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E c o n o m i c
g g s
FEDERAL RESERVE BANK OF ATLANTA
OCTOBER 1982
Review H
PRODUCTIVITY
BANKING
CHECKS
International Activity Booms in Southeast
"Safekeeping" as a Transition Product
INVESTMENT
COAL
Regaining the U.S. Edge
U.S Fiscal Policy and 70s Slowdown
Utilities' Demand Heats Up
Economic
Review Wm
FEDERAL RESERVE
BANK
OF ATLANTA
President:
William F. Ford
Sr. Vice President and
Director of Research:
Donald L. Koch
Vice President and
Associate Director of Research:
William N. Cox
Financial Structure:
B. Frank King, Research Officer
David D. Whitehead
Larry D. Wall
National Economics:
Robert E. Keleher, Research Officer
Stephen O. Morrell
Mary S. Rosenbaum
Regional Economics:
Gene D. Sullivan, Research Officer
Charlie Carter
William J. Kahley
Database Management:
Delores W. Steinhauser
Payments Research
Veronica M. Bennett
Paul F. Metzker
Visiting Scholars:
James R. Barth
George Washington University
James T. Bennett
George Mason University
George J. Benston
University of Rochester
Gerald P. Dwyer
Emory University
Robert A Eisenbeis
University of North Carolina
John Hekman
University of North Carolina
Paul M. Horvitz
University of Houston
Peter Merrill
Peter Merrill Associates
Communications Officer:
Donald E. Bedwell
Public Information Representative:
Duane Kline
Editing:
Gary W. Tapp
Graphics:
Susan F. Taylor
Eddie W. Lee, Jr.
The E c o n o m i c Review seeks to inform the public
about Federal Reserve policies and the economic
environment and, in particular, to narrow the gap
between specialists and concerned laymen. Views
expressed in the E c o n o m i c Review aren't necessarily
those of this Bank or the Federal Reserve System.
Material may be reprinted or abstracted if the Review
and author are credited. Please provide the Bank's
Research Department with a copy of any publication
containing reprinted material. Free subscriptions and
additional copies are available from the Information
Center, Federal Reserve Bank of Atlanta, P.O. Box
1731, Atlanta, G a 30301 (404/586-8788). Also contact the Information Center to receive S o u t h e a s t e r n
E c o n o m i c Insight, a free newsletter on economic
trends published by the Atlanta Fed twice a month.
2
>J
O C T O B E R 1982, E C O N O M I C R E V I E W
^
"¡1
Regaining the U.S. Competitive Edge:
The Shared Destiny
4
How have foreign m a n u f a c t u r e r s b e e n a b l e to
slash into the U.S. s h a r e of m a n y key markets?
Can a n d s h o u l d their m e t h o d s b e u s e d in the
U.S.? Can b a s i c A m e r i c a n habits a n d attitudes b e
changed?
Check Safekeeping: Transition to the
Electronic Future
23
How close are w e to a paperless payments system?
Not c l o s e e n o u g h , say m a n y b a n k e r s , w h o are
turning to " c h e c k s a f e k e e p i n g " to ease the c h a n g e
from c h e c k s to a c h e c k l e s s system.
Electric Utilities in the Southeast
Turning to Appalachian Coal
International Banking Activity
in the Southeast:
Rapid Growth and Change
13
International b a n k i n g activity in the S o u t h e a s t is
e x p a n d i n g m u c h faster than in the rest of the
nation. What's c a u s i n g the e x p l o s i o n , w h o is " i n
the g a m e , " a n d w h a t is the o u t l o o k for c o n t i n u e d
growth?
Government Spending, Tax Rates, and
Private Investment in
Plant and Equipment
34
Capital investment s u r g e d in the mid to late 1 9 6 0 s
b u t s l o w e d in the early 1 9 7 0 s , d e s p i t e a rapidly
e x p a n d i n g work force. What effects d i d government
s p e n d i n g a n d tax p o l i c i e s have o n c a p i t a l investment, productivity a n d w a g e s ?
-fi
44
Statistical Supplement
bb
The s o u t h e a s t e r n c o a l industry may b e o n the
verge of a revival. A l t h o u g h major uncertainties
c o m p l i c a t e the picture, the overall o u t l o o k is
promising.
3
V O L U M E LXVII, N O . 9
Whatever happened to the Yankee trader?
You remember the Yankee trader. He once
commanded the respect overseas that hostile
nations usually reserve for the U.S. Marines. He
was the aggressive exporter whose vessels
sailed the world looking for new markets —
and, ironically, prompted Commodore Perry to
sail into Japan to open that country to foreign
trade less than 130 years ago! We'll talk later
about how Japan has taken advantage of that
opportunity to compete in the world market —
with a vengeance.
Our country emerged from World War II as
the globe's unchallenged leader, a country that
was a superpower economically as well as
militarily. Goods bearing the identification
" M a d e in U.S.A." were prized around the world.
W e boasted a superiority in quality and productivity that let us dominate world markets,
even though our own domestic market was
growing so fast that many industries didn't
even bother to solicit sales overseas. W h e n
foreign goods did find their way onto our
domestic shelves, they often were cheap imitations that our comedians used to joke about.
W e don't joke about foreign goods any more.
Foreign competition is no laughing matter for a
nation that suddenly finds itself under siege,
challenged not only in foreign markets but in
our o w n automobile showrooms and in our
local department stores. Whether we're talking
about steel, autos, shirts, shoes, televisions or
stereos, we find our markets flooded with
goods from overseas. American business
people have complained that the foreign
firms have won their share of our markets
by undercutting our prices, that they
are playing dirty pool by relying on
government subsidies. Yet, all too
frequently these days foreign manufacturers seem to be capturing
Regaining the
U.S. Competitive
Edge:
The Shared
Destiny
domestic sales by equalling or even surpassing
the quality of goods produced by American
industries — while frequently turing them out at
lower cost.
What about our o w n exports? The U.S. accounted for 15 percent of the world's export
sales in 1965, just 17 years ago. That share has
skidded to 11 percent. Last year, as a strengthening dollar hurt us competitively, we experienced a near-record merchandise trade deficit
of $27.9 billion. Those figures don't indicate
how dramatically we've lost markets where we
used to be awesome competitors (Chart 1).
W e don't even seem capable of transporting
goods on our own ships these days. Did you
know that our merchant marine, the largest in
the world as recently as 1950, has slipped to a
distant 11th — trailing such countries as Italy
and Singapore? According to the National Maritime Council, the share of U.S. oceanborne
foreign trade on registered U.S. flag ships has
declined in the last 30 years from over 40
percent to barely 5 percent. Our shipbuilding
To c o m p e t e in international
markets, the three major players
on the U.S. s i d e — b i g business,
government, and l a b o r — m u s t
recognize their c o m m o n goals.
Excuses about the success of
foreign competitors only cloud
the issue.
has suffered as well; where we used to rank as
the world leader, we're now trailing in fifth place.
If we've had trouble dominating the seas in
recent years, we're even beginning to take flak
in our skies. Aerospace, of course, has been a
winner for us in world markets for decades. It
accounted for $17.7 billion in exports last year
and racked up a $13.1 billion trade surplus —
both record highs for our most lucrative export
industry.
But competition is threatening even that
industry and its most exportable commodity,
the jet airliner. Foreign competition, and the
recession that has dampened air travel, prompted
Lockheed Aircraft to announce recently that it
will stop building commercial jets after it phases
out production of its TriStar in 1984. Boeing
and McDonnell Douglas, the t w o surviving
manufacturers of jetliners, face surprising competition from European producers w h o have
teamed up to make and sell both commercial
and military aircraft.
Our planemakers' biggest threat comes from
the consortium of European manufacturers
that built the A300 Airbus. That collaboration
of governments and firms in France, Britain,
West Germany and Spain, called Airbus Industries,
by 1981 had captured a fourth of the world
market for big jets that U.S. companies virtually
monopolized a few years back. During the first
five months of 1982, Airbus w o n almost 50
percent of the new orders for large aircraft.
What's more, it is working on another new jet
transport that could pose tough competition
over the next 15 years as airlines phase out
their older planes.
As often seems to happen when U.S. industries
find themselves challenged, our aircraft manufacturers are complaining that the Europeans
aren't playing fair — that Airbus relies on
government subsidies and is boosted by preferential loans to foreign purchasers. Whether
it's unfair or not, our own airlines are hungry
enough for financing that they are taking the
bait. In 1981, foreign imports captured a 6
percent share of the sales of large aircraft in the
U.S. market, up from less than 1 percent in
1970. A Florida-based airline (Eastern) is operating the A300, and you'll surely see more flying
into major Florida cities as sales increase.
What about the obvious victims of foreign
competition? To refresh your memory, let's
briefly run through the litany of industries
FEDERAL RESERVE B A N K O F A T L A N T A
clobbered by foreign competition over the
past 15 years:
O Automobiles — I m p o r t e d autos have
become such a fact of American life that owners
have been known to plaster bumper stickers
reading "Buy American" on their Toyotas and
Volkswagens. Imports, which used to turn heads
when they made their inaugural in U.S. markets
a couple of decades ago, accounted for only 7
percent of our domestic sales in 1960. But they
passed the 27 percent penetration level in
1981 and 31 percent this past July — and they
don't rate a second glance on Main Street
these days. Imported cars contributed to the
loss of nearly 132,000 American jobs last year.
Our own exports? Excluding shipments to Canada,
they account for less than 1 percent of our
production; they don't buy many Chryslers in
Yokohama.
O Steel — Another of our hardest-hit industries, steel firms have watched the foreign
share of our domestic market climb from 5
percent in 1960 to more than 19 percent last
year. The competition, along with the national
C h a r t 1 . Merchandise Trade Balance of Payments-1981
30
18
—
U.S. Dollars
in billions
-
Surplus
6
-
1
1
U.K.*
-6
-
West
Germany
Japan
France
-18
-
-30
U
Deficit
U.S.
1 9 8 0 figure for U.K. (1981 U.K. figure is unavailable).
Source: U.S. Department of Commerce
recession, has idled more than 100,000 American
steelworkers. Most of that competition comes
from Europe. U.S. firms have gone to court,
claiming that European governments sell their
steel in this country at a loss because they are
more interested in creating jobs than in turning
profits.
5
O Textiles and apparel — The mills that
produce America's fabric and clothing were
among the earliest to be challenged by overseas
competitors. Textile imports have increased
from a 6 percent share of the U.S. market in
1960 to 14 percent in 1981. If current penetration
levels continue, imports could claim as much
as 40 percent of our total domestic market by
the end of the decade; that could cost the U.S.
1.2 million future jobs. U.S. manufacturers are
trying to fight back by automating plants, since
they can't match the payrolls of low-wage
competitors in the Orient. The prospect of
future competition from China, with its one
billion people, is enough to keep U.S. textile
executives awake at night. In the first four
months of 1982, China passed South Korea to
become the third largest textile exporter to our
country, behind Hong Kong and Taiwan.
O Consumer electronics — An American
industry that has watched its markets shrink
since the late 1960s, when Japanese producers
hurried to fill a gap in our product line by
introducing low-cost portable television sets.
Did you know that, today, over 90 percent of
the black-and-white television sets sold in the
U.S. are foreign imports? American-made radio
receivers are becoming a rarity. Sixty-seven
percent of car radios and tape players and 94
percent of all other radios sold in the U.S. are
imported. Did you know that even TV sets
bearing some familiar names, such as "Magnavox,"
are manufactured under foreign ownership?
Only five U.S.-owned firms now produce TV
sets, according to the Commerce Department.
That's a shadow of the 18 in business as
recently as 13 years ago.
The Department of Labor has reported that
several other industries traditionally strong at
exporting are showing signs of weakening in
foreign markets. Besides aerospace, mentioned
earlier, they cite power generating machinery,
pharmaceuticals, even computers. And product
lines that can't compete overseas ultimately
may not be able to compete at home, either.
W e could cite other examples, but that
should be depressing enough. Overall, it tells a
story that we may not want to hear: that in
industry after industry, foreign manufacturers
are doing a better j o b than in the past of
slugging it out with American industry — not
only overseas, but right here in our own marketplace And that is truly frightening, considering
6
the growing importance of international trade
to our economy. Even though aggressive competitors have been narrowing our share of
world trade, our merchandise exports grew
from the equivalent of 4 percent of our nation's
output in 1965 to 8 percent now. W e are
relying more on world trade, in other words, at
a time when other countries are beating us at
the game.
Japan: An Economic Powerhouse
Various countries have challenged America's
leadership in a host of competitive markets:
the West Germans in textile machinery, the
Italians in shoes, Hong Kong and Taiwan in
clothing. But Japan stands alone, depending on
your perspective, as either a marvelous success
" W e are relying more on
world trade . . . at a time
when other countries are
beating us at the game."
story of international commerce or as an economic threat to our national well-being. As
NCR Chairman William S. Anderson observed
recently, " I t is Japan, more than any other
nation, which exemplifies the seriousness of
the challenge to American industrial leadership."
Anderson says Japan has struggled up from
the humiliation and devastation of defeat to
become "the most competitive nation on earth."
There is no question that the island nation
has hoisted itself by the bootstraps to earn the
respect of trading partners far more richly
endowed in natural resources. None of its
competitors can claim to be more generously
endowed in national will. Over the past 35
years, Japan has developed through a sense of
mutual purpose into an economic powerhouse
that seems capable of competing with anyone,
anywhere, anytime.
Certainly Japan's success hasn't come without
problems. The Japanese government has been
experiencing budget deficits since the mid1970s — and government spending has begun
to crowd private investors out of the capital
markets. Another problem is the country's
aging population that has strained the pension
system and is jeopardizing the national commitment to lifetime employment. Japan's traditionally short average life expectancy at birth had
grown to the world's longest by 1981, 75.5
years for the Japanese male compared with
68.7 for his American counterpart.
What's more, Japanese government forecasters
recently reduced economic growth projections
for 1982 from 5 percent to 2 1/2 percent. Yet
even that lower estimate exceeds the expected
growth of the United States, Britain or even
West Germany. And consider that some expect
Japan's economy to continue growing right into
the 1990s.
Consider that Japan's export volume climbed
over 10 percent in 1981, while our export
volume dropped 3 percent. The OECD predicts
that during the next t w o years Japan's export
volume will increase 10 percent and ours will
decrease 10 percent Japan's success at exporting
helped it to become in 1980 the world's leading
maker of automobiles, the largest manufacturing
industry in the world. Its exports are continuing
to climb although protectionism has flared not
only in Europe but in the U.S. Unhappily for the
protectionists, they find that when they restrict
one Japanese import the Japanese simply move
along to another product line. And they seem
to come out of it stronger than they were
before.
Critics argue that the Japanese can be protectionists in their o w n way, by erecting a
multitude of non-tariff barriers that can make it
difficult for American firms to penetrate their
tight domestic market. Our government has
taken a harder line recently by urging the
Japanese to open their markets as freely as we
open ours. That's only fair. Our industries
should test those markets and determine whether
the Japanese are opening the door as wide as
they claim. And yet, despite all the alleged
barriers, it's interesting to watch a company
such as IBM competing successfully by establishing a subsidiary on Japanese turf. IBM has
carried the fight to Japan's shores and has kept
the local manufacturers on the defensive. (It's
also interesting, at least, that IBM has been
described as one of the few U.S. companies
with characteristics similar to those found frequently in Japanese corporations. Other U.S.
C h a r t 2 . M a n u f a c t u r i n g O u t p u t per M a n H o u r
35
Percent Increase from 1977 to 1981
28
21
14
0
U.S.
West
U.K.
Germany
Source: U.S. Department of Commerce
France
Japan
firms with similar characteristics include Eastman
Kodak, Texas Instruments, Hewlett-Packard,
Procter & Gamble and Delta Airlines — all of
which have been described as being among
the best-managed in the world.)
Advocates of protectionism cannot ignore
the Japanese productivity that has helped make
that country such a competitor. With the exception of a recent weakening, Japan's productivity
has been increasing steadily while that of
Western nations has stagnated. Japan's 29.1
percent manufacturing productivity increase
(based on o u t p u t per man hour) between 1977
and 1981 far outdistanced those of her major
trading partners (Chart 2). The U.S. registered
the smallest increase, only 4.5 percent. Those
figures clearly indicate that our o w n productivity, though still the highest in the world,
seems to be withering.
Keys to Japan's Success
How d o the Japanese succeed in improving
productivity? How, in fact, have they performed
such an economic miracle? There are a number
of contributing factors:
High on any list of factors encouraging productivity is a Japanese financial and economic
climate that encourages the world's highest
personal saving rate, around 19 percent this
year (Chart 3). Compare that with a U.S. rate of
6 percent, the poorest of any industrialized
nation.
C h a r t 3. Saving
25 r
Rate-1982
Chart 4. Gross Investment - 1981
Percent
5 0 T Percent of GNP
20 -
40
15 -
30
10
-
5
"
nil
20
10
Japan
I I
I I
France
source: OECD
West
I I
U.K.
I I
U.S.
Germany
Japan's savings have helped generate a high
level of investment that has channeled billions
of yen into new plants and equipment. In 1981,
Japan's gross investment was 31 percent of the
nation's CNP — much higher than in other
industrialized countries (Chart 4). Consider
that the average machine tool in Japan is half
the age of its counterpart in America — and
consider the implications of that fact for productivity. Japan's rapid expansion into robotics
also is revealing from the standpoint of industrial
investment According to the Robot Institute of
America, Japanese industry counted 14,246
robots in action as of last December; our
country, although the world runnerup, could
claim only 4,700 — less than a third as many
(Chart 5).
A related factor in Japan's success in the
world marketplace is the nation's determination
to place a higher priority on investment than on
consumption. Japansese investment funds tend
to flow into productive enterprises rather than
into housing and real estate, while we emphasize
the latter through tax writeoffs on consumer
borrowing.
Our nation has been devoting a disproportionately large share of both its CNP and its
savings to housing. That has been great for
builders and realtors and for the southeastern
economy, but it has proven to be a depressant
for industrial productivity. W e as a nation are
finally becoming concerned with such things;
the new tax law represented an encouraging
0
Japan
West
France
Germany
Source: U.S. Department of Commerce
U.K.*
U.S.
1
* 980 figure
step toward redirecting our capital away from
housing and into savings and thus into plants
and equipment.
Some economists project that the new Individual Retirement Accounts, c o u p l e d with
reductions in the top tax rate, the liberalization
of estate taxes and other changes, could boost
our national savings rate by 2 or 3 percent of
CNP. That's still nothing to shout about by
international standards, but it is an encouraging
shift. We'll still need fundamental changes in
the incentives to save if we as a nation are to
C h a r t 5 . R o b o t s in P l a c e ( 2 7 , 3 8 6 )
December 1981
8
OCTOBER 1982, E C O N O M I C REVIEW ^
generate the investment cash for massive
^industrialization.
We'll need continued progress at restraining
inflation if we are to convince our public to
save money and encourage investment. By
robbing us of our incentives to save, inflation
has been sapping our national capability to
modernize and expand our facilities. The Federal
Reserve is dedicated to thwarting inflation, and
we'll work for continued progress in that truly
crucial fight.
Patience, Reward and Cooperation
Let's look at some of the other factors that
have contributed to Japan's emergence as a
world trader:
Japan's industry is characterized by an emphasis on the group rather than the individual, a
phenomenon reflected in the close and cooperative interaction between business, workers
and the government. Participatory management
generates both new ideas and a sense of
teamwork between management and labor. In
major firms, those workers enjoy the promise
of lifetime employment and an accompanying
sense of loyalty uncommon in our industry.
W e can't overlook Japan's dedication to
projects with a long-term payout, so unlike our
own corporate preoccupation with prompt
bottom-line results. "Japan," as one analyst
summed it up recently, "has patient money."
That's one reason the Japanese are leaders in
semiconductors, a field we pioneered but in
effect shelved because it didn't promise immediate results. Japan's longer-range philosophy
is reflected in the fact that its industries report
profits only yearly, not quarterly as is standard
in American industry.
Corporate success is rewarded in Japan for
the employee as well as for his company.
Employees in successful companies receive
larger paychecks and more attractive benefits
than those in less productive firms. And the
concept of lifetime employment doesn't necessarily percolate d o w n from the big companies
to less favored firms, where employees may be
subject to layoff in a slowdown. The Japanese
distinction between successful and less successful firms has generated some impressive
dynamism. It stands as an interesting contrast
to our system, which in recent years has expended
a disproportionate amount of energy and tax
FEDERAL RESERVE BANK OF ATLANTA 9
money shoring up inefficient companies threatened with failure. Misguidedly, in the U.S. we
put good money after bad money attempting
to save the losers.
Japan also has benefited from its freedom
from military commitments, which account for
a sizable chunk of our o w n budget. Japan has
spent a mere 1 percent of its gross national
product on military personnel and hardware
over the past t w o decades, about $1 trillion
less than the U.S. over those same years. That
means the Japanese government can spend far
less than we spend on research and development, yet achieve a more substantial industrial
return for its investment.
As mentioned previously, a high degree of
internalized cooperation between big government big labor and big business also characterizes
.the Japanese style. In Japan these Big Three
work together instead of working against each
other, as happens far too often in our country.
Japan's cooperative spirit may grow from its
national emphasis on pulling together with a
single-minded purpose. Government, labor and
industry are so mutually supportive that their
collaborative effort has come to be characterized
by outsiders as "Japan Incorporated." A trace
of sarcasm may creep into that characterization,
but I think it reflects a lot of respect and awe as
well.
This cooperation is reflected in the role of
MITI, the Ministry of International Trade and
Industry. MITI is the influential government
ministry that encourages industries that seem
to hold a promising future in international
trade — and to deemphasize those, such as
aluminum, chemicals and shipbuilding, deemed
to have less prospect for real growth in the
global market. This ministry function has been
d u b b e d "helping the winners and identifying
the losers." Japanese officials insist that MITI
relinquished that role in 1980, when it lost the
power to grant licenses to companies seeking
to deal in foreign exchange. Just the same, the
ministry retains substantial power over the
nation's industry, channeling billions of yen
into research in chosen areas such as bio-high
technology and nuclear fission.
What We Can Use
W h a t can we learn from the Japanese experience? Can we create our own "U.S.A. Incorporated?" Do we want to?
Some things clearly are not exportable. Japan's
emphasis on the group rather than the individual,
for instance, is deeply rooted in the national
heritage. I don't expect that we'll be seeing
American workers dressed in company uniforms
and singing corporate anthems. W e don't want
to give up our individuality, which among other
things has given us an advantage over the
Japanese when it comes to innovation. Nor are
we likely to endorse lifetime employment, not
yet.
W e can learn a lesson from Japan by working
to eliminate or reduce the adversarial barriers
that have grown up between our government,
our businesses and our workers. Far too few
American companies exhibit the kind of management-labor teamwork that shows up in
Delta Airlines, with its history of internal cooperation and career security. Yet we must work
together if we are to out-produce a competitor
" F o r our economy, the destiny
of any one element
[government, business, labor]
is the destiny of us all."
as unified as Japan, where the number of mandays lost to strikes has declined steadily since
1974. For our economy, the destiny of any one
element is the destiny of us all.
How can we all assure that this destiny that
we share, for better or worse, will turn out to be
a fruitful one? Let's look at the three elements
in our economy and consider their responsibilities.
First, how can " b i g business" help achieve
the sort of national turnaround that the times
seem to demand? Certainly, management should
set an example of leadership that will encourage
the achievement of super-ordinary goals. It can
emphasize the quality of every employee's
contribution, whether that employee ranks at
the executive or blue-collar level, rather than
permitting nepotism or favoritism to influence
staff advancement. Management can avoid
flaunting perquisites, the corporate jets, executive condos and the like.
10
W e have learned from the Japanese experience that corporations must strive to make the
work experience both more fulfilling and more
profitable — goals they can achieve through
programs that give the rank-and-file a personal
stake in their companies' success or failure.
That includes laying a solid foundation of participatory management that can bring rank-andfile workers into the mainstream of decisions.
O n e step t o w a r d t e a m w o r k that's being
exported to this country on a growing scale is
"quality circles," a form of joint decisionmaking
widely used in Japan since the 1960s. Supervisors and workers meet together voluntarily in
a team effort to brainstorm solutions to corporate
problems. Some estimates are that as many as
3,000 firms nationwide, including AT&T, General
Motors, J.C. Penney and Westinghouse, hold
quality circle meetings in some of their facilities.
