income
(Sbil. - SAAR)
Taxable Sales - S b i l .
Plane P a s s . A r r . (000's)
Petroleum P r o d , (thous.)
Consumer Price Index
1967=100
Miami
Kilowatt H o u r s - m i l s .

Personal Income
(Sbil. - SAAR)
Taxable Sales - S b i l .
Plane P a s s . A r r . (000's)
Petroleum P r o d , (thous.)
Consumer Price Index
1967=100
Kilowatt H o u r s - m i l s .

Personal Income
(Sbil. - SAAR)
Taxable Sales - S b i l .
Plane P a s s . A r r . (000's)
Petroleum P r o d , (thous.)
Consumer Price Index
1967=100
Kilowatt Hours - mils.

Personal Income
(Sbil. - S A A R )
T a x a b l e Sales - S b i l .
Plane P a s s . A r r . (000's)
Petroleum P r o d , (thous.)
Consumer Price Index
1967=100
Kilowatt Hours - m i l s .

Personal Income
(Sbil. - S A A R )
T a x a b l e Sales - S b i l .
Plane P a s s . A r r . (000's)
Petroleum P r o d , (thous.)
Consumer Price Index
1967=100
Kilowatt Hours - m i l s .

PREV.
PERIOD

3,268.0
N.A.
N.A.
8,848.0

3,157.0
>
N.A.
N.A.
8975.1

+ 5

JUN

3,304.6
N.A.
N.A.
8,808.1

JUN
APR

327.9
184.8

326.2
187.7

322.2
177.3

+ 2
+ 4

398.3
N.A.
5,621.9
1,417.0

384.4
N.A.
5,056.6
1,509.0

+ 5

MAY
JUN

403.5
N.A.
5,034.2
1,408.0

+ 5
- 7

APR

N.A.
27.3

N.A.
27.9

N.A.
27.0

+ 1

MAY
JUN

43.6
N.A.
146.0
57.0

43.0
N.A.
134.8
62.0

41.7
N.A.
147.1
57.0

- 1
+ 1

APR

N.A.
3.7

N.A.
3.7

N.A.
3.6

+ 3

1Q

156.4

154.4

147.7

+ 6

2,391.4
29.0
MAY
173.0
7.9

2,699.6
31.0
MAR
174.5
8.1

2,278.3
35.0
MAY
171.0
7.6

+ 5
-17

75.7
N.A.
1,765.8
N.A.
JUN
338.5
4.5

74.3
N.A.
1,869.8
N.A.
APR
334.9
4.8

71.0
N.A.
2,016.8
N.A.
JUN
328.0
4.3

+ 7

49.4
N.A.
296.0
1,240.0

49.3
N.A.
300.9
1,331.0

+ 0

MAY
JUN

49.4
N.A.
314.7
1,238.0

+ 4
- 7

APR

N.A.
4.2

N.A.
4.0

N.A.
4.3

- 2

MAY
JUN

24.5
N.A.
38.1
84.0

24.0
N.A.
35.7
84.0

23.6
N.A.
38.4
86.0

APR

N.A.
1.8

N.A.
1.9

N.A.
1.8

53.9
N.A.

53.1
N.A.

51.1
N.A.

10

1Q

1Q

MAY
JUN

APR

1Q
MAY

APR

1Q

1Q

1Q

YEAR
AGO

ANN.
%.
CHG.

LATEST C U R R .
DATA PERIOD

N.A.

APR

N.A.
N.A.
5.5

N.A.
5.4

+ 4

+ 1
+ 4

-12

+ 3
+ 5

+ 4
- 1
- 2

0

+ 5

N.A.

N.A.
5.1

- 2

- 6

ANN.
JUN
%
1985 C H G .

