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April 1996
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The Economy in Perspective
Are .we there yet? ... The constant dollar value of
goocls and services procluced in the Unitect
States increased for the fifth consecutive year in
1775. By the reckoning of most professional
forecasters, the nation's econonly will expancl
further this year and next. If this prediction
proves correct, only 2 of the 60 quarters in the
1983-77 period will have recorclecl outright cleclines in total output. In real terms, the econonly will have procluced $7.1 trillion in 1977, a
53% increase over its 1782 level.
Moreover, by nlost conventional measures,
the economy is operating at high levels of resource utilization. Capacity utilization in the
goods-producing sector registers close to its average for postwar econonlic expansions, l~aving
recently eased back fronl even higher rates.
Considering the rapid pace of business fixed investment during the past few years, the continuecl activity of the enlarged capital stock testifies
to the strength of clernancl. Labor nlarltets have
also been tight. Although payroll reductions in
sonle large firms have attracted attention, labor
clelnancl has been growing. Since the labor
force has been expanding only slowly, even
moderate increases in labor denlancl have
served to keep pushing the national average unernploynlent rate clown toward 5.5 percent (the
1996:IQ average was 5.6 percent). The ratio of
ernploynlent to working-age population is near
its all-time peak of 63.2 percent.
One re~narltableaspect of this expansion has
been inflation's extraordinary performance. The
inflation trend was negatively sloped during the
1783-95 period, although its actual path was
marked by episodic ups ancl downs. According
to the cost-push model that seems to dolninate
the pop~llarpress, econonlic expansions create
a scarcity of resources, which in turn r-t'lses material and labor costs. Before long, inflation intensifies. Adherents of this view often prescribe
monetary or fiscal restraint, thinking that inflation will slow when the clemancl for goods ancl
sewices slacltens.
If conventional measures of resource utilization are reasonably accurate, \\illy aren't price
pressures in the economy Inore visible? Does
more capacity exist than is reaciily apparent?
Maybe. The concept of physical capacity,
though appealing, doesn't easily lend itself to
practical measurement. Even relative to 30 years
ago, our economy produces a greater proportion of its output in the forln of services than
goods. Self employnlent ancl part-time employment have become more commonplace, increasing labor force flexibility. Innovations in
transportation, comn~unication,and infornlation
management have changecl not only the mix of
goocls ancl sel~~ices,
but also the means of their
production. Iiesources can now be obtained
rnore quickly, ;uncl from more locations, than at
any time in the past. It is by no means clear that
we can conficlently measure economic capacity.
To the extent that increases in denland put upward pressure on prices, individual firnls and
markets rnay be nlore capable of deflecting
those forces than ever before.
The clynanlics of price-level movements may
also differ from those inlplied by the cost-push
model. Inflation-sustained
increases in the
price level-stems from excessive nloney creation. Over a few years, the price level may be
l~uffeteclby a variety of transitory or even cyclical factors. Over longer periods, however, monetary policy deternlines the price-level trend.
When the money supply grows faster than the
rate necessary to complete transactions at current prices, the prices of all goocls and services
rise to absorb the excess money stock. If the
stock of money and its rate of turnover remain
fixecl, the price level can actually decline as real
output expands. In other n~orcls,econo~nic
growth can proceed, even with a declining aggregate price level, in the presence of a stable
monetaly policy. (Such an episocle occurred in
the late 1800s.) Fears that economic growth will
necessarily cause inflation are based on an unwarranted extrapolation of the cost-push model,
a lack of cor~iclencein rnonetary policy, or both.
The pace of economic activity ebbs ancl flows
over time within inclustries, regions, and nations
in response to a variety of factors. Greater coosclination anlong housel~olclsancl fir~nsyields
less volatile fluctuations. Market economies
excel at coordinating plans, ancl they contain
self-equilibrating mechanisms to resolve errors.
Serious disn~ptionsto econonlic expansions are
usually the result of unusual events such as oil
price shocks, wars, or gross economic policy errors. Economic policies c21n actually strengthen
the coordination process if their f~~nclamental
design supports efficient resource allocations
ancl if their objectives are well unclerstoocl.
In the aftermath of an inflation upheaval during the 1970s. monetary policy has been geared
towarcl restoring a clitnate of price-level stability. Since 1983, while overall econonlic growth
has generally been quite flavorable, inflation has
trended gradually clownn~ard.The Consun~er
Price Incles (CPI) increased less than 3% in each
of the last three years, as economic activity continued to be strong. Goods prices have actually
been increasing far rnore slowly than have sen?ices prices (roughly 2 percent versus 3.5 percent
annually cluring the last five years). Using a ballpark estimate of 1 percent as the size of total
nleasurement bias in the CPI, ancl noting the already low rate of change in goocls prices, it is
easy to see m~hypeople increasingly inclicate
that inflation is no longer a factor in their economic clecisions.
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e
Monetary Policy
Billions of dollars
Billions of dollars
10%
Billions oi dollars
Billions of dollars
1.300
a. Growth rates are percentage rates calculated on a fourth-quarter over fourth-quarter basis.
b. Adjusted for sweep accounts.
NOTE: All data are seasonally adjusted. Last plot is estimated for March 1996. Dotted lines represent growth ranges and are for reference only.
SOURCE: Board of Governors of the Federal Reserve System.
In t h e past year, the Fecleml Open
Market Committee h:ks thrice votecl
to lo\\-er its lie). fecleral funcls rate
target: from 6%)to 5.75% in July, to
5.5% it1 Deceml~er,then to 5% in
J ~ I I L I ~ The
I - J ; filncls
.
late-the interest rate paicl o n overnight loans of
reserves I>et\veen 1>;1nl<s-represents the key information gi~icling
open-market operations for control
of b:lnl< reserves. Because rese~ves
;ire the raw materi:ll tor the creation
of Inonetar). assets by the I~anliing
system, their control is the channel
through which central bank operations affect the supply of money in
the economy.
In essence, the federal funds rate
is the price of obtaining 1.eserves.