Japan learned early that such cooperation
makes sense: potential solutions to a production
bottleneck may come more readily to the bluecollar worker on the factory floor than to the
executive w h o is distant, both physically and
emotionally, from the problem.
Quality circles offer an encouraging response
to the frequent criticism that American management ignores the expertise and latent creativity
of its rank-and-file. It is an oversight that has
cost management valuable input that workers
might have contributed. In many corporations,
it has also contributed to the alienation of
employees, who tend to view management
from the perspective of "us against them." The
corporate snub has encouraged American labor
to turn to third parties that workers believe can
help defend their interests — third parties such
as labor unions.
Ironically, some unions have been known to
resist the quality circles concept precisely
because it DOES tend to tear down walls
between management and labor. If employees
start thinking of themselves as part of a corporate
team, the labor leaders fear, it could erode
some of their hold on workers' hearts and
minds.
Of course, labor has its responsibility, just as
does management. If corporations have the
responsibility to provide fair and enlightened
management, labor has the responsibility to
provide a day's work for a day's pay. We're
seeing recognition now in such industries as
automobiles that the worker has a crucial stake
in turning out a quality product that can compete
OCTOBER 1982, E C O N O M I C REVIEW ^
in world markets. In a very real sense, workers'
jobs are on the line just as surely as stockholders'
dollars.
Government? What's its responsibility? Certainly it is not to be a second-guesser, looking
critically over the shoulder of every CEO and
ready to clobber him with a regulation book if
he unwittingly violates some bureaucratic "nono." Government naturally must provide a
measure of protection against irresponsible
corporations that w o u l d abuse the rights of
their employees and the integrity of the environment. But government's role must not be
primarily adversarial. Its role should be to
provide an umbrella under which capitalism
can function most e f f i c i e n t l y — n o t an umbrella
over the inefficient. On the whole, government's
responsibility should be to help clear the way for
American p r o d u c t i v i t y — n o t to stand in the way.
The current administration has accorded a
high priority to reducing government's role as a
policeman. It is heeding the plea of business
men and w o m e n that they need cooperation,
not antagonism, if they are to compete worldwide
The President's Task Force on Regulatory Relief
has projected that the administration's efforts
would save businesses around the country
$12.6 billion during the first half of 1982. Our
own Atlanta Fed analysis concluded that Southeastern companies would save about $1.75
billion over that six-month period and another
$1 billion a year in recurring costs because of
the effort to clear away regulatory obstructions.
We're even seeing encouraging steps toward
cooperation by the Occupational Safety and
Health Administration, frequently criticized in
the past for its hostility toward business. OSHA
plans to launch an experimental program in
seven Sunbelt states, including Florida and
Georgia, that will offer businesses a "comprehensive safety consultation" free of the threat
of penalties.
Reasonably enough, firms determined in
that inspection to have serious hazards will be
required to correct them and to maintain an
effective safety and health program. But participating companies will be exempted for a full
year from time-consuming scheduled inspections by OSHA. That's a departure from past
practice. In the past, employers that invited the
agency's inspectors into their workplaces for
advice risked being slapped with a penalty if
violations were f o u n d — an all-too-typical
FEDERAL RESERVE BANK O F ATLANTA
example of government working at cross purposes with industry.
Government can also encourage the development of trading companies, which play a
significant role in Japan's exporting effort Japan's
trading companies, in fact, handle more than
half of that country's exporting. And those firms
are backed by the Japanese Export Trading
Organization, which has mobilized nearly 1,300
workers to scout out opportunities and to
drum up business for Japanese exporters around
the world. In our country, the House and
Senate have passed different versions of a bill
that would promote the formation of export
trading companies. If Congress can agree on a
final bill, it could speed the creation of trading
companies to seek out overseas buyers of
American goods and otherwise assist small and
medium-sized U.S. companies to expand their
international business.
Meeting the Challenge
So it's clear that we are taking the first steps
toward reinstating our national competitiveness
— by eliminating regulatory obstructions, by
11
" T h e challenge offshore is
too great to squander our
energy on internal conflict
pitting brother
against brother."
encouraging the savings that we need to fuel
industrial growth and modernization, and by
relearning the lesson of mutual cooperation. It
is in the interest of everyone to get on with the
job. Corporate executives, blue-collar workers
and government officials all share a single
destiny. The challenge offshore is too great to
squander our energy on internal conflict pitting
brother against b r o t h e r .
Despite recent progress, much remains to be
done. W e must continue the fight against
inflation, we must continue weeding out costly
regulations that breed inefficiency, we must
give serious consideration to initiatives such as
trading firms that have proven effective in such
countries as Japan. In a mutual recognition of
our shared destiny, we must marshal the
resources of business, labor and government
to compete more effectively with the Japanese
— with all our trading partners — in management,
in technology and in productivity. And we must
commit ourselves to work in our institutions
and corporations to revisit the spirit of American
enterprise and ingenuity that made the Yankee
trader — and his wares — a competitor to be
reckoned with.
This article is based on a s p e e c h Donald L Koch delivered to
t h e Florida Economics Club. Pamela W h i g h a m contributed
v a l u a b l e r e s e a r c h in its p r e p a r a t i o n .
12
OCTOBER 1982, E C O N O M I C REVIEW ^
International
Banking Activity
in the Southeast:
Rapid Growth
and Change
B o o m i n g international trade and
financial deregulation have fueled
a surge in international banking
activity in the Southeast. Most of
the region's activity is with Latin
American and Caribbean countries.
International banking offices in the Southeast
increased dramatically in the 1970s, rising from
33 in 1970 and 56 in 1975 to 125 in 1980.*
Amazingly, growth still appears to be gathering
steam. By mid-year 1982, the number had increased to nearly 300. Three-fourths of these
offices are in Florida—primarily in M i a m i — a n d
another 15 percent are in Atlanta.
Lending and deposit-taking activities of these
southeastern offices are growing substantially
faster than for the nation. Since 1976, loans and
other claims on foreigners have increased at
about a 40 percent average annual c o m p o u n d
•For the purposes of this article, the Southeast" refers to the Sixth Federal
Reserve District—Alabama, Florida, Georgia, and parts of Mississippi,
Louisiana and Tennessee.
FEDERAL RESERVE B A N K O F A T L A N T A
rate, or 10 percent faster than the national
growth. Foreign deposits in the region expanded
at a similarly higher margin than the nation in this
p e r i o d — the Southeast's foreign liabilities grew
at a 30 percent compound rate versus 20 percent
for the nation. Altogether, southeastern claims
on foreigners have increased sevenfold and liabilities fivefold in the 1976-1982 period. This new
business is benefiting people across the region.
What are the Dimensions of Growth and
Importance of International Banking?
International banking institutions facilitate international economic transactions the same way
hometown banks help local business. Both finance
13
trade and investment by creating money and
credit and by channeling resources from savers
to borrowers. International banking and finance,
however, is often more complex than the domestic version. Complications arise partly because
of possible problems with foreign currencies and
partly because physical and legal barriers limit
the free flow of goods, services and payments
across national boundaries. Useful credit information on business firms in foreign countries is
also relatively scarce.
" L e n d i n g and deposit-taking
activities of these southeastern
offices are growing substanially faster than for the nation."
Despite these complications, the nation's international banking activity has grown enormously
in recent years. In part, this trend reflects the
growth of international commerce. But it is also a
result of U.S. and foreign banks' establishing
more offices outside their home countries. As
the world's economies become more entwined,
these banks are motivated to serve existing
customers better, to attract new customers, and
to diversify their sources of earnings and funds.
Let's look at international trade. U.S. and world
trade have grown more rapidly than production
in the past decade. During the 1970s, U.S.
merchandise exports virtually doubled as a percentage of GNP, to 8.5 percent in 1980. This
means that exports have been growing much
faster than U.S. output as a whole. As a result,
trade financing also has been growing relatively
fast.
Some idea of the size of U.S. banks' involvement in financing international trade is revealed
by the flow of funds through the international
payments system. International payments flows
exceeded $100 trillion in 1979. By the end of this
year, these flows may approach $200 trillion at
an annual rate, with 60 to 70 million transactions
a year.1
International lending by commercial banks in
the western industrialized countries has also
' U n i t e d States Banker, June, 1982, p. 40.
14
expanded dramatically in recent years. One
estimate shows a more than fivefold increase, to
$940 billion, in net loans outstanding in the
1973-81 period. 2 Large U.S. banks are active
lenders; at year-end 1981, these banks held
$320 billion in loans to foreigners. 3
U.S. banks' important role in financing expanded
world trade and investment also shows up in
increased bank income. Interest receipts of U.S.
banks on loans, deposits, and other claims on
foreigners was one of the fastest-growing components of the 1970s' surge in U.S. services
receipts in the nation's balance of payments.
These bank earnings grew at a 40 percent average
annual compound rate in the 1970s, raising bank
interest from 4 percent of service exports in
1970 to 22 percent in 1980.
The fast growth of bank interest has helped
offset the emergence in the 1970s of persistent
U.S. deficits in merchandise trade. Despite the
sharp rise for U.S. merchandise exports in the
1970s, imports spurted even more, as other
nations became more competitive with U.S.
producers of cars, steel, textiles and other goods.
The growing surplus on U.S. service transactions
typically offset the negative merchandise balance.
By 1980, the surplus on these transactions (bank
interest surplus was $14 billion) exceeded by
$11 billion the $25 billion deficit on merchandise
trade.
How Important is International Banking
in the Southeast?
Nowhere is U. S. trade growth more visible
today than at southeastern seaports. International
trade through the region's ports grew much
faster in the 1970s than in the rest of the nation. 4
The growing importance of this trade has contributed to, and benefited from, the increase in
international banking in the Southeast. Banks in
N e w Orleans and Mobile boast the longest
tradition in international banking, dating to before
World War II, because of the historical importance
of foreign trade through the ports. More recently,
Miami and Atlanta have emerged as the largest
and fastest-growing centers of southeastern international banking.
2
Bank for International Settlements, "International Banking Developments,"
(mimeo), May, 1982.
Federal Financial Institutions Examination Council, "Country Exposure
Lending Survey" E.16(126),June, 1982.
"See William J. Kahley, "Southeast's Ships Come In: Bright Outlook for
Exports," this Review, May, 1982.
3
O C T O B E R 1982, E C O N O M I C R E V I E W
T a b l e 1 . N u m b e r of I n t e r n a t i o n a l B a n k i n g O f f i c e s in t h e S i x t h District*
AL
Active U.S. bank lenders
(foreign-owned; 6/1/82)
All foreign-owned U.S.
commercial banks (4/1/82)
Foreign agencies (5/6/82)
Representative offices
(5/25/82)
Edge Act corporations
(5/25/82)
District banks with foreign
branches (5/20/82)
IBFs (7/15/82)
District
3
FL
21
(7)
_L
GA
LA
_MS
4
5
2
IN
4
1
District
39
(7)
30
26
2
1
-
—
36
14
1
—
—
51
—
7
3
-
-
10
45
8
1
-
-
56
—
2
2
—
7
-
7
4
3
71
6
1
213
41
12
1
—
3
3
—
8
20
78
284
*As of dates in parentheses. Data include pending and approved, but unopened, offices in Florida and Georgia
The explosive growth of international banking
activity in Miami has been spurred by the growth
of international trade, particularly with Latin
America and the Caribbean. More importantly,
Miami banking offices attract a substantial volume
of foreign nonbank deposits, mostly from Latin
America. Miami's Latin atmosphere has attracted
Latin businessmen and caused U. S. multinational
corporations with commercial interests in Latin
America to locate in the area. Miami's attractive
deposit base and foreign business growth are
attracting numerous banking organizations lured
by the opportunities there. In Atlanta, international banking activity is growing in response
to the international business demands of large
corporate customers throughout the Southeast.
The total dollar benefit of international banking
to the Southeast is an elusive figure. It can be
seen directly (on Brickell Avenue in Miami, for
example) in employment and office occupancy,
as well as in air travel, hotel use, and retailing.
Indirectly, dollars flow through the economy as
accountants, lawyers, and other vendors of goods
and service are hired and paid. Or, the availability
of international banking services may help attract
businesses to an area.
The growth of southeastern international banking
a c t i v i t y — w h e n measured by loans, deposits, or
number of banking offices—has proven remarkable in recent years. An even clearer picture of
the growing importance of such activity emerges
when w e examine the activities of particular
types of international banking institutions operating in the region.
Who are the Players?
International banking activity is conducted by
a variety of domestic and foreign-controlled
banking organizations—U.S. or foreign-owned
commercial banks, U.S. branches of foreign banks,
foreign bank agencies and representative offices,
U.S. or foreign-controlled Edge Act corporations,
and International Banking Facilities. In addition,
U.S. banks have branches and subsidiary offices
in foreign countries (see Box). This broad array of
financial offices, numbering 284, spans the Southeast (see Table I ) . 5
Commercial Banks
Several of the region's commercial banks have
maintained active international departments for
years. Their number has also grown steadily in
recent years. Currently, about 40 commercial
banks in the Southeast, a majority of them in
Florida, report "active" international departments.
Commercial banks chartered in the Southeast
account for a little over 1 percent of large U. S.chartered banks' lending to foreigners.6 However,
lending by the region's banks is accelerating
5
IBFs, while similar to offshore branches, are not separately-chartered
institutions
According t o the "Country Exposure Lending Survey," op- c i t .
6
15
FEDERAL RESERVE B A N K O F A T L A N T A
TYPES OF
INTERNATIONAL BANKING OFFICES
C o m m e r c i a l B a n k s . T h e larger c o m m e r c i a l b a n k s
in t h e S o u t h e a s t usually have b o t h d o m e s t i c a n d
international o p e r a t i o n s T h e international d e p a r t m e n t s
m a k e i n t e r n a t i o n a l l o a n s a n d d e a l in letters of c r e d i t
and collections, often through their correspondent
f o r e i g n banks. T h e y m a y a l s o d e a l in f o r e i g n e x c h a n g e
and provide trust and other services to corporate
c u s t o m e r s a n d individuals. D e p o s i t s t h e y t a k e in U. S.
offices are subject t o reserve r e q u i r e m e n t s a n d Regulation Q limits t h e i n t e r e s t rates t h a t b a n k s m a y p a y
( e x c e p t f o r IBF d e p o s i t s — s e e b e l o w ) o n d e m a n d a n d
time deposits. The m a x i m u m loan a bank may make to
a n y o n e c u s t o m e r is s u b j e c t t o r e g u l a t o r y limits b a s e d
o n t h e b a n k ' s capital. U.S. c h a r t e r e d (federal or state)
b a n k s m a y b e w h o l l y or partly o w n e d by f o r e i g n e r s . A
s u b s i d i a r y b a n k is i n c o r p o r a t e d s e p a r a t e l y f r o m t h e
f o r e i g n b a n k w h i c h o w n s it.
F o r e i g n B a n k B r a n c h e s . This o r g a n i z a t i o n is a n
integral part of t h e f o r e i g n b a n k that e s t a b l i s h e s it. A
full s e r v i c e b r a n c h c a n p e r f o r m t h e full r a n g e of
b a n k i n g services; its l e n d i n g limit is b a s e d o n t h e
p a r e n t b a n k ' s capital. F o r e i g n b a n k s have e s t a b l i s h e d
full s e r v i c e b r a n c h e s in t h e U. S. just a s U. S. b a n k s
have established full-service branches in other c o u n t r i e s
L i m i t e d o p e r a t i o n s , or "shell," b r a n c h e s (like t h o s e
l o c a t e d in t h e B a h a m a s a n d t h e C a y m a n Islands) a r e
u s e d by U. S. a n d f o r e i g n b a n k s t o a v o i d h o m e c o u n t r y
r e g u l a t i o n s a n d f o r tax p u r p o s e s . T h e s e b r a n c h e s
exist " o n p a p e r " only; loan a n d d e p o s i t t r a n s a c t i o n s
are d e t e r m i n e d at t h e p a r e n t b a n k a n d t h e n legally
r e c o r d e d or " b o o k e d " at t h e b a n k ' s o f f s h o r e b r a n c h .
S t a t e laws p r o h i b i t f o r e i g n b a n k s f r o m e s t a b l i s h i n g
b r a n c h e s in all six s o u t h e a s t e r n states.
F o r e i g n B a n k A g e n c i e s . A g e n c i e s are a u t h o r i z e d
t o m a k e b u s i n e s s loans, f i n a n c e i n t e r n a t i o n a l trade,
and conduct money market and foreign exchange
operations, b u t t h e y may not p e r f o r m trust f u n c t i o n s .
T h e y a l s o m a y not a c c e p t d e m a n d or t i m e d e p o s i t s
but may hold credit b a l a n c e s for c u s t o m e r s Agencies'
f u n d s a r e o b t a i n e d m a i l y by b o r r o w i n g f r o m f o r e i g n
affiliates or in t h e U.S. m o n e y m a r k e t . T h e r e is n o
r e g u l a t o r y limit o n t h e s i z e of a l o a n t o a p a r t i c u l a r
borrower.
E d g e A c t C o r p o r a t i o n s . T h e E d g e Act ( 1 9 1 9 )
permits d o m e s t i c b a n k s a n d t h e International Banking
A c t of 1 9 7 8 p e r m i t s f o r e i g n b a n k s t o e s t a b l i s h e i t h e r
b a n k i n g or i n v e s t m e n t E d g e c o r p o r a t i o n s . T h e d o m i n a n t form, t h e b a n k i n g Edge, f u n c t i o n s like a full
s e r v i c e b a n k — b u t o n l y f o r i n t e r n a t i o n a l business.
I n v e s t m e n t E d g e s d o n o t e n g a g e in b a n k i n g activities;
instead, t h e y 'exist t o h o l d a n d m a n a g e a n e q u i t y
p o r t f o l i o of f o r e i g n i n v e s t m e n t s .
I n t e r n a t i o n a l B a n k i n g F a c i l i t i e s . IBFs m a y b e
e s t a b l i s h e d by U.S. d e p o s i t o r y i n s t i t u t i o n s a n d U.S.
offices of f o r e i g n b a n k s t o s e r v e a s r e c o r d - k e e p i n g
e n t i t i e s at m a i n l a n d offices. T h e y are similar t o t h e
o f f s h o r e " s h e l l " b r a n c h e s that b a n k s have m a i n t a i n e d
in s u c h p l a c e s as t h e B a h a m a s a n d C a y m a n I s l a n d s t o
handle foreign b u s i n e s s IBFs are permitted t o c o n d u c t
only i n t e r n a t i o n a l b a n k i n g b u s i n e s s s u c h a s t a k i n g
foreign d e p o s i t s a n d m a k i n g f o r e i g n loans.
16
compared to banks elsewhere in the nation. In
the period 1978-1981, southeastern banks' foreign
lending tripled as a result of their 43 percent
average annual c o m p o u n d growth. Meanwhile,
foreign lending by other U.S. banks was increasing
at only one-third that rate. The rapid gain by
southeastern banks is attributable to more banks
participating in foreign lending and to increased
lending by
other banks, particularly in the
interbank market in Caribbean offshore banking
centers.
Thirty foreign-owned commercial banking organizations operate in the Southeast, about onefourth of them active international lenders. As of
year-end 1981, these banks accounted for 35
percent of the foreign-owned U.S. commercial
banks and 5.5 percent of the $121.8 billion in
foreign-owned commercial bank assets in the
United States. By contrast, only one foreignowned bank operated in the Southeast in 1970.
The recent rapid increase in foreign-owned
U.S. banks in the region follows the movement of
U.S. banks into foreign markets in earlier years.
Generally, foreigners enter the U.S. banking
market to expand or diversify their international
activities. Acquisition of U.S. banks gives foreign
banks a deposit base in the world's largest
banking industry and commercial markets. On
the asset side of the ledger, foreign banks extend
loans primarily to commercial and industrial
firms, particularly multinational corporations. In
addition to foreign bank purchases of U. S.
banks, wealthy individuals also purchase U. S.
banks for investment purposes.
Foreign Agencies and
Representative Offices
The Florida International Banking Act of 1977
permitted foreign banks to establish agencies or
representative offices in the Sunshine State.
Georgia's legislature had passed a similar law a
year earlier to permit foreign banks to locate
offices in that state. Since passage of these bills,
60 offices have opened in the t w o states, the
bulk of them in Florida. The particularly fast
growth in Florida reflects the emergence of
Miami as a banking center for Latin America,
while Atlanta's growth reflects its importance as
regional financial center of the burgeoning Southeast.
Nationally, the 194 foreign agencies at yearend 1981 counted total assets of $65.4 billion.
OCTOBER 1982, E C O N O M I C REVIEW ^
" T h e recent rapid increase in
foreign-owned U.S. banks in
the region follows the
movement of U.S. banks into
foreign markets in earlier years."
Foreign bank agencies in the Southeast account
for a growing share of this total—currently, about
5 percent. In both the region and nation, agencies,
like banks, are involved primarily in financing
international trade transactions. Like banks, they
also finance medium-term loans between their
home country borrowers and countries, particularly when such activity is difficult in those other
countries.
The 10 representative offices in the Southeast
account for a small fraction of the nation's 268
total, most of which operate out of New York.
Edge Act Corporations
The recent growth of southeastern Edge corporations has been dramatic. Atlanta's Citizens
and Southern Bank established the region's first
banking Edge corporation in Miami in 1969, and
there were only 10 Edge corporations in the
region as late as 1976. In the early and mid1970s, money-center and regional banks created
Edges for trade-financing purposes in various
port cities. Liberalization of Edge regulation after
1976 paved the way for a near sixfold increase in
the region's Edges, to 56 today. In terms of the
number of banking Edges—if not asset s i z e Miami's concentration of offices now outranks
New York.
The changes in Edge regulation that spurred
this concentration were the 1978 International
Banking Act (IBA) and accompanying alterations
in 1979 to the Federal Reserve System's Regulation K.7 These regulatory changes permit domestic and foreign banks to establish separately
chartered subsidiaries, or "Super-Edges," with
branches nationwide, that can provide full-service
'See Donald Baer, "Behind Miami's Surge in International Banking," This
Review, April, 1981, for a detailed discussion.
banking to international businesses and foreigners.
The uses of Edges vary, however, depending
on the parent company's purposes. In Miami, for
example, Edges often serve as the regional center
for a parent bank's Latin American and Caribbean
business and as a safe haven to attract foreign
flight capital deposits. In contrast, Atlanta Edges
are oriented more toward trade financing, including the financing of production of exported
goods and services. In New York, Edges provide
out-of-state banks with an international N e w
York presence for clearings and to gather information on financial developments.
Foreign Branches
Southeastern banks have opened nine foreign
branches since mid-1979, as the number of
banks in the region with foreign branches increased
to 20. These branches, four in Nassau and 16 in
the Cayman Islands, were established to permit
the banks to operate in the "Eurodollar" market.
Eurodollar (or, more generally, Eurocurrency)
market activities consist of deposits and loans in
currencies other than that of the country where
the deposit or loan is located or "booked." For
example, a dollar loan to a Latin American
government or corporation from a U.S. or foreign
bank's Nassau "shell" branch is a Eurodollar
transaction. One very broad measure of " t h e "
size of the Eurocurrency market estimates the
end-1981 gross (that is, including interbank deposits) amount of Eurocurrency liabilities at $1,800
billion, up from $210 billion at end-1972. 8 Eurodollars account for about three-fourths of all
Eurocurrencies.
Several explanations have been offered f o r t h e
extremely rapid growth of the Eurodollar market
during the past decade. Those include U.S.
balance of payments deficits; government taxes
and regulations (reserve requirements, interest
rate limitations); inflation; the expansion of world
trade and the use of the dollar in oil and other
transactions.
International Banking Facilities
U.S. banks, increasingly dissatisfied with the
regulations that caused them to establish offshore
shell branches, first proposed the creation of
International Banking Facilities (IBFs) to the Federal
Reserve Board in 1978. As of December 3,1981,
8
Morgan Guaranty Trust Company, W o r l d Financial Markets, July, 1982
17
FEDERAL RESERVE B A N K O F A T L A N T A
the Board agreed to permit U.S. depository
institutions, Edge corporations, and U.S. offices
of foreign banks to establish mainland offices
similar to the offshore shell branches. Those
regulatory changes exempt deposits accepted at
an IBF from foreign residents and corporations
from reserve requirements and interest rate
ceilings imposed on domestic deposits. That
exemption extends to foreign subsidiaries of
U.S. firms.