JUN
1986

MAY (R)
1986

Ägriculture
Prices Rec'd by Farmers
Index (1977=100)
121
Broiler Placements (thous.)
86,019
Calf Prices ($ per cwt.)
58.40
Broiler Prices (4 per lb.)
34.00
Soybean Prices ($ per bu.)
5.19
Broiler Feed Cost ($ per ton) (Q2)189
(Q2)189

123
85,331
58.00
30.90
5.25
(Ql)189

129
90,145
62.00
31.10
5.62
(Ql)204

115
35,815
54.83
32.93
5.24
181

112
35,525
52.70
29.78
5.31
181

123
35,026
58.53
30.02
5.72
204

- 7
+ 2
- 6
+10
- 8
-11

Agriculture
Farm Cash Receipts - S m i l .
(Dates:) M a r . , M a r .
415
Broiler Placements (thous.)
12,342
Calf Prices ($ per cwt.)
50.70
Broiler P r i c e s (4 per lb.)
33.10
Soybean Prices ($ per bu.)
5.20
Broiler Feed C o s t ($ per ton)
181

12,186
49.70
30.00
5.33
179

403
11,883
56.80
29.50
5.73
195

+ 3
+ 4
-11
+12
- 9
- 7

1,088
2,388
62.50
32.00
5.20
181

2,349
55.90
29.00
5.33
230

1,320
2,159
63.00
30.00
5.73
235

-18
+11
- 1
+ 7
- 9
-23

Agriculture
Farm Cash Receipts - $ m i l .
(Dates:) M a r . , M a r .
557
Broiler Placements (thous.)
14,191
Calf Prices ($ per c w t . )
52.90
Broiler Prices (4 per lb.)
32.00
Soybean Prices (S per b u . )
5.20
Broiler Feed Cost ($ per ton)
181

14,230
49.80
29.00
5.20
180

585
14,341
56.80
29.50
5.78
225

- 5
- 1
- 7
+ 8
-10
-10

Agriculture
Farm Cash Receipts - $ m i l .
(Dates:) M a r . , M a r .
348
Broiler Placements (thous.)
N.A.
Calf Prices (S per c w t . )
55.50
Broiler Prices (4 per lb.)
35.50
Soybean Prices (S per bu.)
5.20
Broiler Feed Cost ($ per ton)
181

N.A.
56.40
31.00
5.30
245

376 - 7
N.A.
62.40 -1 1
30.50 + 1 6
5.42 - 4
250 -28

Agriculture
Farm Cash Receipts - S m i l .
(Dates:) M a r . , M a r .
Broiler Placements (thous.)
Calf Prices ($ per cwt.)
Broiler Prices (4 per lb.)
Soybean Prices (S per bu.)
Broiler Feed C o s t (S per ton)

418
6,784
53.30
34.40
5.19
181

6,760
53.30
31.20
5.29
157

569
6,643
58.50
32.00
5.85
160

-27
+ 3
- 9
+ 8
-11
+13

Agriculture
Farm Cash Receipts - $ m i l .
(Dates:) M a r . , M a r .
Broiler Placements (thous.)
Calf Prices ($ per cwt.)
Broiler Prices (4 per lb.)
Soybean Prices (S per b u . )
Broiler Feed C o s t (S per ton)

367
N.A.
53.50
30.50
5.41
181

442
N.A.
56.70
28.50
5.85
183

-17

N.A.
51.40
27.50
5.39
176

SgricuTture
Prices Rec'd by Farmers
Index (1977=100)
Broiler Placements (thous.)
Calf Prices ($ per c w t . )
Broiler Prices (4 per lb.)
Soybean Prices ($ per bu.)
Broiler Feed Cost ($ per ton)

Agriculture
Farm Cash Receipts - S m i l .
(Dates:) M a r . , M a r .
Broiler Placements (thous.)
Calf Prices (S per cwt.)
Broiler Prices (4 per lb.)
Soybean Prices (S per bu.)
Broiler Feed Cost ($ per ton)

+
-

6
5
7
9
8
7

-

+
+

6
7
8
3

NOTES:
Personal Income data supplied by U . S . Department of C o m m e r c e . Taxable Sales are reported as a 12-month cumulative t o t a l . Plane
P a s s e n g e r Arrivals are collected from 26 a i r p o r t s . Petroleum Production data supplied b y U . S . Bureau of M i n e s . Consumer Price Index data
supplied by Bureau of Labor S t a t i s t i c s . Agriculture data supplied b y U . S . Department of A g r i c u l t u r e . Farm Cash Receipts data are reported
as cumulative for the calendar year through the month shown. Broiler placements are an average w e e k l y r a t e . The Southeast data represent
the total of the six s t a t e s . N . A . = not a v a i l a b l e . T h e annual percent change calculation is based on m o s t recent data over prior y e a r .
R = revised.