T ~ L I when
S,
dernancl for reserves esceecls supply, the rate tencls to rise.
ancl vice versa. All else being equal,
then, lnaintaining a lower fi~nds-rate
target illiplies a greater supply of reserves by the monetary authority
:ind, p r e s ~ ~ m a b lay ,Inore sapicl expznsion of money.
Of course, all else is not always
equal, alld I>la~ll<et
interpretations of
rising and falling fi~nds-ratetargets
are ill-adviseel. Still, the past year's
coinciclellce of falling rates ancl
slow growth or outright declines in
the narrow money ~neasures-total
reserves, the monetary base, ancl
Ml-can't help but be puzzling to
111ost oi>se~vers.
The resolution of the puzzle
seems to be founcl in sweep
(cot?titzzieclo~?tzext pcgej
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Monetary Policy (cont.)
Transaction Deposits initially Swept into
Money Market Deposit Accounts
(Billions of dollarsa)
Quarterly
averages
Cumulative
total
1994:lQ
7.5
7.5
1994:llQ
0.0
7.5
1994:lllQ
1.5
9.0
1994:IVQ
0.9
9.9
1995:lQ
0.0
9.9
1995:llQ
12.2
22.1
1995:lllQ
11.1
33.2
1995:IVQ
21.3
54.5
January 1996
14.0
68.5
Billions of dollars a
15
0
May June
July
Aug. Sepl
1995
Ocl.
Nov. Dec
Jan
1996
Percent
a. Not seasonally adjusted.
b. Last plot is estimated for March 1996.
SOURCE: Board of Governors of the Federal Reserve System.
accounts. Createel to help I~anks
econonlize o n the reserves that are
requirecl to suplx)rt cIcIII~I~IcI
deposits, these accounts involve the
very short-term "s~veeping" of
checkable deposits into money Inaslcct cleposit ~lccounts.'l'hese activities are essentially invisible to the
householcls that o\vn check:ible deposits, ;u~lcls o h2x.e little impact on
true tr;i~ls:lction I)al;lnces. However.
stveep activities can, and app:uently
clo, significantly clepress reserves
ancl other narrow money measures.
Sxveep accounts began appearing
on the nlonetary radar screen in
1994 anti have grown in importance
since then. Fro111 the first cluarter of
1994 through the fourth cluarter of
1995. the cumulative total of transaction cleposits initially swept into
money market deposit accounts has
risen more than sevenfolcl. At the
same time, the clisp:~rity between
narrocv-money growth rates before
ancl after adjusting for s-weepsihas
increased. Throughout most of 1995,
~~nacljustecl
total reserves ancl unacljusted M l actually declineci, ~ ~ h i l e
acljusted measures grelb-.
These circumstances suggest potentially large cllallges in the way
we "reacl" monetary develop~llents.
Attenelant to ;my such changes is the
question of how these developments alter the central l~anli'sability
to exercise monetary control.
Fortunfitely, there is thus fils little
eviclence that the swfeep account
(coi?tir~~ied
011 f1extp~lgc~)
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1Monetary Policy (cont.)
Percentage points
3
CPI INFLATION MINUSITS
I
Percent change, lourth quarter over fourih quarter
TREND^
I
a. Trend CPI inflation is defined using median CPI breakpoints.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; Federal Reserve Bank of Cleveland; and Board of Governors of the Federal Reserve System
phenomenon 1:s substantially
the 1991-93 period was actually
afkctecl the lcey aspects of Illoneta1-y
grezter than cleviations fro111 tlie taroperations. Although the level of
get in the periocl since the first cluarter of 1994.
total resel-ves has cert:tinly heen alrered by sweep xctivities, the volatilThe funcls 12te is, of course, not
ity of reserves appears unchangecl.
an encl in itself. The sanle can be
Similarly, the \.:trial,ility of the fedsaid of rnonetLt1-y growth. 'l'hey are
eral funcls rate about the : ~ n n o ~ ~ n c e dnlerely instruments for the conduct
or perceivecl t:lrgets has not been
of monetary policy, the ulti~nateaim
of \~;\;hichinvolves I,roacler macrogreater in the t\vo years since
econon~icperfor111;tnce. Price-level
sweeps were introclucecl than it was
in t h e two ye:trs I~eforetheir creor inflation outcomes are particuation. In k t , ille standarcl cleviation
larly important. 'I'here can be little
solace in the fact that financial m:tro f t h e sate from irnpliecl targets in
lcet ctevelopments like sweep ac-
counts clo not much affect the centlxl bank's ability to control, say, the
fecleral funds rate, if :it the same
time inflation rises or becorues significantly Illore volatile.
Fort~~nately,
there is again n o eviclence of ~tnusualnlonetary policy
behavior in the periocl since the heginning of 1994. Inflation has been
ro~tghlyconst:unt for three years running, as has been the stantlard deviation about trend. In this important
respect, the introcluction of sweep
~ C C O U I I ~has
S
been a nonevent.
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Percent
Percent, weekly averages
QG.
Cycle coherence and ohase
Per~od(years)
a. Shaded bars indicate recessions.
b. Three-month and six-month instruments are quoted from the secondary market on a yield basis; all other instruments are constant-maturity series.
c. Coherence measures the correlation at each frequency; its values range from 0 to 1. Phase measures the leads and lags between cycles. A positive or nega.
tive value indicates that interest rates lead or lag real growth, respectively. Larger positive or negative phase values imply longer leads or lags.
SOURCES: Board of Governors of the Federal Reserve System; and U.S. Department of Commerce. Bureau of Economic Analysis.
In recent \\;\iecks, the yield curve
(particularly the long end) has
shifted upward. Goocl news for the
economy is often deelnetl bad news
for long-term honds, since rob~ist
growth leads I,oncl prices to fall ancl
interest rates Lo rise. Do long-terrl'i
interest Utes sho\v S L I C a~ ~cyclical
pattern? A looli at the relati011 between 10- and 30-year honcls and
recessions since 1977 indicates that
interest rates rose prior to e : ~ hrecession and then fell during each
downturn. The econolny's cyclical
peak. n~hich corresponcls to the
onset of the recession, also coincides with the peak in interest rates.