To prevent the leakage of nonreservable funds
into domestic credit and the erosion of monetary
policy's effectiveness, the Board prohibited eligible borrowers from using IBF loans for U.S.
activities. Also, IBFs are not allowed to issue
negotiable CDs. Two other conditions imposed
by the Board are that the m i n i m u m size nonbank transaction be $100,000 and that foreign
nonbank depositors give t w o days' notice for
withdrawal. These conditions enable small financial institutions to operate I BFs while preserving
the wholesale nature of IBF transactions.
Several state legislatures, including Florida and
Georgia, have exempted IBF transactions from
state and local taxes. This exemption erases any
tax disadvantage I BFs may have suffered compared
to tax-free transactions permitted in offshore
banking centers in the Caribbean and elsewhere.
IBF deposits also are not subject to the FDIC
insurance assessment However, IBFs don't enjoy
the secrecy law advantages of the Caribbean
offshore banking centers, nor is a m i n i m u m IBF
deposit insured as a $ 100,000 domestic deposit.
Assets for the weekly reporting IBFs with at
least $50 million in assets or liabilities grew from
about $65 billion at the end of 1981 to $102
billion in March 1982, and $126 billion in June,
after the first six months of operation. In the
Southeast, total IBF assets in March, 1981, were
$1.8 billion; of that total, about 95 percent, or
$1.7 billion, was accounted for by IBFs with
assets or liabilities greater than $50 million.
Altogether, 78 IBFs were approved by mid-July
1982, and the region's IBFs in the over $50
million category accounted for t w o percent of all
assets in that category nationwide. 9
It is clear that IBFs have grown rapidly in both
the region and across the country since their
inception last December; they have already
captured perhaps 10 percent of the Eurodollar
9
As of June 2, 1982, there were 188 weekly reporters in the nation; 15 of
them were in this District. Data from Federal Reserve Statistical Release
H.14(518).
18
market. Initially, U.S.-owned banks established
IBF accounts largely with assets and liabilities
shifted from their offshore branches; by contrast,
branches and agencies of foreign banks in the
U.S. relied heavily on assets and liabilities already
on the books of their U.S. offices. 10 W i t h few
exceptions, experiences in the Southeast have
mirrored that across the nation.
Who are the Major Customers?
Two prominent trends emerge from the lending
and deposit data for southeastern banking entities.
First, over three-fourths of total lending and fourfifths of foreign deposits (by institutions which
report their international banking activities regularly to the U.S. Treasury) in the Southeast are
with the countries of Latin America and the
Caribbean (Table 2). These March 1982 concentrations are roughly the same as in 1970 and
1976. 11 Second, commercial banks dominate
lending and deposit-taking, with market shares
of 53 percent and 42 percent, respectively (Table
3).
Commercial banks dominate lending to all
borrowing groups except the "all other" category
comprised of foreign nonfinancial corporations
and individuals. Edge corporations dominate
that category (Table 4). Bank lending is directed
primarily (and equally) toward affiliated and
unaffiliated banks; 88 percent of all bank loans
go to other banks (Table 5). By contrast, half of
Edge corporations' loans are to nonbank foreigners.
The overall dominance of banks in deposittaking and lending and the composition of lending
in the region reflect important supply-demand
forces.
It is understandable that commercial banks
have dominant overall shares in foreign loans
and deposits. For years, state and national regulations limited nonlocal banking organizations
from competing with local banks for international
'"Survey of C u r r e n t Business, March, 1982, p. 44. As of June, 1982, about
55 percent of IBF assets were owned by U.S. agencies and branches of
foreign banks (from H.14,518), suggesting that IBFs are quite attractive to
foreigners
" S e e John E Leimone, "The Spread of International BAnking: A Regional
View," this Review, August, 1971; also Donald Baer and David Garlow,
"International Banking in the Sixth District" this Review, September, 1977.
It should also be pointed out that these data do not include all transactions
with foreigners, nor do they include all internationally-oriented transactions
Assets and liabilities of foreign branches of U.S. banks are excluded as are
assets and liabilities associated with bank international transactions with
domestic residents Finally, banks with average liabilities due t o foreigners,
or average claims o n foreigners of less than $ 1 0 million for less than six
months, do not report these items.
O C T O B E R 1982, E C O N O M I C R E V I E W ^
T a b l e 2 . G e o g r a p h i c a l D i s t r i b u t i o n of District
International Banking
( P e r c e n t of Total, M a r c h , 1 9 8 2 ) *
T a b l e 3 . G e o g r a p h i c M a r k e t S h a r e of Activity
w i t h F o r e i g n e r s ( P e r c e n t of Total,
March, 1982)*
Customer Location
Latin America
& Caribbean
Other
Customer Location
Latin America
& Caribbean
Other
Reporting Entity
Europe
Total
Reporting Entity
Europe
Claims
Banks
Edges
Agencies
IBFs
All
10.0
19.4
6.5
11.4
12.6
Banks
Edges
Agencies
IBFs
All
5.7
4.8
13.8
9.1
7.3
Claims
74.2
77.8
88.4
87.1
77.6
15.8
2.8
5.1
1.5
9.8
100
100
100
100
100
Banks
Edges
Agencies
IBFs
All
42.2
44.1
3.6
10.1
100.0
89.5
94.0
57.4
80.8
84.7
4.8
1.2
28.8
10.1
8.0
100
100
100
100
100
Banks
Edges
Agencies
IBFs
All
33.5
13.2
19.9
33.4
100.0
•Data from U.S. Treasury. The number of reporters, march, 1982: Banks16, Edges-19, Agencies-12, and IBFs-16.
business. Elimination of these barriers might be
expected to lead to erosion, but not collapse, of
commercial banks' entrenched position in the
short time market penetration has been allowed.
Indeed, because commercial banks have developed close business relationships with their
corporate customers over the years, and because
they can offer full banking services (including
domestic services) to these customers, banks
seem likely to remain dominant for some time.
Meanwhile, the newcomers may have enlarged
the market by attracting new international business through their out-of-region affiliates. If so,
commercial bank activity may be growing with
increased competition even as its share of the
market declines.
The heavy concentration of commercial bank
lending to unaffiliated foreign banks represents
trade-financing through lines of credit established
with foreign correspondent banks. Affiliated bank
lending largely represents funds placed into the
interbank Euromarket in the Caribbean offshore
banking centers. O n the demand side, the close
trade connection between this region and Latin
America accounts for the networks of southeastern
and foreign correspondent banks through which
much trade-financing flows. By contrast, the
ample supply of funds deposited by foreigners
50.9
28.8
7.9
12.4
100.0
86.4
8.3
3.6
1.7
100.0
53.3
28.7
6.9
11.1
100.0
44.8
22.5
.1
25.6
100.0
25.3
3.0
3 7.7
34.0
100.0
42.4
20.2
10.5
26.9
100.0
Liabilities
Liabilities
FEDERAL RESERVE B A N K O F A T L A N T A
Total
* Data from U.S. Treasury. The number of reporters, March, 1982: Banks-16,
Edges-19, Agencies-12, and IBFs-16.
explains the high share of affiliated bank lending.
Four-fifths of all the Southeast's foreign liabilities
fall into the "all other foreigners" category (Table
5), compared to 11 percent for the nation. These
deposits exceed the amount needed for lending
operations and are placed into the Euromarket
through offshore branches; over two-fifths of the
region's banks total claims, in fact, are on their
offshore branches. 12
The pattern of lending to nonfinancial corporations and individual foreigners also seems
logical. Small foreign and domestic businesses
and individuals, particularly in Latin America,
have turned to southeastern bankers for funds to
finance production or trade. Consequently, this
lending represents a hodgepodge of letters of
credit, bankers acceptances, and loans to smallto-medium size firms in Latin America and the
United States. Edge banks are often members of
worldwide banking networks created by money
' J lf we exclude transactions with "own foreign offices'' from all of the d a t a the
business distributions and market shares by customer groupand geographic
area change somewhat. Principally, claims on Latin America and the
Caribbean fall to 67.4 percent of the total, with most of the reduction due to a
drop in banks' claims on Latin America to 54 percent from 74 percent. As a
consequence, this share of Edges' claims on Latin America slightly exceeds
the banks' share (38.1 percent compared t o 36.1 percent) and market
shares of banks and Edges converge, to 45.1 percent and 35.7 percent,
respectively.
19
T a b l e 4 . Entities' M a r k e t S h a r e s by C u s t o m e r G r o u p
( P e r c e n t of Total, M a r c h , 1 9 8 2 ) *
Reporting Entity
Foreign
Public
Borrowers
Customer Group
Unaffiliated
Own
Foreign
Foreign
Banks
Offices
All
Other
Foreigners
Total
Claims
Banks
Edges
Agencies
IBFs
52.3
21.3
7.0
19.4
62.2
23.9
5.6
83
100.0
100.0
69.4
14.8
4.5
11.3
100.0
100.0
14.8
9.1
44.7
31.4
100.0
46.5
20.7
5.7
27.1
100.0
13.5
60.4
12.8
13.3
53.3
28.7
6.9
11.1
100.0
Liabilities
Banks
Edges
Agencies
IBFs
All
69.0
30.0
38.2
32.6
LQ
23.2
100.0
6.0
100.0
42.4
20.2
10.5
26.9
100.0
*Data from U.S. Treasury. The number of reporters, March, 1982: Banks-16, Edges-19, Agencies-12, and IBFs-16.
center banks. Thus, they bring considerable expertise to the market. Frequently, their parent
corporations or sister affiliates also provide valuable business information or referrals that can
give them a competitive advantage over regional
banks for foreign business. Finally, there is some
evidence the region's commercial banks prefer
to lend to foreign banks rather than to nonfinancial
borrowers. 13 A correspondent relationship with a
foreign bank and short-term trade financing of
U.S. corporate customers is less risky and thus
sometimes preferred to direct lending to foreign
corporations or individuals.
A cautious attitude toward making long-term
loans may also explain the limited amount of
direct lending to public borrowers, which remains
small despite the well-publicized large credits to
troubled foreign governments and other public
agencies or authorities. Few commercial banks in
the region are active in originating, or even
participating in, large-scale syndicated loans. These
loans, normally booked offshore by the large
money center banks, usually have maturities of
five to seven years.
" S e e Baer and Garlow, op. cit. However, it is emphasized that it is difficult to
generalize about the motivations and activities of these different entities.
That is, some banks, or Edges, may focus on direct lending to the foreign
private sector while others specialize in correspondent banking or in
sovereign risk (country) lending.
What is the Outlook for International
Banking in the Southeast?
The regulatory, tax, commercial, and geographical advantages of locating international banking
activities in the Southeast have improved substantially over the past decade. Future growth
prospects for international banking in the region
appear good, but the short-term outlook is cloudy.
And the longer-run outlook, while bright, shines
differently depending upon which crystal ball is
consulted.
In the short run, economic weakness in the
U.S. and abroad seems likely to continue limiting
international banking activity, particularly with
the countries of Latin America. In addition, bankers
appear to be taking a more cautious look at
lending to foreign countries. They are concerned
about the high level of debt in several Latin
American countries and may be more conservative
in their near-future lending activity.
Over the longer haul, world trade, foreign
investment, and internationalization of capital
markets will expand briskly if the current trends
of deregulation of markets and increased reliance
on competitive forces continue. The overall growth
of international trade and banking in the Southeast appears likely to continue to outpace national
20
O C T O B E R 1982, E C O N O M I C R E V I E W ^
T a b l e 5 . Entities' B u s i n e s s D i s t r i b u t i o n by C u s t o m e r G r o u p
( P e r c e n t of Total, March, 1 9 8 2 ) *
Reporting Entity
Foreign
Public
Borrowers
Customer Group
Unaffiliated
Own
Foreign
Foreign
Banks
Offices
All
Other
Foreigners
Total
43.8
17.4
22.0
34.2
33.7
5.6
46.2
40.6
26.2
22.0
100
100
100
100
100
4.4
5.9
53.0
14.5
12.5
86.6
80.7
43.1
79.5
78.9
100
100
100
100
100
Claims
Banks
Edges
Agencies
IBFs
All
6/3
4.8
6.6
11.2
6.4
Banks
Edges
Agencies
IBFs
All
2.9
2.8
44.3
31.6
30.8
28.4
37.9
Liabilities
—
0.1
1.8
6.1
10.6
3.9
5.9
6.8
*Data from U.S. Treasury. The number of reporters, March, 1982: Banks-16, Edges-19. Agencies-12, and IBFs-16.
growth. In part, the region's expectations for
more rapid trade growth reflect the projected
continuation of southern migration of businesses
and potential long-term growth prospects for
Latin America. Service firms, such as banks,
should continue to come into the region to take
advantage of the new opportunities created by
this growth.
Other factors that should affect international
banking in the Southeast positively are the Reagan
administration's Caribbean Basin Initiative (CBI),
the Export Trading Company (ETC) legislation,
and initiatives by the Commerce Department to
create a greater trade awareness among small- to
medium-size firms. The CBI aims to spur economic development in the Caribbean Basin by
fostering trade and the growth of the private
sectors in target economies of the Basin. Because
of their well-established trade connections in the
Basin, Florida banks stand to gain substantially.
Legislation pending in the Congress to establish
ETCs is intended to strengthen the U.S. export
sector. It proposes that bank holding companies
and possibly Edges, depending on the bill's final
version, be permitted to hold an interest in
trading companies. The banking organizations
would help generate additional business opportunities for U.S. firms while offering them a wide
FEDERAL RESERVE B A N K O F A T L A N T A
variety of bank services. Export trading companies might provide particularly valuable assistance to small- and medium-size U.S. businesses
engaged in producing goods and services that
can be marketed abroad. Producers would benefit
from lower unit costs of delivered goods because
of economies of scale.
Small- and medium-size firms are a key to
continued U.S. export expansion. The Commerce
Department estimates that roughly 20,000 of
the 50,000 American firms "capable of" exporting,
don't. 1 4 In the 1974-79 period, the number of
small manufacturing establishments in southeastern states grew by 7.2 percent, triple the
growth rate for the nation. 15 These rapidly multiplying firms provide healthy opportunities for
ETC-connected banking organizations in the Southeast; an estimated one-fourth of the firms with
sales in the $5-$9 million range require international banking services. Edge corporation subsidiaries of money center banks might benefit, in
particular, from the ETC legislation because of
their membership in worldwide banking organizations.
' " C o n g r e s s i o n a l Quarterly, May 23, 1981 p 901
1
S I 9 8 2 . ^ ' "Sm3"
Business:
Linchpin for ,he
Southeast?" this Review,
21
There is ample evidence that international
banking activity in the Southeast is in the midst of
a growth spurt. M i a m i in particular is developing
as an international banking center. Evidence
points to continued strong growth of international
banking activity in the region at least through this
decade. A remaining question, and one of the
most interesting concerning the future of international banking in the Southeast, is whether an
international financial center will emerge eventually in the region.
Measured by lines of newsprint, the most
likely candidate as an international financial
center appears to be Miami, already a major
banking center in terms of its concentration of
banking entities. Most observers believe the
same factors that have caused M i a m i to emerge
as a banking center will lead eventually to money
center status. They believe Miami will develop
some of the banking activities characteristic of
financial centers: a local foreign exchange and
short-term capital market, including the sale of
deposits between banks and a strong bankers
acceptance market, plus widespread originations
of syndicated loans. Currently, these activities
are only at the early stage of development in the
city's banking community.
An opposing view is that Atlanta eventually will
emerge as the region's international financial
center. In this view, "quality of life" factors favor
. . . e c o n o m i c weakness in
the U.S. and abroad seems
likely to continue limiting
international banking activity,
particularly with the countries
of Latin America.
Atlanta over Miami, and will offset Miami's attractive deposit base lure. Atlanta's proponents say
many of these deposits are placed outside Miami
anyway, and there is no reason why they could
not flow to Atlanta.
Still another view, and the most likely outcome, is
that M i a m i and Atlanta are simply not competitors and that both will grow in importance as
financial centers. Miami, because of its geographic location, will continue to grow as the
Latin American financial center. Atlanta, because
of its geographic advantage in the Southeast,
similarly will continue its growth as the financial
center of that region.
Whatever the actual outcome, the remaining
years of this decade promise to be pivotal ones
for international banking in the Southeast.
—William J. Kahley
22
OCTOBER 1982, E C O N O M I C REVIEW ^
Check Safekeeping:
Transition to the Electronic Future
More financial institutions are
promoting c h e c k safekeeping
as a transition product on the
way to paperless payments.
Public acceptance, however,
depends on the resolution of
legal, technical and
promotional problems.
;
The wave of computertechnology sweeping U.S.
industries is not transforming these industries
instantaneously. Firms have a substantial investment in traditional ways of doing business, and
many people remain resistant to change. For
many companies, the problem with the futuristic
vision is, " h o w do we get there from here?"
For the financial services industry, facing deregulation, increasing costs, and outside competition, the future includes a fully electronic payments system that will control costs and boost
profits. Such a paperless system could reduce
costly branch office networks and provide greater
variety and convenience to customers. The
paper check system, however, is firmly
entrenched; the shift to an electronic
payments system will not occur
overnight.
What the financial services
industry needs is a "transition
product" to ease the change
from paper to a paperless
payments system. Check safekeeping, in which financial
institutions keep the checks
and send the customer only
a statement, has the potential
to be that transition product.
Whether it emerges as a successFEDERAL RESERVE BANK OF ATLANTA
ful product, however, depends on whether certain technical and legal issues can be resolved,
and whether the public will accept it.
Potential Advantages
of Check Safekeeping
Check safekeeping has several potential advantages for consumers and financial institutions.
It can help financial institutions stay profitable
and competitive as deregulation progresses, and
it can help consumers control their checking
account costs.
Specific items on the deregulation agenda
suggest that check safekeeping may become a
more important element in the retail product
line. Ceilings on checking account interest rates
are on the way out. W h e n they go, financial
institutions will be able to pay market rates on
checking accounts. To pay these rates and recover
their check processing costs, banks and thrifts
will be inclined to unbundle checking accounts.
They will tend to charge an explicit fee
for each particular element of the service,
including returning cancelled checks
to account holders. At the same
time, competition among depository and nondepository financial institutions will
be intense. This will provide an
incentive to add value to checking account services without
unduly increasing their costs.
Check safekeeping, positioned
as a better alternative than
check return, offers both possibilities.
As a transition product,
check safekeeping can transfer volume from the check
collection system to the net23
work of automated clearing houses (ACHs) and
reduce check collection costs. A substantial
number of transactions are necessary to reap the
benefits of the electronic ACH technology; however, the number of transactions flowingthrough
the ACH network today is miniscule compared
to the number of checks being collected in the
traditional way. The industry is supporting two
parallel payments systems, checks and ACH.
Most of the volume is flowingthrough the checkcollection system, which may suffer diseconomies of scale industrywide as it does in the
Federal Reserve System. Meanwhile, the economies of scale associated with the ACH network
are barely being tapped. 1 A concerted industry
effort to develop interbank check safekeeping
along the lines of a program being developed by
the National Association for Check Safekeeping
could reverse this inefficient use of existing
resources.
Check safekeeping can play a transitional role
in the marketplace, too. Adoption of retail electronic banking services has been slow, with many
consumers reluctant to change their payment
habits radically. Check safekeeping, as practiced
by most institutions already offering the service,
requires a much less abrupt change. It allows
customers to continue making payments by
check, and, even though it doesn't give customers
physical possession of every cancelled check
they might need, check safekeeping permits
them to secure specific cancelled checks or
copies when a real need does arise. It is a small
change, but by weaning customers away from
receiving cancelled checks for all payment transactions, check safekeeping makes a real contribution to the evolution of electronic payment
services.
Check safekeeping can also serve those reluctant or unable to avail themselves of more
sophisticated electronic payment services now
or in the future. In time, many consumers will
make the transition from not receiving cancelled
checks in their statements to not paying by
check at all. However, some market segments
may never make the change. Elderly, less-educated
and less-affluent customers may be slower to
adopt innovations than younger and more upscale
'For a discussion of scale economies in Federal Reserve payment
services, see: David R Humphrey. Costs, Scale Economies, Competition,
and Product Mix In t h e U.S. Payments M e c h a n i s m Board of Governors
of the Federal Reserve System (Washington, April 1982)
24
consumers. Check safekeeping may be a practical
way of providing low-cost checking services to
those customers after more "profitable" customers have changed to electronic alternatives.
In short, check safekeeping has the potential to
help consumers retain their freedom of choice.
By marketing check safekeeping, even financial
institutions not yet offering electronic services
can participate in the process of educating customers. Participating in the customer education
process gives banks a chance to understand their
customers and to respond to their concerns
about the technological changes taking place in
banking today. If the industry is to achieve its
goal of an electronic payments system, all financial
institutions must help customers to make informed
decisions and to understand w h y their checking
account costs have risen so rapidly in recent
months. Providing information that helps customers understand and adopt check safekeeping
also helps them realize that other technological
innovations in the financial services industry are
for their benefit as well as for the benefit of
financial institutions.
Check safekeeping holds considerable potential both as a product that speeds transition
and as a way of reducing present operating costs.
However, development of the service has just
begun. This article examines how check safekeeping works and presents some of the issues
critical to the product's success.
The Check Safekeeping Concept
Check safekeeping is a simple concept. Instead
of returning cancelled checks to customers in
their monthly statements, financial institutions
send only the statement and retain the checks.
An integral part of the concept is a mechanism
. . by weaning customers
away from receiving cancelled
checks for all payment transactions, check safekeeping
makes a real contribution to
the evolution of electronic
payment services."
O C T O B E R 1982, E C O N O M I C R E V I E W
that permits customers to obtain copies of specific
checks when needed. Cancelled checks are
stored for a limited period of time, usually 90
days. This gives customers an opportunity to
examine their statements and to request copies
of the originals, or the original itself, to reconcile
any discrepancies between the statement and
their records. After the specified retention period
the cancelled checks are destroyed, and the
banks use microfilm copies to respond to customer inquiries and to provide copies of the
microfilm image at the customer's request. Microfilm records are maintained for at least the
period required by law—usually seven years
although it may vary from state to state.
Banks already are required by law to make and
maintain microfilm copies of checks. Access to
the copies is also controlled under the law. It is
costly for anyone other than the check writer to
gain access to the microfilm records, and in most
instances the bank must give the customer 10
days advance notice that a request has been
made to look at his records. This gives the
customer adequate time to respond.
Two versions of check safekeeping are in use
today. In check safekeeping at the payor bank,
the items flowthrough the entire check-collection
system and are stored at the customer's bank. In
interbank check safekeeping, the paper flow is
halted (or truncated) at an earlier processing
point in the system. Only check safekeeping at
the payor bank is available to retail checking
account holders today. Interbank check safekeeping applies to only a limited number of
commercial accounts. Neither kind of check
safekeeping is mandatory; customers retain the
right to choose whether to participate.
Check Safekeeping at the Payor Bank
Check safekeeping at the payor bank is relatively easy to operate. If a financial institution
already handles its o w n sorting, microfilming and
statement preparation, it probably has the technology to truncate checks. If not, it may be able
to use the services of a correspondent bank.
Several larger financial institutions provide check
safekeeping services for credit union share draft
programs and for smaller financial institutions.
Several institutions that offer check safekeeping
services use the IBM 3890 reader/sorter with
front-end microfilming capability. A trace number,
assigned to each check before it is microfilmed,
FEDERAL RESERVE B A N K O F A T L A N T A
permits the retrieval of checks that customers
request. Some institutions include the trace
number of each item on the customer's statement to ease the retrieval process. Others determine the number internally, based on the customer account number, date of payment and
item amount. Of course, statements must include
the serial number and dollar amount of each
check in sequential order so customers can
reconcile their accounts. Regardless of how they
"Consumers have shown little
enthusiasm for check safekeeping services, so marketing
the service to retail account
holders requires a thoughtful
set up their programs, institutions that offer
check safekeeping agree that a fast, reliable
retrieval system and careful statement design are
critical to the service's success.
Consumer Acceptance of Payor-Bank
Check Safekeeping
Consumers have shown little enthusiasm for
check safekeeping services, so marketing the
service to retail account holders requires a thoughtful approach. The commercial banking industry
has done an excellent job of selling consumers
on the value of having their cancelled checks
returned to them, and consumers are now reluctant to give them up. In a nationwide survey
conducted by Electronic Banking, Inc. in 1980,
only 21.3 percent of the consumers responding
indicated a positive interest in check safekeeping.2
The survey's description of the service was neutral.