40



JUNE/JULY 1986, ECONOMIC REVIEW

EMPLOYMENT
ANN.
% .
CHG

MAY
1985

Civilian Labor Force - thous.
Total Employed - thous
Total Uemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
M f g . A v g . W k l y . Hours
Mfg. Avg. Wkly. Earn. - $

117,664
109,110
8,554
7.3
N.A.
N.A.
40.5
394

117,234
108,892
8,342
7.1
N.A.
N.A.
40.7
393

114,890
106,601
8,432
7.3
N.A.
N.A.
40.3
386

Civilian Labor Force - thous.
Total Employed - thous
Total Uemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
M f g . A v g . W k l y . Hours
Mfg. Avg. Wkly. Earn. - $

14,642
1,215
7.8
N.A.
N.A.
40.9
349

14,511
1,225
7.9
N.A.
N.A.
40.6
348

14,195
1,091
7.5
N.A.
N.A.
40.8
340

+ 3
+11

Civilian Labor Force - thous.
Total Employed - thous
Total Uemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
M f g . A v g . W k l y . Hours
M f g . A v g . Wkly. E a r n . - $

1,888
1,714
174
9.6
N.A.
N.A.
41.1
357

1,868
1,699
170
9.4
N.A.
N.A.
40.6
354

1,803
1,654
148
8.6
N.A.
N.A.
40.7
340

+ 5
+ 4
+18

OACivilian Labor Force - thous.
Total Employed - thous
Total Uemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured U n e m p l . Rate - %
Mfg. A v g . W k l y . Hours
Mfg. Avg. Wkly. Earn. - %

5,570
5,253
321
5.7
N.A.
N.A.
41.2
329

5,525
5,204
317
5.8
N.A.
N.A.
41.0
327

5,290
5,030
259
5.3
N.A.
N.A.
40.8
318

+ 5
+ 4
+24

Civilian Labor Force - thous.
Total Employed - thous
Total Uemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
M f g . A v g . W k l y . Hours
Mfg. Avg. Wkly. Earn. - $

2,975
2,808
167
5.7
N.A.
N.A.
40.7
335

2,941
2,778
163
5.8
N.A.
N.A.
40.6
337

2,850
2,667
183
6.7
N.A.
N.A.
40.0
314

^ ^ ^ U r ^ ^ b o r F o r c e - thous.
Total Employed - thous
Total Uemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
M f g . A v g . W k l y . Hours
M f g . A v g . Wkly. E a r n . - $

1,985
1,728
258
13.1
N.A.
N.A.
41.0
431

1,988
1,721
267
13.6
N.A.
N.A.
40.6
428

1,995
1,768
227
11.5
N.A.
N.A.
41.7
441

- 1
- 3
+14

Civilian Labor Force - thous.
Total Employed - thous
Total Uemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
M f g . A v g . W k l y . Hours
Mfg. A v g . W k l y . Earn. - $

1,164
1,031
133
11.7
N.A.
N.A.
40.0
298

1,148
1,022
127
11.4
N.A.
N.A.
40.2
299

1,127
1,017
109
9.9
N.A.
N.A.
40.4
291

+ 3

Civilian Labor Force - thous.
Total Employed - thous
Total Uemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
M f g . A v g . W k l y . Hours
M f g . A v g . W k l y . Earn. - $

2,274
2,108
165
7.5
N.A.
N.A.
41.1
347

2,265
2,087
177
7.9
N.A.
N.A.
40.8
345

2,24b
2,0b8
163
7.6
N.A.
N.A.
41.1
333

+ 1
+ 2
+ 1

NOTES'

+ 0
+ 3

+ 1
+ 5

- 2
- 3

+ 1
+22

- 1
+ 2

0
+ 4

APR
1986

MAY
1985

.00,333
19,173
5,001
23,761
17,063
23,027
6,255
5,267

yy ,5bi
19,154
4,783
23,493
17,006
22,871
6,203
5,229

Manufacturing
Construction
Trade
Government
Services
F i n . , Ins. & R e a l . Est.
Trans. C o m . & Pub. Util.