O n the other l~ancl,interest rates
sometimes increase in a recession,
ancl often rise and fall in a recovery.
A closer look at the cyclical relation between real GDP growth ancl
30-year interest rates supports this.
We can think of interest rates and the
real econol'ily as being colllposecl of
cycles of many frequencies. from a
daily one (because markets close at
night) to weekly ancl seasonal frecluencies, to business cycles of three
to five years, to longer-ter~nsecular
val-i;rtion. The relation between interest rates and real GDP then varies
wit11 the period of the cycle.
Colnemnce measures the degree of
correlation at each hequency. The
lo.rver right cl1;ut inclicates high coherence (that is, corno\-ement) in the
three- to five-pear range 2md in the
range :iround one year. P l ~ m emeasures whether one cycle leads or lags
the other Dnring h~rsinesscycles, interest rates tend to lead, rising ancl
killing l~eforereal grox~thdoes.
9
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8
Inflation and Prices
Diffusion index, net percent rising
I February Price Statistics
I
Annualized percent
change, last:
5 yr.
1995
I mo.
12 mo.
2.4
2.7
2.8
2.6
3.0
2.2
2.9
3.2
3.2
3.1
3.0
3.2
-1.8
2.0
1.3
2.1
0.9
2.0
1.7
2.5
30.3
6.3
3.1
5.4
average
Consumer Prices
All items
Less food
and energy
Mediana
Producer Prices
Finished goods
Less food
and energy
Commodity futures
pricesb
12-month percent change
12-month percent change
1HOUSEHOLDINFLATION EXPECTATIONS~
I
a. Calculated by the Federal Reserve Bank of Cleveland.
b. As measured by the KR-CRB composite futures index, all commodities. Data reprinted with permission of the Commodity Research Bureau, a Knight-Ridder
Business Information Service.
c. Mean expected 12-month change in consumer prices as measured by the University of Michigan's Survey of Consumers.
d. Upper and lower bounds for CPI inflation path as implied by the central tendency growth ranges issued by the FOMC and nonvot~ngReserve Bank
pres~dents.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; the Federal Reserve Bank of Cleveland; the Commodity Research Bureau; Board of
Governors of the Federal Reserve System; the National Association of Purchasing Management; and the University of Michigan.
'I'aken ~1s;I ~vhole.the inflation inclicaiors n w e fairly I~enignin February. Procliicer prices for finishecl
goods :~ctil:lllyfell :kt an annu;llized
rate of 1.8(X1. Even after htctoring oc~t
cleclining hocl :inel energy prices,
the I'ro<liiccr I'rice Incles :~clvancccl
just O.9'"ir at :in annualizeel rate. 111cleed, silt-\-cyclata from purchasing
rnanagcrs continue to suggest only
slight price pressure from inclilstry:
Just 10% of responclents repo~rtecl
higher prices in I\/I;~rch.
At thct retail le\-el. the Consu~ner
I'rice Incles (CIII) rose 2.4% in February. Irs core measures, the CI'I less
food ancl energy and the meclian
CPI, incre;lsecl 3.0% and 2.2%. respectively. l)oth under their fi1.e-ye:lrtrend gro~vthrates.
One negative sign in recent
~nontlis2i:ls Iwen a small u p t ~ ~ in
rn
hoilseholcl inflation expectations.
Accorcling to the University of-Michi~ ; ~ n ' s S u r v of
c yConsumers, the public's ouiloolc for inflation over the
nest 12 months is back above 4x1its lligliest reacling in about a year.
I-Io\\rever. accorcling to the Federal
Ope11 Marliet Committee (FOMC),
the chief policymaking arm of the
Fecleral Reserve. consitrner price increases arc espectecl to holcl in the
2XYj to 3% r;tnge. a hit below the inflation rate inclicated by the core
consumer p i c e measures in 1995.
Econo~r~ists
genesally concur that
ultimately clemonetary :t~~thorities
terrninc the purchasing po\ver of
their nations' nioney stock-the inflation trcncl. In ;Lvety rough sensc,
( c o ~ r t i / l ~ 0~1e2 cI /? L ' Y / ~ C I ~ C )
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Inflation and Prices (cont.)
12-month percent change
Inflation Objectives in Selected Countries
Country
Exemption
Objectives
Australia 2% to
3%
Mortgage interest, government
controlled prices, energy prices
Canada
I% to
3%
Indirect taxes, food, energy
Finland
About
2%
Housing prices, indirect taxes,
government subsidies
Israel 8% to 11% None
New
0% to
Zealand 2%
Interest and credit charges,
commodity prices, government controlled prices
Sweden
1% to
3%
None
U.K.
1% to
4%
Mortgage interest
12-month percent change
8
4-quarter percent change
a. Objectives are based on CPI-measured inflation with the exception of the United Kingdom, which uses a retail price index.
b. Bars represent upper and lower bounds of each country's stated inflation objective.
SOURCES: International Monetary Fund; and J. Ammer and R.T. Freeman, "Inflation Targeting in the 1990s: The Experiences of New Zealand, Canada, and the
United Kingdom." Journal of Economics and Business, vol. 47, no. 2 (May 1995), pp. 165-92.
then, tlie FOhlC's a n n ~ ~ ianl f l a t i o ~ ~
projectio~lsnligllt 1,. consiclered the
of the U.S. ce~ltral
inflation ol?jccti~,c.s
hank. I-lo\veven lags in the transmission bet\\-een Inonetar)- policy anci
i~lflationare presumecl to be consiclerably longer than the Cornmittee's
year-alieacl psojectio~ls.Ivloreover, in
establishing its policies, the Fecleral
Steser\.e no\\- consiclers m ~ ~ l t i p l e
goals. I-'erh:1ps chief among them is
tlle state of the economy, :is revcalccl I)y such indicators as the
gro\\-tli rate of real GT>I' or the un-
eriiployment rate. The FOMC's inflation projections are thus considerably less th:m a comrnitme~ltby the
Fecieral Iieselve to achieve a particular inflation outcome.