?
Thomas R Marschall. Research Report: C o n s u m e r V i e w s of C h e c k
T r u n c a t i o n . Electronic Banking. Inc.. (Atlanta. 1980). p. 19.
25
It explained:
The bank statement shows the amount of
each check in numerical order, the date the
check was paid and the amount of the check.
The bank does not return the cancelled checks
with your monthly statement, but holds them
and will send you a copy of any check you
need. These copies are legally acceptable. 3
W h e n presented with a neutral description,
consumers seem unable to conceptualize any
benefits from check safekeeping. W h e n asked
why they were not interested in this service, 78.8
percent said they wanted their cancelled checks.
Only 6.8 percent believed it would be inconvenient or too time consuming to obtain copies of
checks, however, and fewer (5.8 percent) expressed fear of computer or bank errors.4 Negative
aspects of the service, then, did not appear
responsible for the low interest level. The findings
suggest that banks will have to stress the benefits
of check safekeeping in their sales efforts to gain
consumer acceptance. This requires a well-trained
staff, and employee familiarity with the service
through direct experience with their own accounts
is preferred. Benefits cited most often by EBI
survey respondents who used check safekeeping
services were the elimination of check storage
problems and the convenience of having the
bank store checks and retrieve specific items on
request. A large majority of users (87.0 percent)
expressed satisfaction with check safekeeping. 5
Experiences in the bank credit card and credit
union industries provide evidence that retail
customers will accept non-return of signed transaction documents, even though they may not
solicit that system. Visa began truncating sales
drafts in 1974 after a 1973 pilot program using
computer-produced facsimiles of sales drafts
printed with the statement"signature on original
document on file" in place of the original draft.
During the pilot program 1.8 million sales drafts
were truncated, and only 11 customers of the 19
participating banks cancelled their accounts. 6
Credit unions simply incorporated safekeeping
as a part of the initial design of their share draft
services. Instead of returning cancelled share
3
drafts to their account holders, credit unions
provide them with two-part, carbonless copy
checks. The success of this approach is evidenced
by the number of credit unions that have begun
to offer share draft services since the U.S. District
Court in Washington ruled them legal for federal
credit unions in 1978. As of May, 2,799 credit
unions offered ICU share draft services. ICU, a
service affiliate of the Credit Union National
Association, estimates that about 75 percent of
the credit unions that offer share drafts use its
services. The number of credit unions providing
this service to members may exceed 3,700.
Valley National Bank of Arizona, a pioneer in
check safekeeping, has been more successful
than it hoped to be in sellingthe service. Since its
check safekeeping program reached full operation at all 210 branches in May 1981, more than
71 percent of all new accounts throughout the
Valley National system have adopted the service.
The Valley new-account staff explain the benefits
of the bank's check safekeeping service and offer
new customers the choice of the new service or a
traditionally processed checking account. The
bank does not offer a price incentive to encourage
new customers to adopt Check Safekeeping. 7
By using a non-response, direct-mail marketing approach, Valley has also enjoyed considerable success converting existing accounts. During
t w o check safekeeping pilots and recently as
part of an account conversion campaign, Valley
mailed letters to checking account holders explaining the service and stating that the bank
would provide it to them automatically. Customers received a card they could return to the
bank if they did not want the service. Valley used
a follow-up letter approach to ensure that all
customers had t w o chances to reject check
safekeeping. By sellingthe service on the basis of
convenience, privacy, safety and storage space
benefits and by using the non-response
approach for account conversion, Valley has
achieved a 43.1 percent penetration of its personal checking accounts. Over 200,000 Valley
National account holders were using check safekeeping at the end of June.8
lbid, p. 15.
5
'bid p 27
»Charles T Russell. "The Credit Card Experience." In C h e c k T r u n c a t i o n :
Progress '80. Electronic Banking, Inc. (Atlanta, 1980), p. 14
2 6
'Telephone interview with Robert V. Sabeck, Executive Vice President,
Valley National Bank, July 16, 1982.
"Telephone interview with Robert V. Sabeck, July 16, 1982.
O C T O B E R 1982, E C O N O M I C R E V I E W
Check Safekeeping for Corporate
Accounts
There is little evidence that payor banks are
actively marketing check safekeeping as a separate
service to their corporate accounts; however,
banks sometimes provide check storage as part
of their account reconciliation services. Reconciliation services are offered by most of the
nation's larger banks. Thus it is difficult to determine how extensive payor-bank check safekeeping is among corporate accounts. An Electronic
Banking, Inc. nationwide survey of 133 companies of all sizes found 63 using reconciliation
services,9 and only t w o relied on the banks to
store their cancelled checks; however, 42.9 percent of the survey respondents expressed interest
in the concept of check safekeeping at the payor
"There is little evidence
that payor banks are
actively marketing
check safekeeping as
a separate service to
their corporate
accounts.. "
bank.10 Predictably, interest in check safekeeping
was directly related to company size.
While the EBI findings suggest that banks may
be missing an opportunity to reduce some commercial check processing costs immediately, the
industry apears to be taking a longer-range view.
It is leaping over the safekeeping-at-the-payorbank phase of development and proceeding
directly to truncating corporate checks at earlier
points in the check-collection flow.
Interbank Check Safekeeping
In interbank check safekeeping operations,
items to be truncated are identified by a special
'Thomas R Maschall, Research Report: C o r p o r a t e Views of C h e c k
Truncation. Electronic Banking, Inc. (Atlanta, 1981), pp.56-57
'"Ibid., p. 12.
FEDERAL RESERVE B A N K O F A T L A N T A
indicator in the MICR line (the coded information
at the b o t t o m of the check). Data from the M ICR
line are used to prepare a magnetic tape in the
80-character NACHA format as modified to include
truncation entries. Collection, presentment and
settlement are made via the automated clearing
house (ACH) network. Return items also are
processed electronically through the ACH. As in
the safekeeping-at-the-payor-bank process, both
the cancelled checks and a microfilm copy are
kept for 90 days, after which the checks are
destroyed. The microfilm is retained for seven
years.
The difference between check safekeeping at
the payor bank and interbank check safekeeping
is that, rather than the payor bank retaining the
cancelled checks and microfilm, the items are
stored at a bank of d e p o s i t — e i t h e r the first bank
to receive the item or another processor later in
the check-collection flow. This is transparent to
the customer, w h o still calls his bank if he needs a
check copy. Yet it necessitates a system for banks
to communicate the retrieval requests among
themselves. At present this is being done through
the administrative message capability of the
Bankwire—an electronic communication network
used to transfer messages between subscribing
banks. Thus, both funds transfers and interbank
communications are handled electronically.
Physical transportation systems are virtually
eliminated. They are necessary only to deliver a
requested item from the bank of deposit to the
payor bank, and from the payor bank to its
customer. This is usually done by first class mail,
but facsimile transmission can respond to an
urgent request. Retrieval requests have not been
a significant problem in payor-bank or interbank
check safekeeping to date. Only 30 items were
retrieved during the first year of the pilot program
being conducted by the National Association for
Check Safekeeping. 11 The retrieval request rate
at Valley National Bank has ranged from .06 to
.09 percent of all truncated items. 12
Pilots in Interbank Check Safekeeping
Two pilot programs in interbank check safekeeping currently are underway, one sponsored
privately by the Equitable Life Assurance Society
of the United States and one under the auspices
" N a t i o n a l Association for Check Safekeeping, monthly update, June 15
1982.
" T e l e p h o n e interview with Robert V. Sabeck. July 16. 1982
27
of the National Association for Check Safekeeping
(NACS). The Equitable pilot, which got underway
in June 1981, involves payroll checks drawn on
Equitable's account at the Chase Manhattan
Bank in New York and deposited at Manufacturers
Hanover Trust. Checks are safekept at Manufacturers Hanover, and data are transmitted
electronically to Chase. Equitable's program closely
parallels the NACS effort.
After a year of operation about 3,500 checks
were being truncated each month. Nevertheless,
Equitable is dismantling its pilot. Because the
national pilot is being converted to an ongoing
operation in January 1983 and NACS appears
likely to govern the further development of
interbank check safekeeping, Chase has asked
Equitable to join the national effort. Equitable
has agreed; it will begin participating in the
NACS pilot as soon as it exhausts its supply of
checks with its own truncation indicator and
acquires a supply with the NACS preferred
constant 1.
Since Equitable already had full account reconciliation (reconciliation with check storage), it
has not experienced any cost savings as a result
of truncation. The fees for truncated items are
the same as for regularly processed checks.
Nevertheless, Equitable will continue to support
interbank check safekeeping. With greater volume
in the future, the fees might fall below those for a
paper check. According to William Herzog, Equitable vice president, "There's no reason not to
truncate checks." 13
The initial design of the NACS program, outlined in the previous section, was developed
through the cooperative effort of over 40 banks
working with the ABA Check Safekeeping Task
Force. In April 1981 the ABA "announced the
successful live test of interbank truncation," and
the NACS was formed as " a national clearinghouse asociation to administer check safekeeping."14 The ABA now serves as the NACS secretariat.
Initially the items eligible for check safekeeping
under the NACS pilot were limited to corporate
dividend and rebate checks of less than $300.
Accounts on which the checks were drawn had
to have full account reconciliation services, including storage at the payor bank, associated
''Telephone interview with William J Herzog, Vice President. Equitable
Lite Assurance Society of the United States. July 16, 1982
' " C h e c k S a f e k e e p i n g ; G u i d e l i n e s for Inter Bank I m p l e m e n t a t i o n
American Bankers Association (Washington, 1981), p v
28
T a b l e 1 . N u m b e r of I t e m s Eligible f o r C h e c k
S a f e k e e p i n g a n d N u m b e r of I t e m s
S a f e k e p t in N a t i o n a l C h e c k
S a f e k e e p i n g Pilot April 1 9 8 1 - J u n e 1 9 8 2
Percent of
Eligible
Items
Safekept
Number
Eligible
Number
Safekept
279,888
74,546
38,813
69,563
7,916
3,898
1,354
4,363
2.8%
5.2
3.5
6.2
462,810
17,531
3.8%
102,992
41,934
108,282
87,878
41,250
73,355
8,158
4,124
5,593
15.005
4,611
4,648
Subtotal
455,691
42,139
9.2%
TOTAL
918,501
59,670
6.5%
Period
April-September 1981
October 1981
November 1981
December 1981
Subtotal
January 1982
February 1982
March 1982
April 1 9 8 2
May 1982
June 1982
7.9
9.8
5.2
17.1
11.2
6.3
Source: National Association for Check Safekeeping
with them. Each operating bank was limited to
entering only one account into the check safekeeping pilot. Effective last January, however,
the NACS raised the ceiling on the value of
eligible items to $1,500, removed the limitation
on the number of accounts each operating bank
could enter into the pilot, and added retirement,
annuity and pension checks, payroll checks and
bank money orders to the list of eligible items.
The effect of liberalizing the NACS restrictions
and the admission of three more operating banks
into the pilot program can be seen-in Table 1. In
the first six months of operations the pilot banks
truncated 2.8 percent of eligible items. By the
end of 1981, the proportion had grown to 3.8
percent. The 1982 data show significant improvement. I n t e r m s o f t h e percentageof eligible items
truncated, the low months in 1982 were equal to
the high months in 1981. It is important to note
that "eligible items" comprise all checks of the
specified types that fell under the ceiling on
dollar amounts and were drawn on the corporate
accounts participating in the pilot. Some of these
items could have been deposited first at the
bank on which they were drawn and, thus, not
available for interbank check safekeeping. Others
never passed through the hands of the NACS
O C T O B E R 1982, E C O N O M I C R E V I E W ^
operating banks. However, dividend checks were
chosen for the first phase of the NACS pilot
because generally they are distributed nationwide.
NACS believes the addition of three new operating
banks, which may be viewed as concentration
points for the widely dispersed dividend checks,
was the primary factor contributing to the improvement shown by the 1982 data. 15
Unresolved Issues in Check Safekeeping
The fact that payor bank and interbank check
safekeeping programs are functioning successfully
does not imply that all the issues surrounding
check safekeeping have been resolved fully.
Indeed, experimentation has just begun. Safekeeping at the payor bank is straightforward
since it involves only a bank and the customers it
serves. Because more than one institution is
involved in interbank truncation transactions,
this type of check safekeeping is more complex.
Standards and agreements are necessary for
interbank check safekeeping; and if it is to
expand beyond its present limited status, liability,
technology, and profitability issues must be addressed.
Legal issues. The legal issues centeraround the
right of customers to receive their cancelled
checks and on payor banks' responsibility to
examine items presented to them to ascertain
that they are properly payable. The consensus of
legal opinion is that customers do have the right
to have cancelled originals returned to them and
that this right may be waived. H o w these waivers
are obtained, however, is an issue that can be
resolved between a bank and its customer. The
cautious approach being taken in interbank check
safekeeping stems from the issue of examining
items. Using the M ICR line as the source of data
to be captured and transmitted precludes the
payor bank's ability to examine the checks. This
is the reason the NACS check safekeeping program is limited to accounts that have full reconciliation services. W h e n the pilot was first proposed in 1979, the ABA's Check Safekeeping
Legal Subcommittee's position was "...that the
payor bank's procedure of reconciliation with
the information provided in advance by the
customer concerning the check, and with the
information transmitted to it by the truncating
^Telephone interview with Rebecca Childress.
American Bankers Association, June 1982.
FEDERAL RESERVE B A N K O F A T L A N T A
Research
Associate,
bank, should serve as a valid legal substitute and
satisfy the bank's legal responsibilities for checksignature verification." 16
Lacking any equivalent of full account reconciliation for consumer accounts, banks have
been hesitant to expand interbank check safekeeping to retail accounts. The primary concern
is that a payor bank could be held liable for failing
to verify signatures. Most banks today do not
verify signatures on every check they process
because they believe the cost of doing so is
greater than the risk involved. Nevertheless, this
does not preclude banks from being held liable
for failing to exercise due care. A court addressed
the issue in Jackson vs. First National Bank of
Memphis, Inc. in 1966 and found the bank guilty
of negligence. 17 This does not close the issue, of
course, for common law changes, albeit slowly.
In the meantime, there are alternatives. Banks
participating in an interbank check safekeeping
program could agree to share in the liability. The
U.C.C. could be changed. And one writer has
suggested that the Federal Reserve could use its
power to "vary the effect of Article 4 " granted to
it under U.C.C. 4-103(2), (3) to relieve banks of
their duty to verify signatures. 18 The first option is
probably the most feasible short-term solution.
Once banks have gained enough check safekeeping experience to permit them to assess the
risks more accurately, they may be more willing
to allocate the risks among themselves. Legislative
and regulatory changes probably will follow more
slowly.
Technology issues. The need to verify signatures
also raises the issue of check safekeeping technology. It is technologically feasible to transmit a
digitized image of the entire check, or part of it,
from the keeper to the payor bank. Known as
image lift, this technology "optically captures
and digitizes the image of the check as it is
processed while simultaneously capturing the
accounting information in the MICR line." 19
From the point of view of converting the
present check collection process into an electronic medium, image lift technology seems like
a practical solution, but limitations associated
l6
Edward F Dobbins, Jr. "Legal Aspects." In C h e c k S a f e k e e p i n g : A
P r o p o s a l f o r Inter B a n k C h e c k T r u n c a t i o n American Bankers Association (Washington, 1979), p. 13.
" L e g a l Issues i n C h e c k T r u n c a t i o n . Electronic Banking. Inc. (Atlanta.
1981), pp. 15-16.
'"Ibid., pp. 11 and 15.
,9
David M. Smith. Truncation: Image vs. Nonimage." T h e M a g a z i n e of
Bank A d m i n i s t r a t i o n . December 1981. p. 50
29
with the technology and longer-term implications
raise questions about its viability.
The primary technological limitation is data
transmission capability. At present data transmission speeds, it could take 11.6 hours to
transmit images of 100,000 truncated checks. 20
To put this into perspective, the nation's commercial banks received approximately 125.6
million items from their depositors on a typical
day in 1979, and over 70 percent of these items
were on-other checks 21 that could have been
transmitted electronically in a full truncation
environment.
In addition to the data transmission speed
problem, the industry must consider the data
communication costs and the investment it would
have to make in image lift hardware and software.
The technology is new. It is relatively expensive.
It is not widely used. What's more, there are a
limited number of vendors. Even if the cost can
be reduced quickly t o a level that would make its
use feasible, making image lift the foundation
technology for interbank check safekeeping would
require the c o m m i t m e n t of many financial institutions to a new technology that could ultimately
perpetuate checks. If the long-term industry
objective is primarily to improve the check
collection system, and not to reduce the number
of paper items processed, the c o m m i t m e n t and
investment could well be worthwhile. Proponents
of image lift technology cite it as a potential
solution to the signature verification problem
and as a way to meet consumers desires by
providing a statement that includes reduced
images of cancelled checks. Nevertheless, these
benefits contribute little to another industry
objective: developing a more fully electronic
payments system that encourages customers to
access their transaction funds in a variety of ways,
not only by checks.
Profitability. The question of profitability must
be addresed in terms of costs saved. Profitability
refers more specifically to the checking account.
At least at this point, it would seem difficult to
justify charging a premium for what is essentially
a feature to reduce bank costs.
Cost reduction has been the primary impetus
for check safekeeping. Federal Reserve Functional
C o s t Analysis reports reveal that the cost to
20
21
lbid.
Federal Federal Reserve Bank of Atlanta. A Q u a n t i t a t i v e D e s c r i p t i o n o f
t h e C h e c k C o l l e c t i o n System, Vol. I. (Washington: American Bankers
Association; Park, Ridge, IL: Bank Administration Institute, 1981), p. 153.
commercial banks to process on-us debits and
transit items and the cost to maintain demand
deposit accounts rose an average of 10 percent
per year during the 1977-1980 period. Higher
postage rates and the pricing of formerly free
Federal Reserve check collection
services
added to the cost burden in 1981. Cost increases
are not expected to abate; one bank executive
has suggested that total check processing costs
for the industry may double during the first half
of the 1980s, reaching $20 billion by 1985. 22
Evidence on the cost savings associated with
check safekeeping at payor banks is scanty, but it
is encouraging. Prior to implementing a check
safekeeping program in 1976, Mercantile-Safe
Deposit and Trust Company, a $402 million
bank in Baltimore that processed more than 65
million checks that year, estimated it could save
$60,000 annually by not returning checks to its
customers. Most of the expected savings were
the result of the elimination of fine-sorting, reduced
statement preparation time, and lower postage
expense. The estimated savings represented
only a fraction of the bank's $5 million operations
budget; however, the bank already had a bulk
filing system in place. Greater savings would
accrue to banks that instituted bulk filing as part
of their safekeeping program. 23
IBM studied payor-bank check safekeeping
using image lift technology in 1978. That study
indicated that banks could save as much as 12
percent of their check-processing costs by capturing a digitized image at a central site and
processing the image instead of the check. W h e n
a configuration in which images were captured at
branch locations and transmitted to the central
processing site was evaluated, however, the net
savings was reduced to 3 percent. Using image
lift technology to capture check images on a
cycle date and using the images to prepare
statements produced little in potential savings.
Furthermore, software development costs were
not estimated for any of the three design configurations. 24 Thus the 12 percent savings in the
most efficient theoretical configuration is probably
somewhat overstated.
Valley National Bank is one institution that
readily shares data about its check safekeeping
" M i c h a e l Hosemann. "Future of Debit and Credit Cards." In T h e Future of
t h e U.S. P a y m e n t s System. Federal Reserve Bank of Atlanta (Atlanta,
June 23-25, 1981), p. 126.
" C h e c k S a f e k e e p i n g : Case S t u d i e s o f C u r r e n t T r u n c a t i o n P r o g r a m s
American Bankers Association (Washington, 1980), p. 2/
30
O C T O B E R 1982, E C O N O M I C R E V I E W ^
T a b l e 2. Valley National Bank Estimated
Monthly Costs per Account
Direct Operating Costs
Safekeeping
Non-Safekeeping
$.330
$ .330
.370
.004
.002
.035
.027
.011
$ .773
.320
$1,093
(.508)
$ .585
.002
$.338
.170
$.508
$7.02
Function
Capture & Reject/
Cycle Passes
Fine Sort
Storage/Destruction
Matchmaker
Operations
Manual Statementing
Mail Department
Subtotal
Postage
Total Monthly Costs
Monthly Savings Per
Safekeeping Account
Annual Savings Per
Safekeeping Account
With Indirect Allocation
Safekeeping
Non-Safekeeping
$.551
$ .551
.616
.007
.003
.002
$.563
.170
$.733
.062
.044
.017
$1,290
.320
$1,610
(.733)
$ .877
$10.52
Function
Capture & Reject/
Cycle Passes
Fine Sort
Storage/Destruction
Matchmaker
Operations
Manual Statementing
Mail Department
Subtotal
Postage
Total Monthly Costs
Monthly Savings Per
Safekeeping Account
Annual Savings Per
Safekeeping Account
Source: Valley National Bank, 1982
program. The bank even presents seminars periodically to explain its operation and to let participants experience it on site. The estimated monthly
costs per account shown in Table 2 were presented at a Valley seminar last spring. The bank's
evidence clearly is encouraging.
Valley National Executive Vice President Robert
Sabeck also cites intangible benefits of the check
safekeeping program. W i t h over 43 percent of
the bank's personal checking customers using
the service, the number of "cripples"—statements
missing a check that may take considerable
personnel time to locate—has been reduced.
FEDERAL RESERVE B A N K O F A T L A N T A
Furthermore, the use of check safekeeping reduces the number of misdirected checks (cancelled checks sent to the wrong person) a situation
that can be embarrassing for the account holder
and the bank. Sabeck believes check safekeeping is a "cleaner operation." The bank is not
experiencing a greater volume of telephone calls
or increased photocopy expense, as it had anticipated before it actually implemented check
safekeeping. 25
The cost savings benefits of interbank check
safekeeping have not yet been made known.
The prices banks will charge each other for
interbank safekeeping transactions have not been
announced by the NACS, and banks participating
in the pilot have been reluctant to share information about their actual costs. A preliminary
assessment of potential cost savings conducted
before the pilot began indicated that payor
banks would save 6.61 cents per item and that
the costs at truncating banks would increase
1.46 cents for each item safekept. Thus the
industr/s net savings in an interbank safekeeping
environment would be 5.15 cents per item. 26
The preliminary model's estimation of savings
under payor-bank and cooperative (interbank)
truncation conditions are shown in Table 3. The
percentages were developed from information
provided by 35 banks that participated in the
original research effort. The values (cents saved
per item) were calculated by applying the percentages to costs as estimated in the 1978
Functional C o s t Analysis report. Of course, costs
have changed since then; and Fed pricing was
not considered in the equation. The ABA, as
secretariat to the NACS, is developing a new
model based on banks' actual experience in the
pilot program. It should enhance other banks'
ability to evaluate their own potential costs and
benefits.
Conclusion
Check safekeeping holds the potential to be
an important product in the transition from a
paper-based to an electronic payments system.
It could reduce costs, educate consumers and
?4
E Clark Grimes. "IBM Study Finds a Potential Savings ot 12% from
Internal Check Nonreturn." A m e r i c a n Banker May 21, 1980, p. 11.
" T e l e p h o n e interview, July 16, 1982.
26
Dr. Allen H. Lipis. '"Cost Savings in Truncation." In C h e c k S a f e k e e p i n g :
A Proposal for Inter Bank C h e c k T r u n c a t i o n American Bankers
Association (Washington, 1979), p. 5
31
T a b l e 3 . P r e s e n t C h e c k P r o c e s s i n g C o s t s ( M a j o r Banks)
% Reduction with Truncation
Functions
State ment Processing
Postage
Statement Preparation
Payor Bank Only
Payor
44
44
60
60
80
100
100
100
79.0
2T0
Cooperative
Keeper
100.0
Check Processing
Fine Sorting
Check Filming/Sorting
Check Filming
21.9
18.5
13.3
Inclearing Capture
Inclearing Reconcilement
Transit Repass
Transit Reconcilement
Branch Capture & Encoding
Branch Reconcilement
35
30
0
0
0
0
0
0
3.7
9.9
3.7
5.0
11.1
12.9
100.0
100
100
0
0
0
0
- 2 0
-65
-70
0
0
100
100
0
0
Account Service
Item Retrieval/Inquire
Item Storage
Transportation
S o u r c e : Check
Safekeeping
A Proposal
tor Inter Bank Check
Truncation,
help financial institutions differentiate themselves from their competition. In the long run,
check safekeeping probably will be only one
item in a vast array of payment services from
which account holders can make their choice. It
will not necessarily be used by all account
holders, nor offered by all financial service providers.