13,021
2,309
778
3,246
2,301
2,752
753
720

1j,UUJ
2,309
771
3,235
2,303
2,747
750
719

Nonfarm Employment - thous.
Manufacturing
Construction
Trade
Government
Services
F i n . , Ins. & R e a l . Est.
Trans. Com. & Pub. Util.

1,446
355
73
311
307
248
69
71

Nonfarm Employment - thous.
Manufacturing
Construction
Trade
Government
Services
F i n . , Ins. & R e a l . Est.
Trans. Com. & P u b . Util.

ANN.
%
CHG

yö,61/
19,426
4,865
23,292
16,447
22,031
5,994
5,287

Nonfarm Employment - thous.
Manufacturing
Construction
Trade
Government
Services
F i n . , Ins. 8, R e a l . Est.
Trans. Com. & Pub. U t i l .

APR
1986

MAY
1986

Nonfarm Employment - thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins. & R e a l . E s t .
Trans. Com. & Pub. Util.

MAY
1986

T

'

+
+
+
+
+
-

2
3
2
3
4
4
1

/ic
2,317
in
3,136
2,260
2,651
725
727

+

+
+
+
+
+
-

c
1
0
2
4
4
4
1

1,444
356
71
310
307
248
68
71

1,428
359
72
304
299
242
65
73

+
+
+
+
+
+
-

1
2
1
2
3
i
6
3

4,561
522
336
1,235
698
1,186
331
136

4.
,563
521
337
,234
1.
698
1 ,190
330
137

4,430
515
334
1,195
685
1,131
314
137

+ 3
+ 1
+ 1
+ 3
+ 2
+ b
+ b
- 1

2,629
555
154
670
457
479
142
164

557
152
664
457
474
141
164

2,563
552
144
644
4b2
464
136
162

+ 3
+ 1

Nonfarm Employment - t h o u s ^ ^ 1,544
Manufacturing
167
Construction
94
Trade
382
Government
327
Services
318
F i n . , Ins. & R e a l . Est.
85
Trans. Com. & Pub. Util.
107

1,553
168
93
383
328
319
85
109

1,607
181
107
385
329
321
85
116

-4
-8
-13
- 1
- 1
- 1
0
- 8

Nonfarm Employment - thous.
Manufacturing
Construction
Trade
Government
Services
F i n . , Ins. & R e a l . Est.
Trans. Com. & Pub. Util.

909
222
36
183
191
136
37
40

909
221
35
181
193
136
37
39

840
220
37
177
190
132
35
40

Nonfarm Employment - thous.
Manufacturing
Construction
Trade
Government
Services
F i n . , Ins. & R e a l . Est.
Trans. Com. & P u b . U t i l .

• m x
1,930
too
85
465
319
384
90
93

1,917
486
83
462
319

1,855
490
83
431
305
359
89
91

n

91

-

•

+ /
+
+
+
+
+

+
+
+
+
+
+

4
1
5
4
1

8
1
3
3
1
3
6
U

All labor force dara are from Bureau of Labor Statistics reports supplied by state agencies.
Only the unemployment rate data are seasonally adjusted.
The Southeast data represent the total of the six states.