I<ecently, however, a n~im1,er of
foreign central banks have I ~ ~ L I ItoI
estal~lish.peci/ic inflation objectives
for their ~nonetaryauthorities. For
ex~imple, Canada, Finland. New
Zealanel. S\veclen, and the G.K. have
all instituted official inflation targets
in the past five years. In each case,
tlle central hank has chosen to target
the trencl gro\\rtl~in core consumer
~ x i c e swithin a specifiecl range. The
U.K.has estal~lishedone of the least
ambitious targets, holcling the trenci
in retail prices less ruortgage interest
\vithin a fiiirly \vide I% to 4%) banci.
'The Bank of Canada targets its CS'I
less foocl, energy, and indirect taxes.
Currently, the Callaclian inflation target is between 1% and 3%, clown
froru a 2%)to 4% range in the early
1C)')Os.Perhaps 111ostrigorous is New
Zealancl's objective, which hopes to
hold core consumer prices within a
tight 0% to 2% range.
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e
EconomicActiviQ
Percent change
4
ANNUAL GDP GROWTH a'C
Real GDP and Components, 1995:ivQa
(Final estimate, ~.a.a.r.~)
change,
billions
of 1992 $
Percent change, last:
Four
Quarter
quarters
8.2
13.7
0.4
-1.2
14.1
0.5
1.2
0.3
-0.3
2.2
1.3
2.0
1.8
1.I
2.6
5.6
Equ~pment
5.3
Structures
0.4
R e s ~ d e n t l ainvestment
l
4.1
Government spending -13.2
National defense
-10.0
Net exports
17.7
Exports
20.7
3.1
4.0
0.9
6.4
-4.1
-12.0
6.7
7.3
5.0
-1.4
-1.3
-6.6
11.1
1.3
6.5
4.6
-
-
Real GDP
Consumer spending
Durables
Nondurables
Services
Business fixed
investment
3.0
Imports
Change in business
inventories
-1 6.7
Percent
86 ICAPACIN UTILIZATION AND
EMPLOYMENTIPOPULATION RATIO^
-
-
Ratlo
64 5
Percent change from corresponding rnonlh 01previous year
[PERSONAL INCOME AND SPENDING TRENDS^
I
a. Chain-weighted data in 1992 dollars.
b. Seasonally adjusted annual rate.
c. 1996 and 1997 estimates are from Blue Chip Economic Indicators, March 10, 1996.
d. Seasonally adjusted.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; U.S. Department of Labor, Bureau of Labor Statistics; Board of Governors of the
Federal Reserve System; and Blue Chip Economic Indicators.
Winter's I-ecessionfears h;lve ~neltecl
away, 1x11
forec;~stcdgro\\.th ratesapprc)sirilatel>. 2?4) this yeru ancl
next-remain l~elon.historic norms.
k1:iny economists, ho\vever, regarcl
this rate as conipatit,le with sust:li~iecl csl,;~lision in an economy
operating xt Iiigll levels of inclustrial
calxlcity ancl employment.
I)o\vn\\.:trcl ;~cljustmentsin I7usiness fisecl in\.estnienl. s~n;~lles
ill-
ventory accum~~lation,
ancl higher
imports parecl real GDI' growrth in
1995:IVQ to 0.5% fro1110.9%. The re\.isions. ho\irever, itlcludecl higher
estimates of consumer spencling.
lie;~lGlII-' grew 2.0% for all of 1995.
'The 0~lt1001c for consumers is cautiously optimistic. Ileal clispos:ll,le
income incrc:ised 3.1% in Fel~ruary
and supporteel a rise in real personal
cons~lmptionexpenclitures. With in-
conic gener.llly growing kister than
cons~imptionlast year, consumers
\\.ere able t o itliprove their balance
sheets. 1-louseholcl fi11anci:ll net
n.orth shon-ed a sh:lrp rise, largely
on the strength o f ecl~iity ~ilarlcet
gains (see page 10). 0ver:ill consumcr cont'iclence. which sagged in
late 1995,seelrls to I3e recovering.
Estirn;itcs suggest that real retail
(coi/lir?ue~/
otl ~~extp~igel
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Economic ActiviEy (cont.)
B~ll~ons
of 1987 dollars
I
lTO
RETAIL SALES AND CONSUMER CONFIDENCE
Index 1985 = 100
120
Industrial Production
(Percent change, s.a.a.cb)
Dec. 1994- 19953111Q- Dec. 1995Dec. 1995 1995:IVQ Feb. 1996
Total index
Consumer goods
Durable
Nondurable
Business
equipment
Defense
and space
equipment
Intermediate
products
Materials
Index 1987 = 1 00
Days supplyC
1100
1.5
0.4
-0.9
0.8
0.6
-0.6
3.6
-1.5
5.0
-0.5
-7.4
1.6
4.5
0.2
23.2
-9.1
-16.1
-1.9
-0.1
2.4
1.5
2.0
0.0
4.3
b
Percenl
Millions of un~ts,s a a r
lo
O
HOME SALES AND CONVENTEONAL MORTGAGE RATE
I
a. February data are estimated by deflating nominal retail sales by the Consumer Price lndex for commodities.
b. Seasonally adjusted annual rate.
c. U.S. dealers' current stock as a share of daily average sales (includes domestic and imported vehicles).
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the Census; U.S. Department of Labor, Bureau of Labor Statistics; The
Conference Board; Board of Governors of the Federal Reserve System; the NationalAssociation of Realtors; the Federal Home Loan Mortgage Corporation; and
Ward's Automotive Re~orlS.
sales rose 0.8% in Febrilar)~.
Indiistrial procluction surgecl in
F ~ ~ I I Iwith
~ I -grocvth
~,
in lnally categories offsetting Jan~1:u-y declines.
Strong gains in the production of
I>usiness eclr~ipmenthave led the
incles since l>ece~nher,hut coulcl clirninish during tile year if businesses
g l i plzulls to trim
follow t l ~ r o ~ ~~vitli
capit211 spending. The General I\Iotors stsike, ~vhicliellclecl 011 March
22, Lvill have some short-term ripple
effects on output, but shoulcl have
no lasting impact on the pace of
ecoilomic activity.