The major impetus for developing check safekeeping has been to reduce or control rising
check-collection costs. Where this objective is
achieved and banks are willing to share the
benefits with their customers, it may lower service
charges relative to traditionally processed checks.
While the early data on savings that can be
attained by check safekeeping seem promising,
the jury is still out.
1979
There are unresolved technological and legal
issues concerning check safekeeping. These issues
center on payor banks' responsibility to examine signatures and check contents prior to
payment to be sure the items are properly
made. Several approaches to resolving these
issues are being considered, including the use
of image lift technology and agreements among
banks to share liability. Finally, the decision will
also be influenced by what each individual
financial institution perceives its role in the
future payments system to be.
—Veronica M. Bennett
32
OCTOBER 1982, E C O N O M I C REVIEW ^
Back Issues and
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JANUARY
Economic
Review
1982
FEBRUARY
MARCH
SPECIAL ISSUE:
The Southeast in 1982
Banking's New Competition: Myths
and Realities
The Southeast in 1982: An Overview
Historical Origins of Supply-Side Economics
Florida: Dealing from Strength in Slow Year
The Surge in Bankruptcies:
Georgia: Hoping Recession's Gone With Wind
is the New Law Responsible?
Southeastern Oil Industry Booming Again
Tennessee: World's Fair, New Plants
Should Boost Economy
The Costs of Slowing Inflation: Four Views
Louisiana: Can Gas and Oil Keep
Cost-of-Living: Why the Differences?
Outlook Bright?
Alabama: Will "Heart of Dixie" Skip
a Beat?
Behind the Sunbelt's Growth:
Industrial Decentralization
Explaining the Cash Explosion
Tax Cute: W h o Shoulders the Burden?
Lumbering at Top Speed:
The Check Collection System,
1952-1979
Regulation of Bank Capital:
An Evaluation
Cost of Living Data: A Guide to Sources
Mississippi: Ailing Economy Looks
for Cure
APRIL
JUNE
MAY
SPECIAL ISSUE:
SPECIAL ISSUE:
The Changing South
Line of Commerce: Battle Over Banking
The Legal and Legislative History of the
Line of Commerce in Banking
Regulatory Agencies' Approaches to
the "Line of Commerce"
Theoretical Review
Review of Empirical Literature
Sixth District Survey of
Small Business Credit
Do Banks Price As If Thrifts Matter?
Evidence from the Banking Side
JULY
IRAs in the Southeast: A Laboratory for
Deregulation
Challenges for Retail Banking in the 80s
Supply-Side Economics and
the Vanishing Tax Cut
Supply-Side Conference in Atlanta
Southeast's Ships Come In
Industrial Impacts of the
1981 Business Tax Cuts
What Are Businesses Looking For?
A Survey of Industrial Firms
in the South
Business Climate: Behind the Geographic
Shift of American Manufacturing
Migration: Changing Faces of the South
Uneven Growth: Southern Population
Changes at the County Level
The New Federalism: Assessing the
Fiscal Health of State and Local
Governments in the Southeast
SEPTEMBER
AUGUST
SPECIAL ISSUE:
A Changing Era Challenges
Thrift Industry
Florida S&Ls' Use of Expanded Powers
Mutual-To-Stock Conversions By S&Ls
Adjustable Rate Mortgages:
Southeastern S&Ls Interested
But Cautious
Small Business: Linchpin for the Southeast
Trucking Deregulation in the Southeast
Rapid Growth & Construction:
A Volatile Pattern For the Southeast
Bankers and the Fear of Flying
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The Deficit Puzzle
A Primer on Budget Deficits
Cyclical and Secular Components of
the Federal Budget:
Implications for Credit Market Activity
Is Inflation a Consequence of
Government Deficite?
The Crowding Out Controversy:
Arguments and Evidence
Deficits, Savings and Capital Formation
Fiscal Policy: An Effective Stabilizer?
Financial Futures as a Risk
Management Tool for Banks and S&Ls
Positioning for Interstate Banking
The Flat-Rate Income Tax:
Boon or Boondoggle?
Does Unemployment Insurance Affect
the Composition of Joblessness?
Supply-Side Economics: Guiding
Principles for the Founding Fathers
Asking the Right Question:
Small Business and the
Information Future
C o m i n g in N o v e m b e r - S p e c i a l I s s u e :
E c o n o m i e s o f Scale i n B a n k i n g
Contact: Information Center • Fédéral Reserve Bank of Atlanta • P.O. Box 1731 • Atlanta, Ga. 30301 • 404/586-8788
Capital Formation and Economic
Growth in the 1970s
Government
Spending,
Tax Rates, and
Private Investment
in Plant and
Equipment
Higher tax rates played a
greater role in stifling the
investment b o o m of the 1960s
than did government spending.
The slowing investment rate
contributed significantly to
lower productivity and
real wages.
34
For the U. S. economy, the 1970s proved to be a
decade of contradictions.
By some measures, it was a decade in which
the economy faltered more seriously than at any
time since the Great Depression. During the first
eight years of the decade, real GN P per person of
working age grew at a c o m p o u n d annual rate
barely in excess of 1 percent (see Table 1). Yet
that sluggish GNP growth was contradicted by
surging employment, which reached a record
levelof97.6 million in November1979. N o t o n l y
did aggregate employment reach record levels,
but the fraction of the potential work force
employed also reached an all-time high during
the 1970s. In 1974, the percentage of the population aged 18 to 64 holding market-sector jobs
surpassed 70 percent for the first time in history.
H o w can this rapid employment growth be
reconciled with the equally sharp decline in the
growth of output? One obvious explanation is
that the growth of other production factors failed
to keep pace with the growth of labor. An
examination of net investment in plants and
equipment during the postwar period corroborates this conjecture.
The surge in aggregate employment during the
last 15 years can be attributed to t w o sources.
The fir$t, noted above, is the steady increase
since World War II in the percentage of the
working-age population holding jobs. The second
is the rapid growth during the late 1960s and the
1970s in the pool of potential workers. During
the 1950s, the working-age population grew at a
compound annual rate of 0.7 percent. As those
born during the postwar " b a b y b o o m " began to
reach working age in the late 1960s and the
1970s, this growth rate in the pool of potential
workers more than doubled.
I n o r d e r t o keep the stock of capital per worker
growing at the rates experienced in the 1950s,
this rapid increase in workers would have required
an increase in the share of national income
invested in plants and equipment. Economic
theory suggests that, in the absence of other
complicating factors, the prospect of profitable
investment opportunities would elicit an increase
in the share of national output devoted to net
additions to the capital stock. These investment
opportunities would have resulted from the
impending increase in the size of both the
OCTOBER 1982, E C O N O M I C REVIEW ^
Table 1. Percent of Working-Age Population Employed
and Growth Rates of Working-Age Population
and Real GNP
Growth Rate
of Real GNP
Per Person of
Working Age
Percent of
Working Age
Population
Employed
Growth Rate
Of Population
of Working
Age
1930-39
-1.07
55.5
1.23
1940-49
3.13
62.0
1.15
1950-59
3.14
65.0
0.70
1960-69
2.61
66.8
1.43
1970-77
1.08
68.9
1.64
Period
NOTE: Growth rates are compound annual percentage rates of change.
Working-age population isdefined as total noninstltutional population of the United States aged 18 to 64, Inclusive. Population data
are from H i s t o r i c a l Statistics o f t h e U n i t e d States, C o l o n i a l
T i m e s t o 1 9 7 0 and C u r r e n t P o p u l a t i o n Reports. Employment
data are from L o n g T e r m E c o n o m i c G r o w t h , 1 8 6 0 - 1 9 7 0 ,
B u s i n e s s Statistics. 1977. and the Survey o f Current Business.
Real GNP data are from the N a t i o n a l I n c o m e a n d P r o d u c t
Accounts.
potential work force and the market for the
output of those investments. Because greater
investment entails a sacrifice in current consumption, however, it is unlikely that the entire
burden of adjustment to a higher capital stock
would have been borne immediately. It is unlikely
therefore, that the investment rate would have
increased sufficiently to maintain the previous
rate of growth of net investment (and thus
capital stock) per worker. One would thus expect
a slowing in the growth rate of labor productivity
and also in the real wage of labor.
How well d o these predictions accord with
actual experience? The ratio of real, gross, private,
nonresidential fixed investment to real GNP did
hold up in the face of the surge in the work force.
It held consistently above its postwar average
throughout the entire decade from 1965 through
1974, falling only slightly below the average from
1975 through 1977. Yet the picture resulting
from an examination of net additions to the
capital stock, after allowing for depreciation of
existing plant and equipment, is somewhat different. 1
'Differences in the behavior of gross and net saving have been noted in
Michael J. Boskin, "Taxation, Saving, and the Rate of Interest," J o u r n a l
of Political Economy, 86, No. 2, part 2 (April 1978): S3-S27.
FEDERAL RESERVE B A N K O F A T L A N T A
Table 2. Real Net Private Nonresidential
Fixed Investment as a Percentage of
Real Net National Product
Period
Investment
1930-39
-2.94
1940-49
1940-45
1946-49
1.51
-0.30
4.21
1950-59
2.86
1960-69
1960-63
1964-69
3.42
2.40
4.11
1970-77
1970-74
1975-77
2.70
3.25
1.79
1946-77
3.16
Note: Numbers are averages of annual figures.
Source: N a t i o n a l I n c o m e a n d P r o d u c t A c c o u n t s , Tables 1.10 and 5.3.
Table 2 shows the ratio of real, net, private,
nonresidential fixed investment to real net national product for selected periods. Net investment as a percentage of Net National Product
(N N P) was well above its postwar average during
the mid and late 1960s. In fact, it was almost as
high as during the immediate postwar investment boom when the capital stock was rebuilt
after the real declines that had occurred during
the Depression and World War II. During the
early 1970s, however, the net investment ratio
was only slightly above its postwar average and,
during the mid-1970s, it was well below this
average. In fact, the ratio during 1975 to 1977
lagged below the lowest level recorded for any
other single year since W o r l d War II. It thus
seems that investment indeed did not increase
enough to keep the capital stock per worker
growing at its average postwar rate.
Further evidence on this point is revealed in
the growth rates of labor productivity (as measured
by real output per hour in private nonfarm
business) and of real wages (Table 3). The figures
indicate that both productivity and real wages
did grow slowly during the late 1960s and the
1970s. It is interesting that both labor productivity
and real wages grew more slowly during the late
35
Productivity3
Real W a g e b
1950-59
1950-54
1955-59
2.55
2.61
2.48
2.63
2 71
2.55
1960-69
1960-64
1965-69
2.59
3.03
2.15
1 48
1 61
1.35
mid to late 1960s was not sustained into the
1970s, when the work force grew even faster
than it had during the 1960s. A clue to explaining
this phenomenon is that effective tax rates on
the income from capital were cut substantially in
the early 1960s, but had returned to their previous
levels by 1970. Indeed, the investment boom
followed close on the heels of the Kennedy tax
cuts. It might be promising, then, to examine
government fiscal policy as an important determinant of private investment.
1970-77
1970-74
1975-77
1.56
0.95
2.58
079
0 54
1.27
Government Policy and Capital Formation
Table 3. Growth Rates of Labor Productivity
and Real Wages
Per
iod
Note: Numbers are compound annual percentage rates of change.
a
O u t p u t per hour in private nonfarm business. Source: H a n d b o o k of
L a b o r Statistics, 1978
^Average hourly earnings of production workers in manufacturing
deflated by consumer price index. Sources: L o n g T e r m E c o n o m i c
G r o w t h , 1 8 6 0 - 1 9 7 0 and H a n d b o o k o f Labor Statistics, 1978
1960s than during the first half of that decade,
even though the net investment ratio indicates
that something of an investment boom began in
1964 and continued throughout the decade.
This boom apparently was insufficient to supply
the rapidly growing work force with enough
capital to maintain the previous rates of increase
in productivity and real wages.
"[During the 70s] . . .
investment did not increase
e n o u g h to keep the capital
stock per worker growing at
its average postwar rate."
Casual examination suggests then that these
data are largely, but not completely, in accord
with what economic theory would have forecast
in the absence of other complicating factors. This
suggests that some such complicating factors
might have been at work, and might explain
discrepancies between the predictions and what
actually occurred. The major discrepancy was
that the predicted investment increase of the
With the perceived "capital shortage" publicized
in the financial press, one of the most widely
recognized issues of public economic policy
concerns how government activities affect private
capital formation. Government has been enpowered to conduct a broad range of policies
that can affect even the minute details of our
everyday lives. In recent years, we have seen that
power exercised more broadly than ever before
as programs have extended government control
into areas previously reserved for private activity.
Many of these programs have potential effects
on private investment decisions, whether by
design or as an unintended consequence.
For example, regulations designed to protect
the environment and to improve occupational
health and safety standards raise the cost of
doing business, thus discouraging new "productive" investment, while at the same time
encouraging investments to meet the newly
imposed requirements. Such regulations lower
the stock of capital used to produce national
output, as conventionally measured; they increase
the capital to produce such things as clean air
and water, which do not enter into the conventional measures of national output.
The most rapidly growing of all government
programs, as measured by budgetary outlays, are
those involvingtransfer payments to people. The
effects of such transfer programs on capital
formation probably weren't a primary consideration of those w h o designed them. But like all
policies requiring expenditures of public funds,
these programs d o affect capital formation, however indirectly, because the government must
somehow finance its expenditures. This financing
may be accomplished (1) by raising tax revenues,
(2) by issuing interest-bearing government debt,
or (3) by printing money. Each of these actions
may discourage capital formation.
36
O C T O B E R 1982, E C O N O M I C R E V I E W ^
This article examines the effects on private
capital formation of the first t w o of these methods
of government financing—the taxation of income
from capital and the issuance of government
debt. It thus ignores the effects of government
policies such as environmental standards, which,
important as such policies might be, do not entail
large outlays of public funds. It also ignores the
composition of public expenditures by assuming
that all such spending takes the form of lumpsum payments to private citizens, undoubtedly
an over-simplification. Some public expenditures
are used to acquire public capital, such as highways, which increases the productivity of privatesector investment. Other forms of government
spending, most notably transfer payments, entail
disincentives to private productive activity. While
such incentive effects are of great importance,
we won't consider them here.
Finally, this article does not examine the effects
of government monetary p o l i c y — i n particular
the printing of money to finance public spending—
on private capital formation. This omission doesn't
imply that such effects are unimportant. Many
believe that excessive money creation causes
inflation and that the interaction of inflation and
the tax laws increases the rate of taxation of the
true economic income from capital.
absence of a tax, the market is in equilibrium at
price P Q and quantity Q 0 - If a tax o f t per unit sold
is imposed, the price paid by the purchaser rises
to Pd, and the price received by the supplier falls
to Ps. This reduces the quantity to Q i . The size of
the wedge is Pd - Ps, which is equal to t, the
amount of tax per unit.
The wedge analysis can be applied to investment in physical capital as well as to other
activities, as illustrated in Figure 2. Here the
supply curve refers to aggregate saving out of
current income (the supply of funds to the
capital market). The demand curve depicts available investment opportunities (the demand for
funds). The horizontal axis measures the quantity
of saving and investment, and the vertical axis
measures the rate of return on saving and investm e n t According to the wedge analysis, an increase
in the tax rate on income from capital ("the tax
wedge") will reduce the amount of capital formation taking place.
F i g u r e 2 . T h e e f f e c t of a c a p i t a l i n c o m e t a x
on s a v i n g a n d i n v e s t m e n t
The Tax Wedge
An intuitive economic proposition states that
taxing an activity reduces the amount of that
activity taking place. The tax raises the price paid
by the purchaser of a good or service above that
received by the supplier and is said to drive a
wedge between the t w o prices (Figure 1). In the
F i g u r e 1 . T h e e f f e c t of t a x a t i o n o n o u t p u t
The Deficit Wedge
Government can also finance its expenditures
by issuing debt, and we can view such a debt
issue as a second wedge impinging upon the
capital market. In any period, private saving must
exceed private investment by the amount of the
government's debt issue. (This ignores the possibility of investing abroad or borrowing from
foreigners.) Government securities compete with
private securities for investors' dollars, and only
FEDERAL RESERVE BANK O F ATLANTA
37
those funds left after the sale of government
bonds are available to finance the private sector's
accumulation of physical capital. This "deficit
wedge" is illustrated in Figure 3.
F i g u r e 3 . T h e e f f e c t of d e f i c i t f i n a n c e o n
saving a n d investment w h e n
g o v e r n m e n t b o n d s are net w e a l t h .
A government debt issue is seen to increase
private saving, reduce private investment, or
both. Which of these three alternatives actually
occurs? That has been the subject of considerable
debate d uring the last few years. The most
widely held view, at least until recently, has been
the "crowding-out" proposition, one version of
which is depicted in Figure 3. Before the government debt issue, private saving and private
investment are equal at l 0 = S 0 . T h e interest rate
is r Q . If the government floats a bond issue of size
D, then bond prices are bid d o w n and the
interest rate is forced up to n . The increase in
interest rates stimulates saving, which increases
to S i , and stifles investment, which falls to h . On
the other hand, if saving is completely insensitive
to the interest rate as in the most naive Keynesian
models, the saving curve is vertical rather than
upward-sloping. In this extreme version of the
crowding-out hypothesis, saving remains constant while investment falls by the full amount of
the debt issue. Underany version of the crowdingout proposition, however, investment must decrease, while saving may increase or remain
constant.
The crowding-out hypothesis has been questioned by those w h o argue that government
bonds aren't perceived as net wealth by the
private sector and thus don't reduce private
capital formation. The argument is essentially as
follows. 2 Suppose the government reduces the
current tax bill of every taxpayer by $1 and
finances this reduction by issuing bonds which
bear the market rate of interest. Suppose that a
lump-sum tax equal to $1 plus interest will be
levied on each taxpayer next year in order to
retire the current bond issue.
Will taxpayers feel wealthier today as a result
of this transaction? Will they therefore increase
their consumption and lower private capital
accumulation? If people behave rationally, the
answers to these questions must be "no." People
will save the dollar they currently received so as
to be able to meet their increased future tax
liabilities. Current saving will increase by the
amount of the government debt issue, and no
private capital accumulation need be crowded
out (Figure 4). N o w a debt issue of size D causes
thesavingscheduletoshift rightward byan equal
horizontal distance D to S'. Saving increases to
Si, investment remains constant at l 0 , and the
interest rate remains constant at r G . According to
this view, crowding-out will occur only if the
private sector does not fully take account of the
future tax liabilities implied by government bonds
and thus regards these bonds as a substitute for
claims on physical capital.
F i g u r e 4 . T h e e f f e c t of deficit f i n a n c e o n
saving and investment w h e n
g o v e r n m e n t b o n d s are n o t net w e a l t h .
The above argument, unobjectionable as far as
it goes, fails to take into account the interaction
between the deficit wedge and the tax wedge.
'See Robert J. Barro, "Are Government Bonds Net Wealth?" J o u r n a l of
Political E c o n o m y 8 2 (November/December 1974): 1095-1117
38
O C T O B E R 1982, E C O N O M I C R E V I E W ^
Governments seldom raise revenues through
lump-sum taxes. More commonly, they raise
revenues through distortionary taxes on economic
activity, that is, through taxes which entail wedges.
A deficit today thus indicates not merely tax
liabilities tomorrow, but also a tax wedge tomorrow.
Consequently, a deficit today will reduce the
incentive to acquire assets whose income will be
subject to the implied future taxes.
Thus, the statement that government bonds
are not net wealth cannot be broadened into a
statement that a government debt issue is a
neutral economic policy. The latter statement
follows the Keynesian tradition of ignoring the
incentive effects of fiscal policy and of concentrating only on the effects of policy upon the
private sector's wealth or disposable income.
" A c c o r d i n g to the w e d g e
analysis, an increase in the
tax rate on i n c o m e from
capital ('the tax wedge') will
reduce the a m o u n t of capital
formation taking place."
According to this tradition, a current transfer
payment financed by current taxes is a neutral
policy, since it has no effect on disposable
income. If government bonds are not net wealth,
then the Keynesian tradition of ignoring incentive
effects w o u l d argue that a transfer financed by a
government debt issue would also be neutral,
since it doesn't affect net wealth. 3 A more neoclassical approach, emphasizing incentive effects,
would suggest that neither of these policies is
neutral—that they both involve disincentives to
productive activity. 4
3
This rather cautious wording is used to satisfy those who might argue
that a true Keynesian must, by definition, believe that bonds are net
wealth, since bond illusion is one of the central elements of the standard
Keynesian model.
4
For a more formal treatment of these issues, see Douglas H. Joines,
"Government Fiscal Policy and Private Capital Formation," Ph D. Dissertation,
Univeristy of Chicago, December 1979
FEDERAL RESERVE B A N K O F A T L A N T A
Empirical Evidence
How large are these wedges and what effect
d o they have on capital formation? At the theoretical level, the notion of the tax wedge is clear.
At the empirical level, however, it is not at all
obvious how to go about measuring it. Our
evidence rests on several assumptions about the
U. S. tax system. The first is that all taxes ultimately
fall upon i n c o m e — a l l arise from either the generation or the spending of income. This proposition
is fairly obvious when applied to personal and
corporate income taxes, sales taxes, and payroll
taxes, but it is equally applicable to other taxes.
For example, we can view property taxes (by far
the largest government revenue source not accounted for by the taxes listed above) as tax on
the flow of services produced by real property. In
constructing effective economy-wide income
tax rates, it is thus necessary to take account of all
taxes paid in the economy and to take some
comprehensive measure of income as the tax
base. The income measure used here is Net
National Product (NNP).
Construction of effective marginal tax rates on
income from labor and income from capital
requires that NNP be separated into t w o components, one attributable to capital and the
other to labor. Income attributable to capital was
taken to include corporate profits, rental income
of persons, and net interest. 5
The economy-wide marginal tax rate on the
income from capital is the fraction of an incremental dollar of income earned by the economy's
capital stock taken by the government in taxes. It
thus depends upon the marginal tax rates of the
individuals receiving the incremental dollar and
upon the distribution of that dollar among those
individuals. If we assume that each individual's
share in an incremental dollar of income produced by the capital stock is equal to his share in
existing capital income, then the economy-wide
marginal tax rate is equal to a weighted average
of the individual marginal tax rates, with the
weights being the shares in existing capital income. A similar calculation will give the economywide marginal rate of taxation of labor income. 6
Alternative calculations which attributed business and professional
income and farm income to capital did not yield materially different
results.
6
These tax rates on income from labor are not reported here, but may be
found in Douglas H. Joines, "Estimates of Effective Marginal Tax Rates
on Factor Incomes," J o u r n a l of Business. 54, No. 2, (April 1981): 1 9 1 226.
39
More specifically, the effective marginal tax
rate on income from capital is taken to include
three components. The first component represents the federal personal income tax. It is
measured by taking a weighted average of the
effective marginal federal personal income tax
rates in the various income brackets, where the
weight for each bracket is the fraction of total
income from capital accruing to individuals in
that bracket. 7 The second component is assumed
to be a flat-rate tax applicable only to income
from capital. It is estimated by taking the ratio of
property and corporate profits tax receipts to
income from capital. The third component is
assumed to be a flat-rate tax applicable to
income from all sources. It is estimated by taking
the ratio of all remaining taxes (except the Social
Security tax, assumed to be labor-specific) to
NNP. The most important of these remaining
taxes, as judged by revenue raised, is the sales
tax. The effective marginal tax rate on income
from capital is taken to be the sum of these three
components. These calculations were performed
for each year between 1929 and 1975, inclusive. 8
The resulting tax rate series is denoted MTRK.
In principle, the deficit wedge is much easier
to measure. It could simply be taken to be the
real government deficit per person of working
age. Unfortunately, this variable probably is inappropriate for the statistical tests reported below,
since a deficit's size almost certainly is determined
endogenously within the economic system.9 These
empirical tests, however, require that the investment series be explained as functions of exogenous variables. A variable more nearly exogenous than the deficit and which can serve as a
good proxy for it is real government purchases of
goods and services. 10 Consequently, the ratio of
such purchases (by federal, state, and local
governments) to working-age population is used
'These weights sum to less than unity, since some income from capital
escapes the federal personal income tax. Data on the federal personal
income tax are taken from the Statistics of I n c o m e series published by
the Internal Revenue Service Other data on income and tax receipts are
from the N a t i o n a l I n c o m e a n d P r o d u c t A c c o u n t s
"For the sake of brevity, this description of the tax rate calculations has
been greatly simplified. A more thorough description is contained in
Joines, "Estimates of Effective Marginal Tax Rates on Factor Incomes."