FEDERAL RESERVE B A N K O F A T L A N T A




41

SMSA

SOUTHEAST REGIONAL ECONOMIC

NONFARM EMPLOYMENT
THOUSANDS
May
May
Annual %
1986
1985
Change
f i ASAMA

1,446.2

GEORGIA

4,429.6

109.0
439.6
378.1
137.1
801.2
431.4
94.9
101.0
748.8
293.8

Daytona Beacn
Ft. Lauderdale
Jacksonville
M elbourne
Miami
Orlando
Sarasota
Tallahassee
T a m p a - S t . Pete
West Palm Beach

360.1
109.4
155.5
115.6

4,51o.3

•PORIUA

1,427.7

377.4
114.4
158.2
117.1

Birmingham
Huntsville
Mooile
Montgomery

100.9
425.2
360.4
135.2
782.8
409.8
93.6
98.0
731.1
285.2

UNEMPLOYMENT
PERCENT
Apr
May
1986
1986

+ 1

INDICATORS

RATE

PLANE PASSENGER

May
1985

May
1986

ARRIVALS

May
1985

Annual X
Chanqe

9.6

y.4

9.1

146.1

120.3

5
D
2
1

7.6
b.3
10.1
7.5

7.4
6.3
10.0
6.7

6.8
5.5
8.2
7.4

66.7
33.5
28.1
17.8

54.3
26.0
24.6
15.4

+ 2

d.7

5.8

5.2

2,391.1

2,271.4

+ 5

+
+
+
+
+
+
+
+
+
+

4.2
4.1
5.2
5.5
6.1
4.4
3.9
3.6
5.0
5.2

4.6
4.3
5.5
5.6
6.8
4.4
4.0
3.8
5.0
5.3

3.7
4.1
4.0
3.9
6.3
3.9
3.4
3.3
4.2
5.1

25.3
281.2
121.4
17.0
826.9
491.9
49.7
31.1
401.0
145.6

22.4
233.6
106.6
28.1
775.6
306.7
56.2
28.7
566.9
146.6

+13
+2u
+14
-40
+ 6
+60
-12
+8
-29
- 1

1,801.0

-2

15.7
10.4
5.0
42.0

-2
+14
- 4
-12
+16

+
+
+
+

8
3
5
1
2
5
1
3
2
3

+23
+29
+14
+16

mm

m

2,629.4

2,563.0

+ 3

5.6

5.5

6.6

1,765.9 ~

Atlanta
Augusta
Columbus
Macon
Savannah

1,311.8
145.8
89.3
116.3
96.8

1,267.0
144.4
89.2
113.0
96.0

+
+
+
+
+

4
1
0
3
1

4.4
6.2
7.2
5.7
6.2

4.4
6.0
7.1
5.8
6.3

5.2
6.8
8.3
8.4
7.5

l?685!o
17.9
10.0
4.4
48.6

1 0 UISÌA N A

1,543.9

1,607.0

-4

13.0

13.4

11.4

314.7

329.9

-5

213.2
518.2

217.3
536.4

-2
-3

10.9
10.9

11.5
10.9

10.1
11.3

34.3
280.4

28.0
301.9

+22
- 7

909.1

839.6

+ 8

11.5

11.0

9.4

38.1

35.2

+8

8.5
7.6

7.4

-20
+13

Baton Rouge
N e w Orleans
PlSSISSIPPI
Biloxi-Gulfport
Jackson

165.1

6.6

33.8

5.4
29.8

1,855.2

+ 4

7.3

7.8

7.3

272.0

171.0

177.6
228.3
421.1

+ 1
+ 2
+ 3

6.3
7.2
4.4

6.9
7.7
4.8

6.8
6.8
4.3

25.0
46.1
200.9

18.9
39.6
112.5

Birmingham
Huntsville
M obile
Montgomery
•
M
m
Daytona Beach
Ft. Lauderdale
Jacksonville
Melbourne
Miami
Orlando
Sarasota
Tallahassee
Tampa-St. Pete
West Palm Beach

664.1

RESIDENTIAL SINGLE-FAMILY
BUILDIN G P E R MITS
N O . OF UNITS, 12-MO. R A T E
May
May
Annual X
1986
1985
Chanqe

-5

225.0
97.5
81.7
52.4

246.2
96.8
113.6
55.5

- 9
+ 1
. -28
-6

5,349.0

5,020.6

+ 7

103.8
o24.4
287.4
185.4
597.4
1,133.7
67.4
59.0
929.8
483.4

84.8
429.5
332.6
211.4
616.1
653.3
81.3
52.9
937.0
518.3

+22
+45
-14
-14
-12
+74
-17
+12
-1
-7

632.1

pORGIA

10,202
2,950
l,6b3
746
-

8,961
2,352
1,404
898

+14
+25
+18
-17

RESIDENTIAL MULTI-FAMILY
BUIL DIN G P E R MITS
N O . OF UNITS, 12-MO. R A T E
May
May
Annual %
1986
1985
Chanqe
8,211