Sales of light vehicles (at 15.8 million units) advanced 7.8% in February from year-ago levels, ancl the inclustry trirnmecl its inventories :1nd
increaseel production. Although
procluction remains relatively weak.
it coulcl get a boost in April from
strike-relatecl inventoly recluctions
in hIarch.
New home sales fell 1.3%)in Fellruary follo\ving three consecutive
~nonthlygains. All of the decline
was concentrated in the Miclwest.
Sales o f existing homes jrllilpecl
6.5%,horvever-the first increase
since September. Mousillg starts
continued to rise in Febr11al-y. !\Itlioi~ghmi~lti-ut~it
liousi~lgstarts improvecl. high vacancy rates seem to
be holcling them at low levels.
http://clevelandfed.org/research/trends
April 1996
Best available copy
The Housebold Balance Sheet
Ratlo
1
65 MORTGAGE AND CONSUMER DEBT^
Ratio
24
Percent
a. All data are measured at end of year.
b. Percent of respondents reporting that their current financial position is better than their position last yeac
c. Includes tangible assets. Latest available data are for 1994.
d. Total financial assets less total liabilities.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; Board of Governors of the Federal Reserve System; Federal Home Loan Mortgage
Corporation; and the University of M~chigan.
Consi~melclelx as a share o f income. \vhich has risen sharply since
1932, has reacliecl a historic peak.
,,
I his clevelop~~ient-togetller \\/it11 :I
more graclual rise in the r-atio of
nnortgage clebt to income-has
increased concerns that clebtlxirclened consumers might soon
retrench ancl hincler the expansion.
Though reasonable, such fe:lrs
seem lal-gely inclifferent to historic
consumel.-debt patterns :ind to
developments on the asset sicle of
the householcl leclger.
In the short run, the householcl
sector's zll~ilityto service its dehts
depencls o11the aliiount of debt relad
ancl astive to l ~ o i ~ s e h o lincome
sets. l'he deht-to-income ratio, however. hzts Ixen rising for at least the
past 45 years-a trend more reflective of financial innovatioll ancl
creclit availa1,ility than the profligacy
of consillness. The current cyclical
incre;~secloes not appear exceptionto its pace in
ally n p i d cor~~parecl
the ~ x e v i o ~expansion.
~s
The over-all
growth of householct :issets. moseover, h:~s esceeclecl the gro\vth of lial~ilities.1'rim:lrily clue to a rise in
ecli~ities,llouseholcl debt-to-asset nltios fell in 1995.
In the long term. the householcl
sector's ability to pay off its clel,ts
clepencis o n its solvency, or net
\\iorth. Last year. fillancia1 net worth
(less t:ungible assets) rose sharply.
The clelinquency rate for consumer lo:~nsincreaseel in 1995, but
rem:~ins low. The uptick in interest
rates o n standard consumer loans
coi~lclincre:~sethe clifficulty of sewicing them. Nevertheless. serious
- not
consumer liqi~iclityproblems ,I ~e
imminent.
.
http://clevelandfed.org/research/trends
April 1996
Best available copy
Labor Markets;
Chanae, lhousands oi workersa
Labor Market Conditionsa
Average monthly change
(thousands of employees)
1995
1996
Year
IQ
Jan. Feb.
Mar.
Payroll employment 144 206 -146 624 140
Goods-producing
-5
6 -57 146 -72
Manufacturing
-14 -36
-72 27 -62
Motor vehicles
0 -13
-8
2 -33
Construction
11 39
17 114 -13
Service-producing 149 200 -89 478 212
Services
93 126 -16 263 131
24
24
5 37 30
Healthservices
Government
9
8 -37 36 25
Average for pertod
Civilian unemployment
rate (%)
5.6 5.6 5.8 5.5
5.6
Nonfarm workweek
(hours)
34.5 34.3 33.8 34.6 34.5
Mfg. workweek
(hours)
41.6 41.0 39.9 41.6 41.4
Percent
66
LABOR MARKET I N D I C A T O R S ~ ~:~
Percent
10
Percenl ris~ng,three-month span
80
DIFFUSION INDEX OF
I
EMPLOYMENT^
65
64
63
62
61
fin
a.
b.
c.
d.
Seasonally adjusted.
Production and nonsupe~isoryworkers.
Vertical line ~ndicatesbreak in data series due to survey redesign.
The diffusion index represents the percent of industries with increasing employment plus one-half of the industries with unchanged employment
SOURCE: U.S. Department of Labor, Bureau of Labor Statistics.
Nonklrii~e n l ~ l o y ~ l i e1110ved
~lt
aheacl
at L: niocle~.atepace in March. rising
by 1.40.000. 'I'his Ixtest figure 1xing.s
average monthly jol,s gro~vth to
206,000 for the first c1u;uter of 1906.
compared to 142.000 in the foi~stli
cliiarter of 1995. ?'he total nonfarm
ancl ~llanirkicturi~~g
diffusion inclexes tu\.e reversed their clon-nw:~rclpatiis, signaling that a gro\ving
n~imberof incliistries 1lar.e I>ecn reposting employment g:iins over the
P:LSLfc\v months.
Net cleclines in both constr~lction
;inel 11l:~nuhcturinglecl to a 72,000\\;orlies clrop in the goocls-1,roclucing
sector last month. i\fani~f;lctiiring
employment has experiencecl a
donmvarcl trencl for quite some
time, although a strike by GbI workers esacerl~atedlast montl-i's clecline
of 62.000. Senlice-producing inclustries :~clclccl212,000 worlters cluri~lg
Pfascli-a fairly robust figure for this
sector. 7'his increase was biloyecl 1,);
a n al>ove-;lvel.age employ~nentrise
in lhc narrow services category
(131.000). \vhich stemmeel from
scatterecl gains in :I n~~nil,er
o f ~0171ponent incli~stries,inclueling he:llth,
t>i~siness.ancl computer/clat;l processing services.