'This is because the government cannot set tax rates, total spending, and
the deficit independently of one another. For example, if the government
fixes tax rates and spending, some value of national income will result.
This will, in turn, imply some value for total government revenues and
thus for the deficit.
'"This variable, rather than total government spending, was chosen
because some items of total spending, notably transfer payments to
persons, may themselves be endogenous.
40
in the following statistical tests. This variable is v,
denoted by GXP.
Two measures of capital formation are examined.
One is real gross private domestic investment in
producers' durable equipment per person of
working age (denoted INVE), and the other is
real gross private domestic investment in nonresidential structures per person of working age
(denoted INVS). All of these variables are listed
in Table 4. 11
To determine whether the government fiscal
policy variables exerted any influence on investment during the 1929-75 sample period, we
computed correlation coefficients between the
first differences of each of the fiscal policy
variables and the first differences of the investment variables. 12 W e found that both types of
investment showed a negative contemporaneous
correlation with government spending. For investment in structures, this negative contemporaneous effect is partially offset by a positive
effect one year later.
W e also found a negative correlation between
current increases in both types of investment
and increases in the capital income tax rate
which occur one year later. Such an effect has a
reasonable interpretation. Since it is future tax
rates which affect the profitability of current
investment, future changes in tax rates should, to
the extent that they are anticipated, show an
effect on current investment decisions. It may be
difficult to forecast future tax rate changes over a
long horizon. Reasonable predictions might be
made one year ahead, however, since most tax s
changes work their way through Congress and
state legislatures in the year before they take
effect.
The specific statistical relationships fit to the
data were the transfer function or rational distrij
buted lag models shown in Table 5. These
models, which perform quite well by the usual >
" T h e three real investment series used here were obtained from the
N a t i o n a l I n c o m e a n d P r o d u c t A c c o u n t s of t h e U n i t e d States, 1 9 2 9 7 4 (NIPA), table 1.2, lines 8,9, and 10 These figures are based on the
revised deflator for structures described in the August 1974 issue of the
Survey of Current Business. The government purchases variable was
obtained from line 21 of the same table. The NIPA contains finally
revised data only for the years 1929 to 1972 Revised NIPA data for 1973
were obtained from the July 1977 issue of the Survey of Current
Business. Revised NIPA data for 1974 and 1975 were obtained from the
July 1978 issue of the Survey of Current B u s i n e s s Each series is
identified by the same table and line numbers in all these publications.
,?
The correlation coefficients were actually computed using prewhitened
values of the fiscal policy series rather than between the raw series, in
order that the temporal pattern of the correlations could be more
accurately determined.
O C T O B E R 1982, E C O N O M I C R E V I E W ^
Table 4. The Data
Year
Effective
Marginal Tax Rate
on Income
from Capital
(percent)
Total Government
Purchases of Goods
and Services
Per Person of
Working Age
(1972 dollars)
Investment in
Structures
Per Person of
Working Age
(1972 dollars)
Investment in
Equipment
Per Person of
Working Age
(1972 dollars)
29.45
27.76
28.59
33.12
41.08
41.00
41.44
46.20
44.43
41.36
42.55
45.12
55.81
59.96
61.99
59.96
62.89
61.71
59.21
52.90
49.92
62.03
64.05
60.23
59.92
54.93
55.38
56.52
55.23
54.00
54.29
54.89
54.55
51.45
51.69
49.80
48.91
48.39
49.25
53.60
53.76
51.55
51.15
51.41
52.51
53.43
49.31
566.9
607.9
622.0
585.5
562.9
632.7
639.3
742.7
707.1
760.9
782.4
791.7
1143.7
2188.3
3116.2
3434.2
3007.6
1049.9
842.1
929.0
1051.1
1058.9
1428.3
1705.6
1806.8
1635.7
1583.2
1586.6
1654.7
1738.8
1739.3
1738.2
1813.3
1894.0
1917.6
1947.6
1975.1
2124.9
2263.2
2325.7
2267.2
2173.9
2131.6
2127.7
2088.9
2098.0
2102.7
285.5
237.2
149.4
85.2
64.4
68.9
75.7
101.6
130.6
101.8
105.5
119.7
141.9
78.9
48.9
63.2
94.4
212.0
193.2
203.3
194.5
207.0
221.7
220.3
239.1
248.2
265.4
292.5
290.4
271.1
273.1
289.5
290.6
302.1
198.9
319.9
373.2
393.8
374.6
376.9
388.6
371.9
356.4
357.3
376.4
346.0
297.1
227.3
177.2
114.4
65.2
72.3
92.2
123.2
168.9
192.2
131.6
148.4
191.0
220.6
128.4
114.0
151.7
218.5
261.6
352.9
361.2
308.1
334.9
347.6
336.8
359.2
335.8
376.6
386.2
391.7
333.8
367.8
374.0
360.1
393.3
414.4
458.3
527.7
589.4
568.8
593.1
620.9
583.9
566.7
624.6
707.3
717.3
612.6
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
Note: See pp. 39-43 of the text for a description of these series and their sourcea
statistical standards, indicate that government
spending exerts a statistically significant but
fairly small deterrent effect on capital formation.
Specifically, a permanent $1 increase in annual
government spending causes permanent declines
of about 3.5 cents in annual investment in
nonresidential structures and about 2.5 cents in
annual investment in producers' durable equipment. Alternatively stated, a $ 10 billion increase
in government spending, holding capital income
tax rates constant, reduces investment in plant
and equipment by about $600 million. These
41
FEDERAL RESERVE BANK O F ATLANTA
Table 5. Statistical Equations
Real gross private domestic investment in nonresidential structures per person of working age:
A INVSt = 2.79 + (-0.0610 + 0.0254L)AGXP t - 2 . 0 6 A M T R K t + i
(5.11)
(0.0101)
(0.0102)
(0.992)
+
(1 + 0.486L)i{
(0.152)
Real gross private domestic investment in producers' durable equipment per person of working age:
AlNVEt = 13.9 - 0.0248AGXP t - 3.98AMTRK t + 1
(4.32)
(0.0155)
(1.68)
+ (1 -
0.263L2)f t
(0.158)
Definition of Variables:
INVS Real gross private domestic investment in nonresidential structures per
person of working age.
IN VE Real gross private domestic investment in producers' durable equipment per person of working age.
GXP MTRK -
Real federal, state, and local government purchases per person of working
age.
Effective marginal tax rate on income
from capital.
Note: Standard errors appear in parentheses below parameter est,mates. The tax rate is expressed in percent, and all other variables are in
Ind
'fa r a n S e ^ o f S '
*
^
^
^
L
effects are substantially smaller than most standard
discussions of crowding out would seem to
suggest, constituting less than 0.5 percent of
annual fixed business investment in recent years.
In contrast to the rather small effects of government spending, taxation of capital income strongly
deters capital formation. A one-percentage-point
increase in the effective tax rate on income from
capital results in a decrease in annual investment
in nonresidential structures of about $2 per
person of working age. Furthermore, it reduces
annual investment in producers' durable equipment by about $4 per person of working age.
These effects are measured in 1972 dollars.
Combining the t w o effects and converting them
into an aggregate figure, using the more recent
1977 population and prices, indicates that a onepercentage point tax rate increase reduces investment in plant and equipment by about $1.2
billion.
Further evidence demonstrating the impact of
tax rates on investment can be obtained by
examining the ratio of investment in equipment
^
^
3nV var,abte
*
the d,f,erence
> , s ^ f i n e d such that* = 1 L
to investment in structures. This ratio varies
widely during the Depression and World War II
and has been much more stable since then.
There is, nevertheless, a striking pattern in its
movement during this seemingly stable postwar
period. The ratio declined fairly steadily from
1947 to 1961, with only four of the 14 year-toyear changes being positive. In 1962, Congress
enacted an investment tax credit, in effect almost
continuously since then, that applied to investment in equipment but not to structures. It
seems more than coincidental that, beginning in
1962, the ratio of investment in equipment to
investment in structures reversed its downward
drift and increased fairly steadily until the end of
the sample period in 1975. During this period,
only three of the 14 year-to-year changes were
negative.
Alternatively stated, from the end of World
War 11 until the enactment of the investment tax
credit, per capita investment in structures grew
at a compound annual rate of 2.7 percent, while
per capita investment in equipment grew at a
42
O C T O B E R 1982, E C O N O M I C R E V I E W ^
rate of 0.1 percent. After the enactment of the
credit, however, investment in structures grew at
an annual rate of only 1.2 percent while investment in equipment grew at 4.9 percent. Thus,
the average change in the ratio of investment in
equipment to investment in structures was 0.0588
from 1962 onward, compared with -0.0420 during
the earlier period. By the usual statistical standards, these t w o numbers are significantly different.
" . . . a one percentage point
tax rate increase reduces
investment in plant and
e q u i p m e n t by about
$1.2 billion."
The investment tax credit, then, did seem to
have a noticeable effect on the composition of
investment. This effect undoubtedly was abetted
during recent years by a substantial increase in
the inflation rate. Since capital must be depreciated
for tax purposes at historical rather than replacement cost, inflation tends to increase the effective
tax rate on income from capital. This effect is
more pronounced for long-lived assets than for
short-lived ones, and thus alters the relative
attractiveness of the t w o types of investment.
Summary
The evidence indicates that taxation of income
from capital exerts an important effect on investment behavior. In the early 1960s, effective tax
rates on income from capital were reduced. As
the postwar baby boom generation moved into
the labor force, these tax cuts aided the economy
in producing the new plants and equipment
which w o u l d have been necessary to maintain
previous growth rates of productivity and real
wages. The stimulus was insufficient, however, to
prevent these growth rates from falling somewhat
Since the late 1960s, tax rates have returned to
roughly the levels of the late 1950s and early
1960s, although not to the higher levels of the
early 1950s. Increasing tax rates undoubtedly
helped to stifle the investment boom of the
1960s. Consequently, the growth rates of net
investment, labor productivity, and real wages
have slowed considerably. Increased taxation of
capital income thus seems to have reduced not
only the after-tax returns to capital, but those to
labor as well.
—Douglas H. Joines
University
FEDERAL RESERVE BANK OF ATLANTA
of Southern
California
43
Electric utilities' increasing reliance on
coal could have a major impact on the
Southeast's economy. Coal users and
producers, however, must deal with several
unanswered questions as they plan for the
near future.
Electric
Utilities
in the
Southeast
Turning to
Appalachian
Coal
The U. S. coal industry may be
on the verge of reviving after a
period of decline in which
many considered the fossil
fuel an energy source whose
time had passed. But the turnaround will depend on electric
utilities' demand for coal to
generate power.
Coal, the cheapest of all
fuels before World War II,
began to lose its economic
advantage as petroleum prices
fell after the war. W h e n oil
and natural gas emerged as
competitors, the coal industry
lost important markets such
as transportation and residential heating.
As a result of the 1973 oil
embargo, however, petroleum
costs began to climb and the
nation began looking for a
serious alternative to costly
oil and natural gas. Technological efforts to clean up coal
also have helped attract the
nation's renewed attention to
the fuel. And, in the future,
anticipated production of gas
and synthetic liquid fuels from
coal should increase coal's
competitiveness.
Utilities:
Coal's Major Market
Electric utilities are finding
coal one of the most convenient energy alternatives because of its relative cheapness,
abundance, and high reliability.
Because of these advantages,
power companies today consume nearly 70 percent of the
coal mined in the United States.
The coal industry's loss of transportation and home heating
markets has been more than
offset by electric utilities' increasing demands during the
last 30 years (see Chart 1).
44
OCTOBER 1982, E C O N O M I C REVIEW
Chart 1 . U.S. Coal Distribution by Major Markets
(Million short tons)
600
480
360
Residential and Transportation
Coke Plants
Utilities
Exports
240
120
0
TL rflL J"
1950
1960
1970
1980
Sources: U.S. Dept of Energy, Monthly Energy Review, Sept 1981 and
Weekly Coal Production, Oct 23, 1981.
Electric generating plants use large boiler furnaces to burn coal at high temperatures to
release coal's energy which later converts water
into steam; the steam then turns the blades of a
turbine and generates electricity. Coal can also
cause chemical reactions directly as in the reduction of iron ore for steel production, or
indirectly as a source for the production of
synthetic gaseous or liquid fuels.
Several utilities in the Southeast claim that
their early selection of coal now allows them to
offer lower residential bills. Power companies
using coal as their primary fuel and operating
under a proper regulatory environment are in
fact among the t o p performers in the investment
utility market. Tampa Electric Company's success
story is a good example of a utility that based its
growth and high p r o f i t a b l y standards on generating as much as 80 percent of its energy from
coal.
The Southeast has a direct link to the future of
coal because the fuel is becoming increasingly
important to so many electric utilities. The quality
and accessibility of this region's coal make the
mineral attractive to southeastern utilities and
foreign buyers.
In addition, Alabama and Tennessee boast
important reserves that supply much of the coal
for utilities in the region. Active coal mines in the
two states produced more than 36 million tons in
1980 (Table 1). Although coal produced in the
region represents only 4 1/2 percent of the
FEDERAL RESERVE B A N K O F A T L A N T A
nation's output, it has become increasingly important to the Southeast's electric utilities and
metallurgical sector.
Southeastern coal is ranked as high volatile
bituminous, a superior bituminous for utilities
because of its lowsulphur, low ash, and high heat
production.
In 1980, nearly half of the 77 million tons of
coal consumed by electric utilities in the region
was supplied by Kentucky and as much as onethird came from Alabama and Tennessee mines
(Table 2). Alabama mining activity provided as
much as 70 percent of the state's utility requirements, while Georgia and Florida depended on
Kentucky's coal for nearly half their demand.
The important role that coal plays in the
Southeast's economy guarantees that industry
problems are reflected throughout the region.
The current recession, high coal inventories, and
depressed prices, for example, are producing
severe consequences for Appalachian communities, many of which consider coal their most
vital resource. Most counties in the southern part
of the region have based their economic survival
for decades on mining, and it remains Appalachian's
largest employer.
According to the Bureau of Labor Statistics,
unemployment rates for coal-mining counties
are running high. Rates in Blount (Alabama) and
Campbell (Tennessee) during the first five months
of 1982 were 19.5 and 19.0 percent, well above
corresponding rates of 1 3.8 and 11.5 percent for
Alabama and Tennessee.
Including bonuses and other paid benefits,
coal miners may average between $25,000 and
$35,000 annually, standing among the best paid
U.S. workers. But coal miners work in often
unfavorable environments and run many risks to
earn their high pay, since mining is one of the
nation's toughest industrial jobs. Despite mining's
high income levels, Appalachia figures among the
nation's most economically deprived areas; the
coal industry has unfortunately failed to produce
significant growth or prosperity in this region.
The low annual per capita income of other
Appalachian counties (averaging $4,000-$5,000),
is well below the $9,458 for the United States.
The coal industry has a long history of labor
unrest because miners and coal operators often
have failed to compromise on conflicting issues
such as miners' income, safety, and other benefits.
The most recent wage settlement negotiated in
mid-1981 raised miners' hourly wage to an average of $ 12 but the preceding strike paralyzed the
industry for 72 days and disrupted a high share of
the nation's coal supply.
45
THE VALUE OF APPALACHIAN COAL
Where the Southeast Gets Its Coal
Coal Mining, Production Methods, and Quality
Coal mining activities in the United States are
concentrated in three major regions: the Appalachian
or eastern coal region, the interior, and the western
region.
The largest coal-producing areas are in the Appalachian region, with the central and southern Appalachian
mountains mining much of the coal consumed in the
Southeast.
Although the nation's coal industry is located primarily in Kentucky, West Virginia, and Pennsylvania, it
also extends to Alabama, Georgia, and Tennessee,
the only southeastern states with such mining activity*
Coal reserves in Alabama and Tennessee represent
only about 1 percent of the 472 million tons of
demonstrated coal reserves in the U. S. However, the
reserves are large enough to provide the region with
more than seven decades of coal at current consumption levels Georgia has limited coal reserves
mined in the northwestern part of the state. They
produce small quantities of coal for use in the metallurgical sector.
Most of the region's intense coal mining is in
northeastern Tennessee and northwestern Alabama.
Most coal produced in the Southeast (50 to 60
percent) is allocated to electric utilities which value
the high volatile bituminous coal as a boiler fuel. The
rest is consumed locally by the metallurgical industry
in Alabama or exported to Japan and Europe.
According to the Department of Energy, the average
price paid for coal by utilities in 1981 was about $32
per ton. Although southeastern coal costs utilities in
the region about one-fifth more than the nation's
average price, it offers two clear advantages: Appalachian coal has a high BTU rating, or higher heatproducing ability, and it offers lower transportation
costs
Consequently, Appalachian coal has supplied a
high share of utilities' consumption in Georgia, Alabama,
Tennessee, and surrounding states Due to the comparative advantages of coal from this region, it is likely
that southeastern utilities will continue to rely on
Appalachian coal for their future power generation.
Coal can be mined basically in two ways: surface
(strip) mining or underground (deep) mining.
Surface mining is used when coal is found close
to the earth's surface or on hillsides Coal is stripped
from the ground by heavy earthmoving equipment.
The western region uses this method widely because
its terrain generally is parallel to coal seams. In the
Appalachian coal fields, strip mining methods are
also used; however, some coal is extracted using
contourstrip mining techniques since coal deposits
outcrop from hills or mountains
Underground mining extracts coal that lies deep
beneath the earth's surface. Although modern
equipment has been introduced in recent years,
this technique still requires extreme safety precautions. Underground miners must descend into
deep coal beds; their only connection to the outside world are shafts and passageways sometimes
thousands of feet long. There, coal is broken using
explosives, continuous digging machines, or long
wall cutting equipment Finally, coal is loaded into
shuttle cars or conveyor belts that transport the
material out of the mines.
S o m e Facts About U-S- Coal Production
U. S. coal use dates back as early as 1745-55 when
it was discovered and first mined in Illinois, Virginia,
and Ohio. During the early days of the industrial
revolution, much of the nation's economic growth
depended on its abundant coal. The spread of industries and railroads boosted coal demand during the
1920s During the Great Depression and World War II,
the coal industry experienced first an acute downturn
and then a surprisingly strong recovery.
*ln this article, the "Southeast" refers to the six states entirely or partly
included in the Sixth Federal Reserve District—Alabama, Florida, Georgia
Louisiana, Mississippi, and Tennessee.
Western Coal: Outlook Clouded by Unresolved
Issues
The vast and rich western coal reserves of the
West—mainly in Wyoming, Montana, Colorado, and
Utah—offer this country's most promising areas for
future coal mining.
Besides its abundance, western coal is often cheaper
to mine because reserves lie near the earth's surface,
making it accessible through large-scale strip mining.
It also is attractive to utilities due to its low sulphur
content.
Despite these positive factors, the western region
faces three important constraints that must be resolved
in the future:
(1) an incomplete railroad system that offers only
partial access to mines and markets;
(2) environmental regulations that escalate costs
by requiring producers to restore mined land to its
original use, and
(3) large portions of western reserves are federally
owned, requiring producers to sign leases with the
government to mine coal.
A controversial issue concerning western coal development is the use of slurry pipelines as an alternative to rail transportation. Slurry pipelines offer an
economic and efficient alternative for connecting
western mines utilities, and ports
Congress is debating whether to grant slurry pipelines the right of eminent domain to cross state lines
and private property. Naturally, slurry pipelines face
strong opposition from other shipping interests
The struggle in Congress between pipeline advocates
and other shipping interests is likely to postpone for
some time the full development of western coal.
46
OCTOBER 1982, E C O N O M I C REVIEW ^
Table 1 . U.S. Coal Reserves
(millions of tons)
Demonstrated Reserve Base 1
Percent
Percent
Total
Underqround
Surface
Selected
Producing
States
Montana
Wyoming
Illinois
West Virginia
Kentucky
Pennsylvania
Ohio
Colorado
Texas (lignite)
Indiana
North Dakota
(lignite)
Utah
Virginia
120,428
69,924
67,606
39,776
34,002
30,281
19,056
17,281
12,660
10,586
District States
Alabama
Tennessee
Georgia
U.S. Total
59
61
78
87
76
96
68
71
—
84
Coal
Production
1970
1980
Annual
Average
Growth
41
39
22
13
24
4
32
29
100
16
3.4
7.2
65.1
144.1
125.3
80.5
55.3
6.0
NA
22.2
29.9
94.9
62.5
121.6
150.1
93.0 2
39.4
18.8
29.3
30.8
77.9
121.8
0.4
1.6
2.0
1.5
2.9
21.3
N.A
3.9
9,952
6,478
3,471
96
76
100
4
24
5.6
4.7
35.0
16.9
13.2
41.0
20.2
18.1
1.7
5,000
984
4
472,714
35
67
53
61
65
33
47
39
20.5
8.2
26.4
9.9
2.9
2.1
—
*
*
612.7
829.7
3.5
'Represents 100 percent of coal in place as of January 1, 1980.
'Including Anthracite
' C o a l production in Georgia was only 5,000 tons.
Sources: U.S. Department of Energy: D e m o n s t r a t e d Reserve Base of Coal in t h e U-S. o n J a n u a r y 1 , 1 9 8 0 , May 1982; E n e r g y Data Report,
October 2 3 , 1 9 8 1 ; and C o a l Data, A Reference, July 1980, p. 19.
Table 2. Origin and Destination of Coal Receipts to Electric Utilities, 1980
(thousands of tons)
Origin
Alabama
Tennessee
Indiana
Illinois
Wyoming
West Virginia
Pennsylvania
Kentucky
Ohio
Virginia
Colorado
Other States
Total Output
Consumed
by Utilities
Alabama
Florida
Georgia
14,233
1,024
3
150
469
108
437
1,595
1,357
4,799
—
2,124
—
—
318
—
1,648
2,441
20
10
16
4,853
—
51
—
—
—
Destination
Louisiana
687
—
—
—
2,068
—
—
—
—
12,799
43
276
—
1
1,053'
1
19,838
8,684'
21,307
Mississippi
_
—
—
—
—
2,068
—
46
489
—
—
—
1,370
—
—
755
404
3,751
Tennessee
_
3,978
663
519
—
175
—
16,006
136
366
—
—
21,843
District
Total
Total
Consumption
from CoalProducing States
15,826
6,705
2,069
8,081
2,068
503
16
36,676
2,620
713
755
1,459
15,826
7,643
27,266
53,396
89,731
53,115
50,948
112,380
34,324
13,769
13,566
122,031
77,491
593,995
'Includes 987. million tons imported from foreign suppliers.
Source- U.S. Department of Energy (EIA), Cost a n d Quality o f F u e l s f o r E l e c t r i c Utility Plants, 1980 Annual.
FEDERAL RESERVE B A N K O F A T L A N T A
47
However, the improved outlook resulting from
the strong demand of utilities has brought some
hopes to the region because increased production
affects not only earnings and employment but
the well being of the entire Appalachian area.
In addition, public policy encourages electric
utility plants to use coal instead of petroleum
and natural gas.1 Some utilities converted their
oil and natural gas plants to coal during the 1970s
in accordance with the Power Plant and Industrial
Use Act of 1978. Although southeastern utilities
have also converted oil and gas-burning plants to
coal, new coal-generating capacity in the area
will come largely from new coal plants scheduled
to be completed before 1990.
of noncombustible limestone particles. The huge
Tennessee Valley Authority (TVA) is currently
undertaking research on the FBC method, designed
to permit the continued use of high-sulfur coals
which are abundant in the Tennessee Valley.
Because this technology implies higher initial
plant investments, it probably will not be in wide
use before the end of this century.
Gasification is currently the most promising
alternative for coal use because it converts coal
into clean-burning natural gas. Coal gasification
chiefly consists of separating the carbon and
hydrogen content of the coal prior to its conversion
to gas. The nation's first underground gasification
plant is under construction in Beulah, North
Dakota, but it is doubtful that the plant will be
economically competitive when completed in
1984. 2
New Technologies in Coal
One of the brightest hopes for the coal industry
may rest with experimental efforts to clean up
the fuel and to eliminate the need for pollutant
controls.
