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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 about Federal Reserve policies and the economic environment and, in particular, t o narrow the gap between specialists and concerned l a y m e a Views expressed in the E c o n o m i c Review are not necessarily those of this Bank or the Federal Reserve System Material may be reprinted or abstracted If the Review and author are credited. Please provide the Bank's Research Department with a copy of any publication containing reprinted material. Free subscriptions and additional copies are available from the Information Center, Federal Reserve Bank of Atlanta, 104 Marietta S t r e e t N. W., Atlanta, G a 3 0 3 0 3 2 7 1 3 (404/521-8788). Also contact the Information Center t o receive S o u t h e a s t e r n E c o n o m i c I n s i g h t a free newsletter on economic trends published by the Atlanta Fed twice a month. The Review Is indexed online in the following data-bases: ABI/lnform, Magazine Index Management Contents, PAIS and the Predicasts group. 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 Southeastern Economic Insight Regional Economic Updates Atlanta Fed Dollar Index Thrift Diversification Foreign Investment in the Southeast' plus a statistical summary page in each issue Southeastern Economic Insight covers conditions, trends, and forecasts for the region's industries and general economy. The newsletter Insight is offered free of charge by the Federal Reserve Bank of Atlanta. Return to: Information Center Federal Reserve Bank of Atlanta 104 Marietta Street N.W. Atlanta Georgia 30303-2713 Please start my subscription to Southeastern Economic Insight N a m o . A d d r e s s ^ C i t y FEDERAL RESERVE B A N K O F A T L A N T A .State. .Zip. 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. FEDERAL RESERVE B A N K O F A T L A N T A 43 Federal Reserve Bank of Atlanta 104 Marietta St, N.W. Atlanta, Georgia 30303-2713 Address Correction Requested Bulk Rate Ü . S . Postage PAID Atlanta, Ga. P e r m i t 292