.I.he joi>lcss rate remained essenlast month at 5.6%).
tially ~~nchangecl
while the emplo)~ment-to-1>c)pi11~1tio1~
rrltio (the 11sopol.rion of the \vorkingage po~~ulalion
liolcling a jol,) once
again jun~pecl al>ove the relatively
liigt~63(%1
111:~rli.
(coir[itrrledotr tle.~tp~rgc~l
http://clevelandfed.org/research/trends
April 1996
Best available copy
Labor Markets (cont.)
Percent
UNION MEMBERSHIP BY OCCUPATION
1994
1984
nagerial and professional specially
ervice occupations
ethnical, sales, and administrative support
Farm~ngforestry and fishlng
0
UNION MEMBERSHIP BY INDUSTRY
1994
5
I
10
I
15
I
I
20
25
Percent unionized
I
30
I
35
I
40
45
Percent oi total comoensalion
50 BENEFIT COSTS BY UNION STATUS, 1994
45
- El Union
Service-produc~ng Goods-producing
Manulacluring
Nonmanufacturing
Percent unionized
SOURCES: The Bureau of National Affairs, Inc.; and U.S. Department of Labor, Bureau of Labor Statistics.
The recent Gener:tl iI4otors strilie
brought the po\ver of unions 1>:1cli
into the national spotlight. While the
[JAW \van some concessions in that
strike. the overall health of unions is
poor. Union meml>ership as a share
of' total employment has fallen more
than 10 percent:lge points in the
past 20 years, reaching a low of
15.5% in 199.4.
The only inclustry sector to l ~ e come more ilnionizecl in tlie past 10
years is the government. \\-here
union rolls increaseel a slight 2.9%1.
In most of tlie ~ ~ n i o n tl.aclitional
s'
strongholcls. memhership is clown
sharply. In transportation ancl pilt>lic
i~tilities,it has cleclined hy more
than 10 percentage points. ancl in
sector it has
the ~nanuhlcturi~~::
tallen nearly S(%.
The image of the blue-collar
union meml~eris fast clisappearing.
Sot even a clual.ter of operators. ktbric:ttors, ancl lahorers or of precision,
procl~~ction,
craft, and repair \ ~ o r l i ers are i~nionizecltoday. While other
occulxitions that have traditionally
1)ecn less unionizeel (manageriz~l.
sel-\kc, :mcl teclinical occiipatio~ls)
seem to l>e holding steacly, their
union memher~sliip rates :ire a11
I>clo\v 15(%,,
In hlct, some h a w ;ugilecl t1i:lt the
fi)ciis of urlions is not on the future.
I > L I ~ 0 1 1 taking care of toclay's union
me~nher,an olcler \\~orliern.110 is
nc:tritig retire~nent.If this is so, it is
not si~rprisingthxt unions seem to
{>a). more attention to retirement
:inel licaltli Ixnefits than to \vagc
gains ancl new ~memhership.
http://clevelandfed.org/research/trends
April 1996
Best available copy
Social Securig
Current dollars per year
1
2'500 AVERAGE OASI CONTRIBUTION PER WORKER
Birth year
Workers per retiree
/ NUMBER OF O A S WORKERS PER RETIREE
Historical Minimum Returns over
Various Time Horizonsa
(Percent)
Asset type
Time horizon
5
years
Small
company
stocks
-27.5
S&P 500
stock
-12.5
index
Long-term
government
-2.1
bonds
Intermediateterm government
1.0
bonds
10
years
15
years
-5.7
-1.3
20
years
5.7
-0.9
0.6
3.1
-0.1
0.4
0.7
1.5
1.6
1.3
a. Figures are based on 1926-94 data and represent the minimum observed compound rates of return, before adjusting for inflation, for a series of overlapping
holding periods, each spanning the specified number of years.
SOURCES: Annual Report of the Boardof Trustees of the Federal Old-Age andSunfivors Insurance Tmst Fund, April 3.1995; Economic Report of the President,
1995; Dean R. Leimer, "Cohort-Specific Measures of Lifetime Net Social Security Transfers," Social Security Administration, Office of Research and Statistics,
Working Paper No. 59, February 1994; and Stocks. Bonds. Bills, and Inflation 1995 Yearbook, Chicago: lbbotson Associates, 1995.
Since \Vc)rlcl \&is 11, average OlclAge ancl Sur\;i\~orsInsunince (OASI)
contril~c~tionsper worlier hxve
grown much kister than average
hourly compensation. Lirge Ixnefit
expansions cli~ringthe 1950s, 60s.
anci 70s meant generous r-ates of retu~-11 for those horn before 1930.
I-Iowever, current rules :inel clernographics nlake it lil<ely that \vorlicrs
horn after 1945 \\/ill reap estremely
low retilrns.
Rec:~use of the p~)st\v;irbenefit
expansions, the OASI trust filncl has
;~ccurn~~l:itecl
less money to finance
f u t ~ ~ rIxnefits.
e
3~10seover. h o ~ n
1937 to 1989. returns o n the trc~st
filncl portfolio (required by statute to
worliers per retiree. l'hus, mziintaincontain government securities excluing current i3enefit le\,els tvould
sivell.) ;iveragecl only 0.6% per ).ear
mean imposing tax rates that are
after inflation-a poor return comeconomically and politically infeasiparecl to cornlllon stocks. Finally.
hie. Reclucecl benefits for fclt11r.ere1,ecaclse they are either t~.ansferrecl tirees seem ilnavoiclahle.
to olcler generations as benefits or
l'oclay's workers \\roulcl prol~ably
are lent to the government. all curbe better off investing in private
rent contributions are consumecl
capital marliets. Incleed, historical
ratl~er than in17ested in illcomedatsi suggest that this might cut
generating assets. Therefore. the
their risli. since the t n i i l i t r ~ l ~ tren
contril,utions are actually investturns on in\-estments in L.S. comments in claims on future ~vorl<ers' mon stoclcs held for 20 years or
e~irnings. Moreover, the h a i ~ y nlore liar-e I ~ e e nhigher than t l ~ o s e
I~oomers'impending retirement \\.ill
o n long- anel intermediate-terrn~
significantly lower the f ~ ~ t i l earnre
government 1,oncls.