Efforts to improve coal utilization have created
technologies that now produce cleaner coals
and even synthetic fuels from coal that substitute
for oil. Other advances have enhanced the possibilities for coal gasification, liquefication, solventrefining, and the capture of sulfur pollutants, a
process known as fluidized-bed combustion.
In mid-1981, an experimental plant owned by
the Southern Electric System became one of the
few research centers in the United States to use
raw coal in the production of synthetic liquid fuel
that eventually could power motor vehicles. The
plant, located in Wilsonville, Alabama, has for
some time been the center of intense technological efforts to turn coal into clean-burning
solid and liquid fuels. A clean-burning substitute
eventually could eliminate the need to equip
new power plants with the expensive scrubbers
now required to clean up smoke from coal
combustion. The liquid and solid fuels from coal
probably will not be commercially competitive
for several years:
Fluidized-bed combustion (FBC) is the other
important process offering to broaden future
markets for coal. This process involves capturing
sulfur dioxide emissions by burning coal in a bed
Lagging Electricity Demand and Financial
Pressures Trouble the Utility Industry
Despite a national trend toward the use of coal
for power generation, utilities could be affected
by the weakening demand for electricity and the
deteriorating financial position of some firms.
In the Southeast, however, electricity demand
has grown a little faster than the nation's average
because of continued migration and the industry's
recent decentralization. 3 In spite of conservation
efforts, electricity demand has been growing in
Florida, Louisiana, and Georgia due to the continuing influx of people and industry. By contrast,
cities in Alabama, Mississippi, and Tennessee,
hard hit by the recession, have experienced
declining electricity sales, due to shrinking industrial and residential demand (see Chart 2).
The deteriorating financial health of the utilities
industry has affected not only increased coal use
but also has impacted the general economy.
Electric utilities are among the most capitalintensive industries, currently accounting for onefifth of all new industrial construction. 4
Many of the industry's financial ills are attributable to weak revenue growth and the costly
measures necessary to control environmental
pollution resulting from coal combustion.
' T h e N e w York Times, November 17, 1980.
For a complete view of the Southeast's demographic outlook and industry
decentralization, see E c o n o m i c Review articles by William J. Kahley May
1981, and John Hekman, March, 1982.
3
'This legislation (P. L. 95-620) prohibits most new power plants from burning
oil and gas. It also provides for tax incentives to utilities that construct and
convert coal-fired plants from oil and gas and penalties for failures to do so.
-Department of Energy, EIA, I m p a c t s of F i n a n c i a l C o n s t r a i n t s o n t h e
E l e c t r i c Utility Industry, December, 1981
48
O C T O B E R 1982, E C O N O M I C R E V I E W ^
Chart 2. Florida, Georgia and Louisiana
Total Electricity Demand
(Million K W H Sales)
9,000
7,800
FL
6,600
5,400
GA
LA
4,200
3,000
1979
1980
1981
Alabama, Mississippi and Tennessee
Total Electricity Demand
6,500
TN
5,400
4,300
_
AL M S
3,200
2,100
1,000
1979
1980
stock less attractive to investors. Plant construction
programs, then, had to be financed largely w i t h
long-term borrowing that a d d e d to utilities' financial burdens.
However, during recent years some utilities in
the region have acted firmly t o overcome their
financial difficulties. Some have been selling
neighboring utilities not only their services but
even partial ownership of generation capacity. In
addition, some larger companies plan to expand
and market their technological knowledge to
developing countries and to domestic businesses,
opening new avenues for future growth.
Electric utilities have asserted repeatedly that
environmental controls constitute an important
obstacle to the increased use of coal. It is difficult
to assess the impact of pollution control on a
company's performance; however, a survey of
selective power companies in the region indicates that between 15 to 30 percent of utilities'
costs are attributable to pollution-control measures. Southeastern utilities w i t h higher coal
consumption have about one-tenth of theirplant
assets invested in pollution-control facilities. (See
Appendix on the performance of selected southeastern utilities during 1980).
The political debate in Congress is likely to
heat up soon over controversial clean-air issues
involving air quality near power plants and sulfur
dioxide emissions, blamed for a p h e n o m e n o n
c o m m o n l y called acid rain. Pending legislation
such as an a m e n d m e n t to the Clean Air Act of
1970 could have tremendous impact in utilities'
future coal use.
1981
Source: Federal Reserve Bank of Atlanta.
Coal's Future Outlook
Since utilities are granted monopolies in their
operating areas, rates for electrical services are
regulated in each state by a b o d y of elected
utility commissioners. During the 1970s w h e n
inflation, high interest rates, and skyrocketing
fuel costs shrank profits, electric companies
repeatedly turned to their regulators, requesting
approval of higher rates. Because of consumers'
adverse reaction t o rate increases, however,
political considerations have played an important
role in regulators' decisions to grant requests.
Delays in rate advances and weak revenue growth
have, in turn, impacted the utilities' financial
performance.
During the mid-1970s, lagging utility revenues
translated into lower profits, which made utilities'
Coal's future has raised both high hopes and
serious questions in the industry. Big uncertainties such as oil prices and the future supply of
energy in an unstable world have gained greater
attention in recent years. The recent increase in
coal d e m a n d from utilities and foreign markets is
one of the most positive developments ever for
the nation's coal industry. But will the lagging
electricity d e m a n d impede coal's revival? Will
U.S. coal exports repeat the surprisingly high
records of 1980-81?
The behavior of world energy prices and supplies
are important to coal's future because markets
remain highly dependent on global developments.
Oil, in particular, will continue to influence
coal's supply and demand. Coal's price advantages
49
FEDERAL RESERVE B A N K O F A T L A N T A
compared to oil are likely to broaden beyond the
next decade, a favorable outlook for increased
coal use. Official projections indicate that oil
prices in 1995 will be nearly eight times the price
of coal, up from only three times in 1980 (see
Chart 3).
These projections are conservative since they
do not include the possibility of disruption in
world oil markets, such as those during the 1973
embargo and the Iranian revolution in early
1979.
But how is waning electricity demand affecting
coal use?
The nation's 0.3 percent growth of electricity
demand during 1980-81 was one of the smallest
in years. The National Electric Reliability Council—
which plans and coordinates power supply for
the utility industry—has in recent years lowered
its 10-year projection for electricity consumption.
The latest NERC projected average growth rate
for both the Southeast and the nation is only 3
percent, down from the nearly 8 percent growth
projected during the mid-1970s. 5
However, the region's projected growth means
that electricity demand would still double shortly
after the year 2000.
Will this slowly rising growth really affect future
generation from coal? The outcome depends on
factors such as utilities' energy mix and regional
differences that may determine generating costs.
According to the NERC, the District's largest
utilities are highly dependent on coal as their
major source for electricity generation (see Chart
4). During 1981, coal supplied nearly 70 percent
of the combined energy requirements of the
Southern Company and TVA, generating more
than 1 74 billion kwh of electricity. By contrast,
Florida utilities are meeting nearly half of their
energy requirements with costly oil, while nuclear
power, coal, and gas provide the remainder.
By 1991, District utilities are expected to
phase out oil and natural gas by increasing their
use of coal and nuclear power. By the end of the
decade, TVA and the Southern Company expect
to increase nuclear power substantially while
maintaining coal as their major fuel. Even though
coal's share of total energy requirements for TVA
and the Southern Company is expected to decline by 1990, coal will continue to be the major
source for electricity generation. Florida utilities
'National Electric Reliability Council, E l e c t r i c Power S u p p l y a n d D e m a n d
1982-1991, September 1982
Chart 3. Coal and Oil, Comparable Price Projections
(cents per thousand BTU)
1.2
0.96
r
_
Oil
Prices
0.72 _
0.48
S
/
-
^ r
0.24
Coal Prices
0
1965
1973
1980
1985
1990
1995
Source: U.S Department of Energy, G.I.A 1981 Annual Report to Congress
February 1982.
expect to more than triple their coal use by 1991,
increasing coal generation from 16 percent in
1981 to 48 percent while cutting oil and gas
consumption substantially.
In the event of a continued slowdown in
electricity consumption, coal demand in this
region probably will not be affected as much as
demand for gas and oil. For utilities close to the
Appalachian region with coal-generating capacity,
lower demand will even favor coal or nuclear
power because of their lower generating costs.
O n the other hand, utilities in Louisiana and
Florida with existing oil and gas-generating capacity may slow their planning for new coal
plants. So far, though, coal plant construction in
the Southeast hasn't been affected by the lowerthan-expected demand. In fact, southeastern
utilities still plan to increase coal-generating
capacity by 13,138 megawatts before 1990 (see
Table 3).
Instead, lagging electricity demand, excess
capacity, and lower oil prices have affected the
completion of several nuclear power plants throughout the nation. Concern about the safety of
handling radioactive materials resulting from the
Three Mile Island accident in 1979 and over the
disposal of waste material remains a major constraints for the nuclear power industry.
In the Southeast, t w o major utilities recently
deferred the completion of new nuclear plants.
Georgia Power deferred for two years t w o nuclear
units that represent 2,300 megawatts of capacity
(see Table 4). TVA's recent cancellation of several
50
O C T O B E R 1982, E C O N O M I C R E V I E W ^
C h a r t 4. Net Electrical Energy Requirements by Major Source
•
r
r
• » v d r o
Coal
50.8%
Florida utilities
to triple coal use
by 1991 ...
27.0%
1 6.6%
2.0%
Florida Utilities
1981
Florida Utilities
1991 Projection
82.8%
Southern Company
utilities will maintain
reliance on coal...
76.9%
5.8%
.8%
a°9%
1 1
-
0.2%
3 %
0.4%
S o u t h e r n Co. Utilities
1991 Projection
S o u t h e r n Co. Utilities
1981
1 2.9%
69.7%
and coal will be
major source of
energy for TVA.
47.5%
10.5%
39.7%
19.8%
T e n n e s s e e Valley Authority
1981
T e n n e s s e e Valley Authority
1991 Projection
Source: National Electrical Reliability Council, Electric Power Supply and Demand 19821991, September 1982 and TVA, Projections of Energy Demand, May 1982
nuclear reactors represented an important setback
to that utility's ambitious plans for nuclear generation. TVA deferred construction of some of its
planned nuclear units in 1979 because of lower
projected demand.
Coal Exports
Another encouraging sign for the coal industry
is the rapid growth of coal exports. Coal exports
during 1978-1981, for example, increased nearly
42 percent. In 1981, exports surpassed even coal
consumption by this c o u n t r / s coke plants, coal's
FEDERAL RESERVE BANK OF ATLANTA
second most important market during previous
years.
According to the National Coal Association,
worldwide imports of steam coal will triple by
1990. U.S. coal exports, although only a small
share of the nation's output, increased substantially during the last t w o years. Southeastern
ports with coal-handling facilities kept busy handling coal shipments to markets in Europe and the
Far East.
Mobile, New Orleans, and Savannah recently
have disclosed ambitious port expansion plans
to handle future coal exports. The McDuffie coal
51
Table 3. Additional Coal-Generating Capability Scheduled by Utilities in the Southeast
(in megawatts)
Scheduled Plant
Completion Dates
5/85- 5/91
6/87
Additional
Coal-Generating
Capability of
Plants (1981-91)
1,962
370
Scherer 1, 2, 3, 4
2 / 8 2 - 2/89
2,332
3,232
Crystal River 4, 5
Seminole 1, 2
Big Bend 4
12/82-12/84
6 / 8 3 - 1/85
3 / 8 5 - 3/89
3,232
1,280
1,200
417
St. Johns River 1, 2
Martin 3, 4
Stanton 1
Manciness
12/85- 6/87
12/87-12/89
11/86
3/89
1,100
1,400
355
400
Electric Utilities
Alabama Power Co.
Alabama Electric Coop.
Coal Plants
Miller 2, 3, 4
Unit 1
Total Alabama
Georgia Power Co.
Total Georgia
Florida Power Co.
Tampa Electric Co.
Florida Power and
Light Co.
Orlando
Tampa Electric Co.
Others in Florida
District
Total Florida
Mississippi Power Co.
Southern Mississippi
5/81-10/81
669
6/81
6/87
6,821
503
250
Daniel 2
Coal 1
Total Mississippi
753
Total Southeast
13,138
Source: E l e c t r i c Power S u p p l y a n d D e m a n d , 1 9 8 1 - 9 0 , National Electrical Reliability Council, July 1981 and utilities'
annual reports.
terminal at the Port of Mobile, for example, will
double coal capacity by 1985. Mobile, as well as
other Gulf ports in the Southeast, affords substantial cost advantages in handling coal from the
Appalachian region, offering costs as low as
$10.25 per ton, while transportation costs to
some eastern ports from mining regions can be
as much as 50 percent higher. 6
Completion of the Tennessee-Tombigbee Waterway, scheduled for the mid-1980s, will provide
additional savings for coal exported through
Mobile. The waterway is expected to be an
important alternative route for coal exports from
the Appalachian region. Some forecasts have
estimated that 21 of the 28 million tons of freight
projected for the waterway annually will be coal
shipments, more than half exported through the
Port of Mobile.
Future markets for steam coal exports in particular promise new growth opportunities for Appalachian producers of high BTU and lower
6
Fortune. December 14, 1981, pp 122-126
sulfur coal. Steam coal demand from Western
European markets appears to offer the best
possibilities for future coal exports.
In fact, steam coal exports from the Appalachian
region are estimated to reach nearly 75 million
tons in 1995, up from 28 million tons in 1980,
with Western Europe accounting for 70 to 80
percent of the total demand. 7
Future coal exports through ports in the Southeast will depend on how other important world
coal-producing nations normalize production.
However, the United States' reputation for supply
stability could enhance its future position in the
export market for coal and allow the continuity
of coal shipments overseas.
*
Summary
4
Coal's outlook appears promising. New markets
for coal are opening up, coal's price advantages
'Appalachian Regional Commission. Potential Role of A p p a l a c h i a n Prod u c e r s in t h e S t e a m Coal Export M a r k e t November 1981.
-
52
O C T O B E R 1982, E C O N O M I C R E V I E W ^
Table 4 . Additional Nuclear Plant-Generating Capability
Scheduled by Utilities in the Southeast, 1981-90
(in megawatts)
Plants
Scheduled
for Commercial
Operation
7/81
6/86 & 6/87
Plant
Deferral
Dates
NuclearGenerating
Capabilities
of Plants
807
2,426
Utilities
by State
Alabama Power Co.
TVA
Unit
Name
Farley 2
Bellefonte 1, 2
Total Alabama
Florida Power Co.
St. Lucie
12/83
Total Florida
Georgia Power Co.
Georgia Power Co.
Vogtle 1
Vogtle 2
5/85
11/87
12/87
12/88
729
1,150
1,150
Total Georgia
TVA
Yellowcreek 1
4/88
8/97
2,300
1,285
Total Mississippi
TVA
TVA
TVA
TVA
TVA
Sequoyah 1 , 2
Watts BAr 1, 2
Hartsville A1
Phipps Bend 1
Hartsville B2
3/81 & 7/82
3/84 & 1/85
7/88
2/89
4/89
—
—
3,233
729
—
—
8/96
cancelled 2
cancelled 2
1,285
2,296
2,354
1,233
1,233
1,233
8,349
Total Tennessee
Total Six District States
Less units under review for cancellation or deferrals
1M96'
(4,984)
Total Nuclear-generating capabilities in the Southeast (1981-1990)
10.912
'Refer to summer megawatt capability.
2
ln addition to these two units, TVA's staff recently proposed scrapping units Phipps Bend 2 and Hartsville B2, which were in
deferral status since 1979
Source: E l e c t r i c Power S u p p l y and D e m a n d , 1 9 8 1 - 1 9 9 0 , National Electric Reliability Council, July 1981, and TVA's
Review of L o a d Growth, January 1982
over other alternative fuels are projected to
broaden in forthcoming years, and technology to
make coal more usable is readily available.
Coal from the Appalachian region has regained
new importance in recent years due to its quality
and accessibility which has made it attractive to
southeastern utilities and foreign buyers.
Despite these favorable trends, coal users and
producers must deal with uncertainties such as
the slower than expected growth in electricity
demand, financial and regulatory constraints,
and unstable world oil prices.
So far, weakening demand has not curbed
utilities' plans for increasing coal-generating capabilities. Instead, these factors have adversly
affected the nuclear power industry, with several
utilities recently discontinuing the planning and
construction of several new nuclear generators.
But world oil prices may ultimately determine
many of the unanswered questions regardingthe
future of coal and other alternative energy sources.
It is clear that, at least during this decade,
Appalachian coal will continue to play a major
role in meeting southeastern electricity demand.
Coal export markets also are likely to bring new
growth opportunities to Appalachian producers
and to increase the activity of southeastern ports
with coal terminals.
—Gustavo Uceda
and Gene D. Sullivan
53
FEDERAL RESERVE B A N K O F A T L A N T A
APPENDIX
ELECTRIC UTILITIES IN THE
SOUTHEAST INCREASING THEIR FUTURE
COAL-GENERATING CAPABILITIES
Although electric utilities in the Southeast sell an
identical product and enjoy monopolistic marketing
advantages, they face the 1990s with differing alternatives based on dissimilarities such as ownership
and the fuel mix used to generate electricity.
The rising cost of oil and natural gas during the
1970s led some utilities to shift to coal and nuclear
power as alternatives. Most utilities in the Southeast
have already started to build new coal and nuclear
units or to convert existing ones to coal. But expanding
generating capacity implies careful long-term planning.
Utilities must balance such factors as the six years
normally needed to build an average size coal-fired
plant, environmental regulations affecting plant investment and costs, and changes in projected electricity
demand.
Since utilities' future development will impact the
Southeast, let's look at the performance and development plans of a selected number of companies in this
region.
plant. Gulf Power Company, Georgia Power's sister
utility, purchased a 25 percent interest in units 3 and 4
of the Scherer coal plant in early 1982.
Gulf Power Company, although small, has been
growing rapidly in the past years. Gulf Power provides
electric power to about 600,000 people in northwestern
Florida The company's generating capacity is nearly
1,970 megawatts. Coal is the major fuel consumed by
the utility, representing 98 percent of all fossil fuels
entering the system in 1980. In 1981, the company
put into operation a new 500-megawatt coal-burning
plant that has expanded its generating capabilities.
Mississippi Power Company provides electric service to 160,721 customers in 23 southeastern Mississippi counties. In addition, the company furnishes
wholesale electric service to three cooperatives serving a combined population of over 500,000. The
company's total installed generating capability is nearly
1,966 megawatts, of which 74 percent is coal generated.
The Southern Electric System
Middle South Utilities
Southern Electric is the nation's largest investorowned electric utility system in terms of assets. The
system includes the parent Southern Company and
its subsidiaries—Alabama Power, Georgia Power,
Mississippi Power, Gulf Power, and Southern Company
Services, Inc.
Alabama Power Company is a $4.9 billion company engaged in providing electricity to a major
portion of Alabama. The company owns 8,000 megawatts of generating capacity, of which 9 percent is
hydroelectric and 18 percent nuclear. Coal, however,
is the company's major fuel, accounting for nearly 73
percent of the electricity generated by the company.
Coal-generating capacity is expected to increase
1,962 megawatts between 1985 and 1991 as the
company completes construction of Miller Plants Nos.
2,3, and 4. Nuclear power has also become increasingly
important to Alabama Power. The company's first
nuclear plant, Farley Unit No. 1, began operation in
late 1977. Asecond plant, completed in mid-1981, has
added 860 megawatts of new capacity.
This holding company owns all common stock of
Louisiana Power& Light, Mississippi Powerand Light,
and five other utilities in the Southeast.
Louisiana Power and Light Company generates
and distributes electricity in a 19,500-square-mile
area, serving a population of more than 1.5 million. It
operates seven generating plants, all fueled by oil and
natural gas.-With a total generating capability of 4,625
megawatts. The company is constructing its first nuclear
generating unit, Waterford 3, some 25 miles upriver
from New Orleans. The facility will add 1,104 megawatts
to the company's capacity. The utility is building its first
two 800-megawatt coal-fired generating units in the
St. James Parish area.
Georgia Power Company is the largest privately
owned electrical utility serving the Southeast, providing electricity to over 600 communities in Georgia. It
also furnishes power at wholesale to 46 municipalities
and to 39 rural cooperatives. The company's generating capacity is 11,652 megawatts, of which nearly
three-fourths is produced by coal-generating stations.
The company plans to construct new coal-fired plants
during the period 1982-90, adding more than 15
percent to its capacity. Georgia Power is considering
the sale of part of its plant assets to electric utilities in
Florida Florida utilities, heavily dependent on oil, may
acquire a 16.5 percent interest of the Vogtle nuclear
Mississippi Power and Light Company has a net
plant capability of 2,763 megawatts. Generating units
consumed 78.6 percent gas and 21.1 percent oil in
1981 as the plant's only fuels. The company serves a
population of about 1.5 million, including the Mississippi
Delta area Jackson, and portions of south Mississippi.
Most of the power is company-generated. The balance
is obtained through interchange agreements with
affiliates and interconnections with TV A, Mississippi
Power Company, and Gulf State Utilities.
The Tennesse Valley Authority (TVA)
TVA supplies electric power as wholesaler to an
area covering almost all of Tennessee, portions of
northern Alabama northeastern Mississippi and southwestern Kentucky, and small parts of Georgia, North
Carolina and Virginia Generating capacity of the
coordinated system is 31,053 megawatts, of which 57
percent is coal-fired, 11 percent hydro, 8 percent
54
OCTOBER 1982, E C O N O M I C REVIEW
A p p e n d i x T a b l e : Performance of Selected Utilities in the Southeast during 1981
Fossil Fuels Purchased
by Utilities in 1980
Assets
Total
(trillion Btu)
Percent of
Coal
Total
($ million)
Alabama Power
290.5
99.0
4,880
8.9
8.2
Florida Power Corporation
Florida Power & Light
Gulf Power Company
Tampa Electric Company
161.1
376.3
82.3
117.0
36.4
0.3
98.4
78.7
2,563
6,122
838
1,037
7.6
8.8
12.6
11.3
14.4
11.1
11.4
14.7
Georgia Power Company
498.0
99.1
5,886
7.0
12.4
Central Louisiana Inc.
Louisiana Power & Light
New Orleans Public Service
59.4
166.6
49.4
5.6
552
2,330
345
—
—
Percent of
Total EPF'
Return on
Common Equity
1.5
2.4
14.0
15.6
12.1
—
Mississippi Power Company
Mississippi PowerS Light
60.5
80.0
85.6
0.3
665
728
10.6
3.4
15.7
18.1
Tennesse Valley Authority
698.7
99.6
15,580
7.5
N.A
N.A. - Data not available.
'Asset value of environmental pollution facilities(EPF) in operating plants in 1980 as a percentage of total company assets. Facilities included are
scrubbers, precipitators, coal washing facilities, and other pollution control installations.
Sources: Utilities' Annual Reports and U.S. Department of Energy, S t a t i s t i c s o f Privately o w n e d E l e c t r i c Utilities in t h e U.S., Annual 1980, and
Cost and Quality o f F u e l s for Electric Utilities Plants, Annual 1980
combustion turbines, and 19 percent nuclear. TVA
supplies power to 160 municipal and cooperative
distributors 50 large industrial customers and several
federal agencies. It sells low-cost power largely generated by hydro and coal facilities. The company will
increase its nuclear power capability by 11,102 megawatts by 1990. TVA's research efforts to improve
environmental standards for coal use are also important steps to upgrade the company's future power
generation. TVA's construction program has increased
substantially the agency's amount of long-term borrowing. TVA's long-term and short-term financing bonds
are provided through the Federal Financing Bank.
Selected Independent Utilities
Florida Power and Light Company, the fifth largest
investor-owned utility in the nation, has a capability of
11,738 megawatts to serve an estimated population
of more than five million. More than half of the company's
capacity relies solely on oil. Natural gas and nuclear
energy account for 19 and 21 percent of capacity. The
utility began to experiment recently with a mixture of
pulverized coal and oil. Florida Power expects to have
its first two coal-burning units, Martin Units 3 and 4, by
the late 1980s or early 1990s adding 1,400 megawatts
of capacity.
The company also plans to increase coal-generating
capacity jointly with the Jacksonville Electric Authority.
The St. Johns River Power Project calls for the construction of two 550-megawatt coal units to be completed in late 1985 and mid-1987, with each company
taking half the output.