0,829

2,131
2,094
123

•tuisiana
Baton R o u g e
N e w Orleans
Mississippi

-

-

-

+ 7

94,691

98,533

4,866
8,680
7,716
5,765
6,717
13,064
1,946
1,321
15,585
11,563

4,469
5,269
6,224
5,224
5,220
11,381
2,079
1,628
16,177
11,673

+ 9
+65
+24
+10
+29
+15
-6
-19
-4
-1

2,762
12,726
7,080
3,434
7,982
13,193
1,441
298
16,508
9,106

3,326
11,568
6,963
4,716
10,063
8,208
1,772
428
18,022
9,737
" 24,187
^ 7 9 2
1,828
469

1,844.8

+ 7~

50,334

44,141

+14

28,416

1,372.6
79.3
75.1
41.2
97.8

+ 4
-32
-32
+29
-3

34,668
3,418
618

3M43
2,756
515

+10
+24
+20

19,206
1,991
860

-

-

-

-

955.2

1,278.3

-25

10,703

12,699

-16

4,739

170.7
420.1

277.3
463.5

-38
-9

3,698

2^090
4,989

-26

1,461

3,838

307.3

^ ^

250.0

+23

5,828

6,357

-8

2,724

3,655

71.0

+52

1,543

1,533

+ 1

1,021

1,976

+22

20,489

14,971

+37

18,800

21,670

74.5
99.8
476.6

+24
+ 7
-33

1,740
6,610

1?273
1,652
4,554

+ 5
+45

1,385
7,430

l.iel
637
13,063

3?7
108.0

Chattanooga
Knoxville
N ashville

167.1
106.9
318.6

+431
+ 7
-86

-

99,036

:

1,423.4
53.6
51.3
53.3
94.7

Biloxi-Gulfport
Jackson

+20

401
1,949
849

933.0

Atlanta
Augusta
Columbus
Macon
Savannah

mm

+32
+16
+78

NONRESIDENTIAL BUILDING PERMITS
M I L L I O N S $, 1 2 - M O . R A T E
May
May
Annual t
1986
1985
Chanqe
J|ABAMA

•

+59

179.5
231.8
433.4

Chattanooga
Knoxville
Nashville

159.9

+ 0
+ 3

1,930.9

(TENNESSEE

•

u

IJ273

_

_

_

_

_

•

•

M

M
+ 9
+83

-

"~

9,642

•

-17
+10
+ 2
-27
-21
+61
-29
-19
-8
-6

-

•

•

•

I

-62
"25

1

•

-48
J J I I H —
+19
-43

NOTES:Labor Force data are from Bureau of Labor Statistics Reports supplied by state agencies. Plane Passenger Arrivals are collected from
26 airports. Building Permit data are supplied by the U. S. Bureau of the Census. Nonresidential data excludes the cost of construction
f o r publicly owned buildings.

42



JUNE/JULY 1986, E C O N O M I C REVIEW

CONSTRUCTION
MAY
1985

MAY
1985

APR
1985

MAY
1984

ANN.
% .
CHG.

S Mil.
61,148
8,846
15,823
11,643
2,403
1,090

62,887
8,776
16,058
11,619
2,302
1,104

64,751
8,635
16,307
10,128
1,994
1,191

- 6
+ 2
- 3
+15
+21
- 8

Residential Building
Value - $ Mil.
Residential Permits - T h o u s .
Single-family units
Multifamily units
Total Building Permits
Value - $ M i l .

Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools

10,361
1,178
2,482
2,343
420
161

10,632
1,173
2,512
2,339
390
159

9,991
983
2,371
2,039
357
111

+ 4
+20
+ 5
+15
+18
+45

Residential Building Permits
Value - $ M i l .
Residential Permits - Thous.
Single-family units
Multifamily units
Total Building Permits
Value - $ M i l .

Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools

Mil.
632
59
149
181
21
16

649
57
167
169
18
17

664
63
121
135
51
9

- 5
- 6
+23
+34
-59
+78

Residential Building Permits
Value - $ M i l .
Residential Permits - Thous.
Single-family units
Multifamily units
Total Building Permits
Value - $ M i l .

: Mil.
5,349
469
1,196
1,203
243
53

5,455
469
1,145
1,238
213
54

5,021
542
1,066
1,154
163
42

+ 7
-14
+12
+ 4
+49
+26

Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Single-family units
Multifamily units
Total Building Permits
Value - S M i l .

GEORGIA
s u m
jildinq Permits - $ M i l .
Nonresidential Building Pei
1,978
Total Nonresidential
351
Industrial Bldgs.
524
Offices
392
Stores
35
Hospitals
26
Schools

2,008
349
528
382
36
21

1,845
240
521
309
32
15

+ 7
+ 4
+ 1
+27
+ 9
+73

Residential Building Permits
Value - $ M i l .
Residential Permits - Thous.
Single-family units
Multifamily units
Total Building Permits
Value - $ M i l .

APR
1985

MAY
1984

ANN.
%
CHG.

88,225

87,135

75,155

+17

1,005.0
770.4

992.9
782.8

899.6
739.6

+12
+ 4

149,373

150,022

139,906

+ 7

15,564

15,537

13,599

+14

203.7
157.6

203.1
162.5

186.2
164.5

+ 9
- 4

30,293

30,676

22,294

+36

607

595

476

+28

10.2
8.2

9.9
8.5

9.0
6.8

+13
+21

1,239

1,244

1,140

+ 9

8,696

8,711

7,741

+12

106.2
94.7

106.6
97.1

99.0
98.5

+ 7
- 4

14,044

14,166

12,762

+10

3,546

3,480

2,860

+24

50.3
28.4

49.6
28.3

44.1
24.2

+14
+17

5,525

5,488

4,705

+17

707

728

879

-20

10.7
4.7

11.0
5.3

12.7
9.6

-16
-bl

1,662

1,778

2,157

-23

350

352

368

- 5

5.8
2.7

5.8
2.9

6.4
3.7

- 9
-2/

657

658

618

+ 6

1,658

1,672

1,275

+30

20.5

20.1
20.4

15.0
21.7

+37
-14

3,044

2,208

+36

12-month cumulative rate

Building
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools

S^^ffiH^^fflin^ermit^

FLORIDA
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools

LOUISIANA
N o n ^ s i d e n t i a l Building Permits
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools

FMÌ1.
9,552
36
325
215
34
43

10,507
39
376
222
35
45

12,783
46
342
245
69
35

-25
-22
+33
-12
-51
+23

Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Single-family units
Multifamily units
Total Building Permits
Value - $ Mil.

N o n r e ^ d e n t i a l Building Permits
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools

307
31
69
79
16
6

307
33
65
74
17
7

250
13
42
47
8
5

+23
+138
+64
+68
+100
+20

Residential Building Permits
Value - $ M i l .
Residential Permits - Thous.
Single-family units
Multifamily units
Total Building Permits
Value - $ M i l .

1,162
226
232
253
70
15

933
78
280
149
34
5

+22
+194
-22
+83
+103
+200

Residential Building Permits
Value - $ Mil.
Residential Permits - T h o u s .
Single-family units
Multifamily units
Total Building Permits
Value - $ M i l .

TENNESSEE
m f l H M M B ^ H H H
Nonresidential Building Permits
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools

MÍ:
1,138
229

218
272
59
15

urn i n n n i milium
i
18.8
3,006

MOTESData supplied by the U . S . Bureau of the Census, Housing Units Authorized By Building Permits and Public Contracts C-40.
Nonresidential data excludes the cost of construction for publicly owned buildings. Th'4 southeast data represent the total of the six
states.

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43

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