ings base by reducing the ~ l ~ ~ r nofl ~ e r
.ace
e
e
http://clevelandfed.org/research/trends
April 1996
Best available copy
e
Regional Conditions
Projected U.S. Employment Declines
by Manufacturing Sector, 1995-2005
Thousands of workers
Industry
1995
2005
actual
projected
Percent
change
1,868
1,I 96
618
437
1,354
-8.5
-16.6
-13.5
-19.2
-1 6.6
1,213
-3.5
1,648
1,331
334
-2.2
-1 5.3
-15.1
Industrial machinery 2,042
Fabricated metals
1,434
Primary metals
715
Stone, clay, and glass 541
Electronic equipment 1,624
Lumber, wood,
and furniture
1,257
Food and kindred
products
1,685
Textiles and apparel 1,572
Miscellaneous
393
actual
proje
NOTE: All histor~calemployment data are seasonally adjusted.
SOURCE: U.S. Department of Labor. Bureau of Labor Statistics,StatisticalAbstract of the United States: 1995.
Total employment in the L.S. rose a
solid 5.3% from 1993 to 1995. 'She
1:trgest gains occurrecl in the Soclthwest: Nevacla (17%) ancl Arizona
(12%). The blitlwest ancl the Great
1,akes states experienceel ~noclerate
jobs gro\vth o f ro~lghly5% to 70/1,.
Nation\\;icle, only the l>istrict o f Colurnbia ( 4 . 0 % ) :unci H:lwaii i-1.L'Hl)
saw employment cleclines.
Over the past two years, ernploytnent in the man~~facturing
sector
grew only al>out :1 tl~isclas r'lsr as it
clicl in the service sector- 1.S(%cersus ahnost 6%. Projections for the
ye;~r2005 call for just 5 of 14 manufacturing industries to post employ~ n e n t gains. Paper procl~lcts and
psinting is the only category slatecl
to reach above 10% growth. Con\~ersely,t~vo-thirdsof those m a n w
l':tcturing industries projectecl to suffer employ~nentcleclines in the next
decacle show double-digit losses.
i\lthough 1993-1995 employment
gro\vth in Ohio was just atwage
comp;wecl to gains in other states.
Ohio lecl the nation by a large margin in the number of new facilities
:inel expansions. Iioughly 2.500 new
projects began in Ohio cluring this
time span, with Texas a distant seconcl at a l ~ o u t1,600. Most of the top
10 states in new project starts, however. were in the South. Ohio's
pro\vth was thus sornewhat rem:~rlizll>le,since the only other "Ii~lstBelt"
state in the top 10 was Illinois. with
(coufitl!lec/0017 ?~extpc[geI
http://clevelandfed.org/research/trends
April 1996
Best available copy
Regional Conditions (cont.)
Number ol oroiects
Ohio Manufacturing Employment, 1995-2000,
and Change in Ohio Manufacturing Projects,
1993-1 995
Industries with projected
employment increases
Thousands of workers
2000
projected
Percent
change in
projects,
1993-95
94.9
99.8
4.7
113.5
121.0
23.1
Food and kindred
products
59.7
60.0
-62.0
Instruments
27.4
28.5
7.7
1995
actual
Rubber, plastics,
and leather
Paper products and
printing
Number of projecls
1'000 /TOP 1 0 STATES, NEW FACILITIES AND EXPANSIONS, 1995
lndustries with projected
employment declines
1
2000
projected
Percent
change in
projects,
1993-95
Industrial machinery 165.0
157.1
54.8
Fabricated metals
131.7
118.0
-7.4
96.6
89.8
37.5
Transportation equip. 138.9
130.5
-24.1
66.4
66.2
-11.4
Stone, clay, and glass 44.2
41.6
47.4
Thousands of workers
1995
actual
Primary metals
Chemicals and
petroleum
Electronic equipment 75.2
73.0
3.8
Lumber, wood, and
furniture
43.6
38.1
14.3
Miscellaneous
15.0
14.6
-33.3
NOTE: All historical employment data are seasonally adjusted.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; Ohio Department of Development. Data Line Ohio, vol. 4, no. 3 (March 1996):and Ohio
Bureau of Employment Services. Ohio Labor Market Projections: 1991-2000.
;rl,out 600 lie\\. project starts. For
metals anel transpollation e q ~ ~ i p m e n t
saw jdbs gron;th of zibout ()"/;I and
1995. Ohio :tlso lecl the nation with
6.5%. respectively, yet new project
888 nen. facilities ancl espansions.
starts in these industries fell 7% :~nd
followecl hy Tesz~s:tt 685.
24% over the two-year periocl.
Though it map seem natul.al that
Evidently, most of the growth it1
Ohio's new project starts ancl emtocl:ty's nexv project starts is coming
ploylnent gains woulcl coincicle , emfrom industries with projecteci cleployment gro\\.th :inel project starts
~llovecl in opposite directions in
clines in employment. For example,
zlbout a thircl of the r n z ~ n ~ ~ f n c t ~ ~ r iemployment
ng
in both the inclustri;ll
industries. For example, f;lbric:~tecl machinery :lnd the stone, clay, ancl
glass inclustries is expectecl to clrop
significantll. in the nest clecacle: yet,
new \ixojects ancl expallsiolis have
mushroo~neclby 55% in the industri:tl machinery sector ancl by 47?6 iin
the stone, clay ancl glass category
over the past t\vo years. Incleecl,
even the i n d ~ ~ s t r~\.ith
y the largest
p ~ ~ j e c t epercentage
d
clecline in employment-lumber. ~voocl,and furniture-has seen new projects grow
I>y 14% f r o ~ 1993
~ l to 1995.
http://clevelandfed.org/research/trends
April 1996
Best available copy
Banking Conditions
Percent
Percent
Billions of dollars
00
1 QUARTERLY INCREASE IN LOANS
1
Commerc~aland industr~al
I
I
Net Interest margin
- Return on assets
4 50
Percent
Percent
BANK ASSET QUALITY
20
I
Billions of dollars
QUARTERLY CHANGE IN NONCURRENT
LOANS AND LEASES
Troubled assetsilotal assetsa
a. Troubled assets include noncurrent loans and leases plus other real estate owned
NOTE: All data are for FDIC-insured commercial banks.