FEDERAL RESERVE B A N K O F A T L A N T A
Tampa Electric Company serves an area of nearly
1,900 square miles on the west coast of Florida. Three
steam electric-generating stations and four turbine
cranking units provide a generating capacity of 2,499
megawatts. The company has completed an almost
total shift to coal as its major fuel. Currently, 80
percent of the company's electrical generation comes
from coal. The utility plans to increase generating
capacity upon completion of two additional coal-fired
units by 1985 and 1989, adding 417 and 400 megawatts. In January 1981 the company became the
corporate base of TECO Energy Inc., a new holding
company that also parents several non-utility subsidiaries. TECO Energy's new subsidiaries are set up to
take advantage of coal's growing export market while
securing the utility'sfuture coal needs including transportation and related services Tampa Electric currently
ranks among the nation's top utilities in profitability
and bond rating.
Central Louisiana Electric Inc., even though the
company's total capability of 1,323 megawatts is 98
percent gas-fired, coal is also a future alternative.
Central Louisiana has acquired from a neighboring
company a 50 percent interest in a 530-megawatt
coal-fired unit that will be completed late this year. The
unit will use low sulphur coal from Wyoming. The utility
plans also to fuel future electric generating units with
an estimated 150 million tons of recoverable lignite
reserves from northwestern Louisiana that could increase its capacity with a much cheaper fuel.
Jlc.
FINANCE
ANN.
AUG
1982
$ millions
UNITED STATES
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings & Time
SOUTHEAST
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings <5c Time
ALABAMA
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings & Time
FLORIDA
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings & Time
GEORGIA
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings & Time
LOUISIANA
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings Sc. Time
MISSISSIPPI
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings & Time
TENNESSEE
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings & Time
JUL
1982
AUG
1981
ANN.
%
CHG.
1,162,872 1,153,704 1,043,004
286,067
296,964
295,810
58,152
58,573
44,913
150,134
151,527
153,492
695,757
681,420
579,488
49,477
49,551
37,501
2,297
3,324
3,306
42,121
42,209
33,010
+ 11
3
+ 29
2
+ 20
+ 32
+ 45
+ 28
Savings & Loans
Total Deposits
NOW
Savings
Time
+ 12
2
+ 31
3
+ 20
+ 30
+ 31
+ 26
Savings & Loans
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage C o m m i t m e n t s
124,815
33,262
7,520
14,688
72,229
4,634
330
3,880
124,585
34,789
7,614
14,875
71,135
4,633
329
3,873
111,516
33,800
5,721
15,112
60,144
3,565
252
3,075
13,949
3,438
653
1,556
8,765
815
64
654
13,828
3,527
653
1,569
8,711
818
64
660
12,855
3,448
509
1,614
7,683
556
51
496
+
9
0
28
4
14
47
25
32
Savings & Loans
Total Deposits
NOW
Savings
Time
40,613
11,596
3,268
6,181
20,342
2,116
183
1,647
40,823
12,318
3,332
6,276
20,036
2,133
186
1,653
37,072
12,313
2,493
6,473
16,661
1,608
142
1,248
+ 10
6
+ 31
5
+ 22
+ 32
+ 29
+ 32
Savings & Loans
Total Deposits
NOW
Savings
Time
17,400
5,911
1,089
1,635
9,623
853
32
773
17,448
6,158
1,094
1,653
9,508
839
29
757
14,914
5,808
831
1,609
7,653
697
19
667
+
+
+
+
+
+
+
+
17
2
31
2
26
22
68
16
Savings & Loans
Total Deposits
NOW
Savings
Time
22,741
5,876
1,036
2,448
13,868
126
10
116
22,598
6,102
1,041
2,473
13,595
124
10
115
19,899
5,837
767
2,444
11,411
98
7
90
+
+
+
+
+
+
+
+
14
1
35
0
22
29
43
29
Savings <5c Loans
Total Deposits
NOW
Savings
Time
10,375
2,297
555
737
6,995
N.A.
N.A.
N.A.
10,234
2,354
563
747
6,899
N.A.
N.A.
N.A.
9,269
2,304
422
767
6,034
N.A.
N.A.
N.A.
+ 12
- 0
+ 32
4
+ 16
Savings 3c Loans
Total Deposits
NOW
Savings
Time
19,738
4,144
919
2,131
12,637
724
41
690
19,564
4,331
932
2,157
12,385
719
40
688
17,507
4,090
699
2,205
10,702
606
33
574
+ 13
+ 1
+ 31
3
+ 18
+ 19
+ 24
+ 20
-
+
-
+
+
+
+
Mortgages Outstanding
Mortgage C o m m i t m e n t s
Mortgages Outstanding
Mortgage C o m m i t m e n t s
Mortgages Outstanding
Mortgage C o m m i t m e n t s
Mortgages Outstanding
Mortgage C o m m i t m e n t s
Mortgages Outstanding
Mortgage C o m m i t m e n t s
Mortgages Outstanding
Mortgage C o m m i t m e n t s
Savings 3c Loans
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage C o m m i t m e n t s
AUG
1982
JUL
1982
AUG
1981
534,229
10,510
91,931
432,687
JUN
503,618
16,762
534,299
10,488
93,202
432,044
MAY
505,000
16,549
511,310
6,567
96,955
407,767
JUN
506,053
17,923
+ 4
+ 60
- 5
+ 6
78,888
1,697
11,558
65,733
JUN
69,933
3,142
78,686
1,700
11,666
65,539
MAY
74,256
3,242
74,818
1,018
12,137
61,508
JUN
73,831
3,753
+ 5
+ 67
- 5
+ 7
4,517
89
546
3,908
JUN
3,946
78
4,521
89
553
3,905
MAY
3,963
59
4,333
53
620
3,679
JUN
4,010
109
+ 4
+ 68
- 12
+ 6
47,681
1,155
7,693
38,783
JUN
41,364
2,519
47,524
1,171
7,768
38,660
MAY
45,525
2,650
45,407
716
8,058
36,416
JUN
44,924
3,133
+ 5
+ 61
- 5
+ 6
9,898
190
1,190
8,599
JUN
9,062
171
9,916
184
1,203
8,596
MAY
9,279
180
9,527
107
1,275
8,164
JUN
9,497
151
+ 4
+ 78
- 7
+ 5
7,893
111
1,223
6,585
JUN
7,293
242
7,858
109
1,236
6,535
MAY
7,260
267
7,112
59
1,221
5,851
JUN
7,001
238
+ 11
+ 88
+ 0
+ 13
2,442
53
228
2,174
JUN
2,182
21
2,438
51
225
2,175
MAY
2,145
19
2,371
25
240
2,109
JUN
2,204
38
+ 3
+112
- 5
+ 3
6,457
98
678
5,684
JUN
6,086
111
6,428
95
681
5,667
MAY
6,084
67
6,068
58
723
5,289
JUN
6,195
84
+ 6
+ 69
- 6
+ 7
%
CHG.
-
0
6
- 5
- 16
- 2
- 28
- 8
- 20
- 5
+ 13
+
+
4
2
- 1
- 45
- 2
+ 32
Notes:
A l l deposit d a t a are extracted from the Federal Reserve Report of Transaction Accounts, other Deposits and Vault Cash (FR2900),
.
and are reported for the average of the week ending the 1st Wednesday of the month. This data, reported by institutions with
over $15 million in deposits as of December 31, 1979, represents 95% of deposits in the six state area. The major differences betwe?
this report and the "call report" are size, the treatment of interbank deposits, and the treatment of float. The data generated from
the Report of Transaction Accounts is for banks over $15 million in deposits as of December 31, 1979. The total deposit data general
from the Report of Transaction Accounts eliminates interbank deposits by reporting the net of deposits "due to" and "due f r o m " other?
depository institutions. The Report of Transaction Accounts subtracts cash in process of collection from demand deposits, while the calfj
report does not. Savings and loan mortgage data are from the Federal Home Loan Bank Board Selected Balance Sheet D a t a . The
Southeast data represent the total of the six states. Subcategories were chosen on a selective basis and do not add to t o t a l .
N.A.
FRASER = fewer than four institutions reporting.
Digitized for
http://fraser.stlouisfed.org/
56
Federal Reserve
Bank of St. Louis
O C T O B E R 1982, E C O N O M I C R E V I E W
EMPLOYMENT
ANN.
JUL
1982
JUN
1982
JUL
1981
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
112,526
101,490
11,036
9.8
111,569
100,683
10,886
9.5
110,742
102,612
8,130
7.2
39.3
334
39.6
318
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
Mfg. Avg. Wkly. Hours
Mfe. Avg. Wkly. Earn. - $
14,328
12,912
1,416
9.4
14,220
12,815
1,406
9.4
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
4,854
4,489
365
7.3
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
4,763
4,398
366
7.5
CHG.
J on farm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & Real Est.
Trans. C o m . & Pub. Util.
89,539
18,720
4,152
20,614
15,214
19,219
5,426
5,068
13,902
12,821
1,082
7.3
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l Est.
Trans. C o m . & Pub. Util.
11,293
2,145
677
2,677
2,062
2,237
642
699
1,673
1,490
184
8.5
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l Est.
Trans. C o m . <5c Pub. Util.
4,622
4,321
301
5.9
+ 2
- 1
+36
+ 5
+ 4
+21
1,883
1,718
165
7.7
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wklv. Earn. - $
- 2
1,059
936
123
10.3
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
Mfg. Avg. Wkly. Hours
Mfg Av
klv Earn
'- jS"—y "
2,121
1,875
247
11.2
2,103
1,868
235
11.2
JUN
1982
90,596
19,035
4,092
20,680
15,956
19,164
5,410
5,117
JUL
1981
91,107
20,246
4,415
20,600
15,334
18,771
5,376
5,181
ANN.
%
CHG.
-
2
-
6
+ 0
11,388
2,295
725
2,654
2,068
2,151
635
701
3,664
460
285
970
580
855
274
229
2,173
520
104
502
423
362
114
140
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & Real Est.
Trans. C o m . & Pub. Util.
Trade
Government
Services
Fin., Ins., <5c
Trans. C o m .
' "*
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
Notes:
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., ic R e a l Est.
Trans. C o m . & Pub. Util.
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & Real Est.
Trans. C o m . & Pub. Util.
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wklv. Earn. - $
-
JUL
1982
2,057
1,880
176
8.1
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., it Real Est.
Trans. C o m . & Pub. Util.
-1
A l l labor force data are from Bureau of Labor Statistics reports supplied by state agencies.
Only the unemployment rate data are seasonally adjusted.
The Southeast data represent the t o t a l of t h e six states.
The annual percent change calculation is based on the most recent data over prior year.
http://fraser.stlouisfed.org/
FEDERAL RESERVE B A N K O F
Federal Reserve Bank of St. Louis
ATLANTA
57
CONSTRUCTION
JUL
1982
J UN
1982
JUL
1981
50,117
6,242
14,617
5,65 3
1,646
879
51,610
8,172
13,004
6,637
1,320
738
ANN
%
JUN
1982
JUL
1982
CHG
ANN
%
JUL
1981
CHG
12-month Cumulative R a t e
Nonresidential Building Permits - $ Mil.
Total Nonresidential
48,090
Industrial Bldgs.
5,780
Offices
13,884
Stores
5,60 2
Hospitals
1,701
Schools
849
+
+
+
7
29
7
16
29
15
Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Number single-family
Number multi-family
Total Building Permits
Value - $ Mil.
-
Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Number single-family
Number multi-family
Total Building Permits
Value - $ Mil.
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
6,489
763
1,378
1,054
263
95
6,606
816
1,420
1,059
292
91
7,155
867
1,276
1,036
187
86
+
+
+
+
9
12
8
2
41
10
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
398
78
54
67
21
7
401
82
41
70
32
8
434
50
65
74
27
5
+
+
8
56
17
9
22
40
Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Number single-family
Number multi-family
Total Building Permits
Value - $ Mil.
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
3,269
381
639
563
157
20
3,340
407
658
553
169
18
4,040
455
565
577
59
25
- 19
- 16
+ 13
- 2
+166
- 20
Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Number single-family
Number multi-family
Total Building Permits
Value - $ MiL
Nonresidential Building Permits - $ Mil.
Total Nonresidential
1,045
Industrial Bldgs.
156
Offices
247
Stores
104
Hospitals
27
Schools
34
1,056
177
256
119
27
35
1,054
182
243
119
20
28
-
Nonresidential Building Permits - $ Mil.
Total Nonresidential
905
Industrial Bldgs.
91
Offices
263
Stores
167
Hospitals
21
Schools
25
921
89
282
166
29
24
875
103
285
104
63
19
3
- 12
8
+ 61
- 67
+ 32
Residential Building Permits
Value - $ Mil,
Residential Permits - Thous.
Number single-family
Number multi-family
Total Building Permits
Value - $ Mil.
Nonresidential Building Permits - $ Mil.
Total Nonresidential
173
Industrial Bldgs.
15
Offices
42
Stores
39
Hospitals
4
Schools
2
189
23
44
40
6
1
189
18
37
48
8
0.9
- 8
- 17
+ 14
- 19
- 50
+122
Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Number single-family
Number multi-family
Total Building Permits
Value - $ Mil.
Nonresidential Building Permits - $ Mil.
Total Nonresidential
698
Industrial Bldgs.
41
Offices
133
Stores
114
Hospitals
33
Schools
6
699
39
139
111
29
6
562
60
81
114
10
8
+ 24
- 32
+ 64
0
+230
- 25
Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Number single-family
Number multi-family
Total Building Permits
Value - $ MiL
-
1
14
+ 2
13
+ 35
+ 21
-
+
Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Number single-family
Number multi-family
Total Building Permits
Value - $ Mil.
34,772
34,819
48,926
- 29
461.5
392.6
466.8
381.1
711.5
492.6
- 35
- 20
82,862
84,936
100,536
- 18
6,467
6,648
10,155
- 36
92.7
83.9
95.0
85.6
155.7
127.8
- 40
- 34
12,956
13,255
17,230
- 25
239
241
400
- 40
4.0
5.2
4.1
5.1
8.1
7.1
- 51
- 27
637
642
834
- 24
4,062
4,272
6,968
49.6
52.7
51.7
55.2
93.8
90.1
47
42
7,332
7,613
11,008
- 33
1,077
1,055
1,258
- 14
20.9
10.0
20.7
9.9
26.4
10.6
- 21
- 6
2,123
2,111
2,311
579
555
700
9.2
8.5
9.2
7.6
11.7
9.1
1,483
1,476
1,575
142
144
249
- 43
2.8
1.9
2.9
1.9
4.8
3.9
42
51
315
334
438
- 28
368
381
6.2
5.6
6.3
5.9
1,066
1,080
581
11.0
6.9
1,153
-
8
- 17
-
6
- 37
- 44
- 19
-
8
Data supplied by the U. S. Bureau of the Census, Housing Units Authorized By Building Permits and Public Contracts, C-40.
Nonresidential data excludes the cost of construction for publicly owned buildings. The southeast data represent the total of
the six states. The annual percent change calculation is based on the most recent month over prior year. Publication of F. W.
Dodge construction contracts has been discontinued.
http://fraser.stlouisfed.org/
58
Federal Reserve
Bank of St. Louis
O C T O B E R 1982, E C O N O M I C R E V I E W
GENERAL
AUG
1982
UNITED STATES
Personal Income-? bil. SAAR
(Dates: 1Q, 4Q, I Q )
Retail Sales - $ mil.- SA
Plane Pass. Arrivals (thous.) J UN
Petroleum Prod, (thous. bis.)
Consumer Price Index
1967=100 (JUL)
Kilowatt Hours - mils. ( A P R )
JUL
1982
AUG
1981
ANN.
%
CHG.
AUG
1982
(Dates:
I Q , 4Q, 1Q)
Plane Pass. Arrivals (thous.) J U N
Petroleum Prod, (thous. bis.)
Consumer Price Index
1967=100
Kilowatt Hours - mils. ( A P R )
Personal Income-S bil. SAAR
(Dates: 1Q, 4Q, 1Q)
Taxable Sales - $ mil.
Plane Pass. Arrivals (thous.) J U N
Petroleum Prod, (thous. bis.)
Consumer Price Index - Miami
+ 8
+ 0
2,518.6
88,292
N.A.
8,669.1
2,493.1
89,089
N.A.
8,701.0
2,327.4
87,961
N.A.
8,638.7
+ 0
292.2
167.4
290.6
173.9
274.4
160.7
+ 6
+ 4
Personal Income-$ bil. SAAR
(Dates: I Q , 4Q, 1Q)
Taxable Sales - $ mil.
Plane Pass. Arrivals (thous.) J U N
Petroleum Prod, (thous. bis.)
Consumer Price Index
1967 = 100
Kilowatt Hours - mils. ( A P R )
Personal lncome-$ bil. S A A R
(Dates: 1Q, 4Q, 1Q)
Taxable Sales - $ mil.
Plane Pass. Arrivals (thous.) J U N
Consumer Price Index
1967 = 100
Kilowatt Hours - mils. (APR)
+ 9
297.0
N.A.
4,192.5
1,387.5
294.5
N.A.
4,240.8
1,389.0
271.3
N.A.
4,075.1
1,425.8
N.A.
25.4
N.A.
25.9
N.A.
25.0
+ 2
33.0
N.A.
112.9
56.5
33.1
N.A.
111.4
56.0
31.2
N.A.
127.2
60.5
+ 6
N.A.
3.5
N.A.
3.5
N.A.
3.7
108.7
66.6
2,056.9
75.0
JUL
155.1
6.9
107.3
66.8
2,114.9
76.0
MAY
155.7
6^7
96.9
64.8
1,751.8
98.0
JUL
146.1
6.6
+12
+ 3
+17
-23
51.7
N.A.
1,548.8
N.A.
APR
280.2
4.4
48.2
N.A.
1,743.3
N.A.
JUN
269.2
3.8
+ 7
43.0
N.A.
259.4
1,164.0
42.5
N.A.
269.7
1,164.0
39.0
N.A.
256.9
1,172.0
+ 10
N.A.
4.3
N.A.
4.1
N.A.
3.9
Nov. 1977 = 100
Kilowatt Hours - mils. (APR)
GEORGIA
~~
Personal Income~$ bil. SAAR
(Dates: I Q , 4Q, 1Q)
51.8
Taxable Sales - $ mil.
N.A.
Plane Pass. Arrivals (thous.) J U N 1,564.1
Petroleum Prod, (thous. bis.)
N.A.
Consumer Price Index - Atlanta
JUN
1967 = 100
291.1
Kilowatt Hours - mils. (APR)
3.9
Personal Income-$ bil. SAAR
(Dates: 1Q, 4Q, 1Q)
Taxable Sales - $ mil.
Plane Pass. Arrivals (thous.) J U N
Petroleum Prod, (thous. bis.)
Consumer Price Index
1967 = 100
Kilowatt Hours - mils. ( A P R )
ANN.
%
AUG
1981
CHG.
WMÈÊÈÊÊÊÊÊk i
Agriculture
Prices R e c ' d by Farmers
135.0
Index (1977=100)
80,612
Broiler Placements (thous.)
61.30
Calf Prices ($ per cwt.)
26.3
Broiler Prices (4 per lb.)
5.39
Soybean Prices ($ per bu.)
215
Broiler Feed Cost ($ per ton)
—MI
Personal Income-? bil. SAAR
(Dates: 1Q, 4Q, 1Q)
Taxable Sales - $ mil.
Plane Pass. Arrivals (thous.) J U N
Petroleum Prod, (thous. bis.)
Consumer Price Index
1967=100
Kilowatt Hours - mils. ( A P R )
J U L (R)
1982
18.9
N.A.
33.0
92.0
18.9
N.A.
32.7
93.0
17.7
N.A.
36.2
95.3
N.A.
1.6
N.A.
1.7
N.A.
1.6
41.5
N.A.
166.2
N.A.
40.9
N.A.
163.3
N.A.
38.3
N.A.
159.7
N.A.
N.A.
5.2
N.A.
5.5
N.A.
5.4
-11
- 7
- 5
+ 6
+ 5
-10
+ 8
+ 3
—
+1
- 1
+10
+ 7
- 9
- 3
0
+ 8
+ 4
- 4
136.0
81,835
60.60
28.6
5.99
217
138.0
77,377
62.30
28.5
6.71
225
127.5
32,213
57.08
27.7
127.0
30,924
58.06
27.3
6.12
218
6.80
- 2
+ 4
- 2
- 8
-20
- 4
•
Agriculture
Prices R e c ' d by Farmers
130.0
Index (1977=100)
31,843
Broiler Placements (thous.)
58.59
Calf Prices ($ per cwt.)
25.6
Broiler Prices (« per lb.)
5.72
Soybean Prices ($ per bu.)
213
Broiler Feed Cost ($ per ton)
+ 2
+ 3
+1
-
6
-16
219
- 3
722
9,776
56.00
27.0
6.47
235
+ 1
+ 2
- 3
- 9
-13
-11
2,317
1,906
61.20
27.0
6.47
240
+ 4
- 4
- 0
- 7
-13
- 8
997
+1
Agriculture
Farm Cash Receipts - $ mil.
728
(Dates: M A Y , M A Y )
9,938
Broiler Placements (thous.)
54.40
C a l f Prices ($ per cwt.)
24.5
Broiler Prices (<t per lb.)
5.60
Soybean Prices ($ per bu.)
210
Broiler Feed Cost ($ per ton)
10,136
55.50
26.5
5.97
225
Agriculture
Farm Cash Receipts - $ mil.
2,404
(Dates: M A Y , M A Y )
1,839
Broiler Placements (thous.)
60.90
C a l f Prices ($ per cwt.)
25.0
Broiler Prices (<t per lb.)
5.60
Soybean Prices ($ per bu.)
220
Broiler Feed Cost ($ per ton)
1,931
60.60
27.0
5.97
225
Agriculture
Farm Cash Receipts - $ mil.
(Dates: M A Y , M A Y )
1,010
Broiler Placements (thous.)
12,423
Calf Prices ($ per cwt.)
54.40
Broiler Prices (4 per lb.)
25.0
Soybean Prices ($ per bu.)
6.25
Broiler Feed Cost ($ per ton)
215
12,630
54.00
27.0
6.25
215
12,062
—
:—
•—
•
205
+ 5
N.A.
59.10
31.0
6.19
250
526
N.A.
58.80
29.0
7.13
245
+ 1
- 5
-20
+ 2
658
5,788
62.10
29.0
6.74
210
+ 7
+ 3
+ 2
- 3
-17
- 2
500
1,392
54.90
27.0
6.79
199
+ 16
- 5
+ 5
- 6
-15
- 9
—
Agriculture
Farm Cash Receipts - $ mil.
(Dates: M A Y , M A Y )
Broiler Placements (thous.)
Calf Prices ($ per cwt.)
Broiler Prices
per lb.)
Soybean Prices ($ per bu.)
Broiler Feed Cost ($ per ton)
.
—
*
492
N.A.
59.50
27.5
5.67
250
—
-
-
—
Agriculture
Farm Cash Receipts - $ mil.
707
(Dates: M A Y , M A Y )
5,973
Broiler Placements (thous.)
C a l f Prices ($ per cwt.)
63.40
Broiler Prices (<t per lb.)
28.0
Soybean Prices ($ per bu.)
5.61
Broiler Feed Cost ($ per ton)
205
6,182
59.60
30.5
6.07
205
Agriculture
Farm Cash Receipts - $ mil.
581
(Dates: M A Y , M A Y )
1,326
Broiler Placements (thous.)
57.80
C a l f Prices ($ per cwt.)
25.5
Broiler Prices (« per lb.)
5.76
Soybean Prices ($ per bu.)
181
Broiler Feed Cost ($ per ton)
1,335
53.70
28.0
6.14
188
-
-
54.80
26.5
6.81
+ 3
- 1
-
6
-
8
- 6
Notes:
Personal Income data siçplied by U. S. Department of Commerce. Taxable Sales are reported as a 12-month cumulative total.
Plane
Passenger Arrivals are collected from 26 airports. Petroleum Production data supplied by U. S. Bureau of Mines. Consumer Price
Index data siçplied by Bureau of Labor Statistics. Agriculture data supplied by U. S. Department of Agriculture. Farm Cash
Receipts data are reported as cumulative for the calendar year through the month shown. Broiler placements are an average weekly
rate. The Southeast data represent the total of the six states. N.A. = not available. The annual percent change calculation is based
on most recent data over prior year.
R = revised.
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