SOURCE: Federal Depos~tInsurance Corporation.
Insurecl commercial h:inlis reported
a near-recorcl income of S12. 1 hillion in 1995:IVQ :inel set a yearly
recorcl tor totzil income of $48.8I ~ i l liotl. Nearly 970f) of all 1)anlis reportecl positive earnings for the
yeas, ancl 68'W1sari. higher incomes
than in 1994. The goocl tin~cswere
sprcacl nationrvicle ancl across 170th
big a n d sm:lll i>anlis. 'l'his health
was reflectccl in 1~1?lis'
return on assets, xvlihich came in a l ~ o v e1'!41 for
the tl-tircl yeas in a row.
Several components c o n t r i l ~ ~ ~ t e dthe largest clollar p i n s ever. I-Iighcr
to the recorcl earnings. B:lnl;s' net
fee income, lower i~lsuranceassessmeilts. :unci profital~lesales of investinterest margin remained solicl clespite a slight clecline, with increasecl
n ~ e n securities
t
completecl the rosy
earning assets, particularly loans,
e~krnin$spictilre.
taliing up the slacli. Real estate loan
An alxence of s e r i o ~ ~problems
s
grorv-th, often volatile: slon~eclsomealso helpecl. Although lo:i~ih-lossprowh:it in the fourth quarter, increasvisions rose for the year (the first
ing only $4.1 billion. Commerci:ll
time since 19911, net charge-offk
~uncl incl~~strialloans aclvancecl a
held steacly ancl troublecl assets fell.
healtl~y$14.1 billion ancl other lo:ins
The fourtll-q~l:trtw numhers co~llcl
rose S15.2 billion, lecl by creclit c;lrcl
portencl troul,le, tlowever: Net
loans. Overall, 1995 saw the highest
(co~z/i?l~lc?d
017 ~zcxtpagej
share of loan gronxh since 19S.i :inel
http://clevelandfed.org/research/trends
April 1996
Best available copy
Banking Conditions (cont.)
Percent
Percej3j
Billions of dollars
I QUARTERLY INCREASE IN AVAILABLE CREDIT
1
a. Includes credit card I~nes,home equity lines, commitments for construction loans, loans secured by commercial real estate, and unused commitments to
originate or purchase loans.
NOTE: All data are for FDIC-insured commercial banks.
SOURCE: Federal Deposit Insurance Corporation.
charge-offs rose for tile seconcl consecutive cluarter, clelinquent consumer loans increased S 1.2 billion,
anct credit c:~rd tlelincl~ienciesrose
to their highest lewl in two years.
Overall, though, noncrirrent loxns
a n d leases postctl a clecline, for the
eighteenth time in t\\.enty clriarters.
The goocl news paicl o f f handsomely o n the ccluity side. \\lit11
banks reporting a11 impressive
14.68%return on ecl~iity.At this rate
of return, a dollar will cloc~ldein less
tlXm five years. Small banlis laggecl
some\vhat, earning 11.4%. One sign
of banlis' strong profitability ancl
continued goocl health is that despite
growth in assets, the ratio of equity
capital to assets surged above 8%.
Fro111 the borrower's perspective,
a\;ailable credit abounded, reflecting
gro~vthin both loans ancl ~inusecl
lines of creclit. In the fourth quastet
~ ~ n u s elines
d illcreased by Illore than
twice as nluch as actual loans. Businesses ancl consumers apparently
wantecl to position themselves to
take aclvantage of even taster
growth, ancl banlis seemed willing
to lend. 7'he continuing economic
recovery has indeecl bolstered
hanlis' bal;tnce sheets, b ~ i some
t
c)bservers have cautioned that banks
11upbe overlencling in good times.
Strong loan g r o ~ v t h:~CSOSS the
country last ).ear obscures a ~llinor
hanking ~nilestone: For the first
time in recent history, the number
o f comr~lercial banlis clroppetl
below 10,000.
e
0
e
m
0
0
http://clevelandfed.org/research/trends
April 1996
Best available copy
0
The Mexican Economy
Index, March 1986=1
1.8
) REAL DOLLAR-PESO EXCHANGE
RATE^
I
B~ll~ons
of U S dollars
1 CURRENT ACCOUNT
'
Ratlo
13 0
1
M2/TOTAL FOREIGN EXCHANGE RESERVES~
120
-
110
-
100
-
90
-
80
-
60 70
20
l
J
l
M
)
l
M
l
l
J
1994
l
l
S
l
l
N
t
l
J
l
l
M
(
f
M
1995
l
l
J
l
l
S
i
l
N
l
J
1996
a. Adjusted for the ~nflationdifferential between the U.S. and Mexico.
b. Foreign exchange reserves were converted to Mexican pesos using average monthly exchange rates. M2 is the sum of lines 34 and 35 in the International
Monetary Fund's lnternational Financial Statistics.
SOURCE: International Monetary Fund.
macroeconomic conelitions in Mexico seem to have st;lbilizecl, ancl concerns about gro~vthhave hecome focusecl on the conclition of the
12ankilg system. ?'he peso's real eschange rate, which cornl~inesinfor~ t nomin:ul exchange
mation a b o ~ the
rate ancl the inflation mtes in the U.S.
ancl Mexico. wa greatly rccl~lcedhy
the clc\.:~luationof the peso in Decenllxr 1994. I>oosting Mexican
corrlpetitiveriess ancl cspo~ts.
I-Io\~ever,high intercst sates in
bfefcsico, which r e s ~ ~from
lt
c;~pital
o ~ ~ t f l o \persist.
~s,
They increz~sethe
cost o f efforts !;I, the h,Iexic;~ngov-
ernment ancl international fin:lncial
zugencies to help hanks ancl bonoxvers cope with increased clebt I~urclens and with lower clo~nestic
spending. Most observers are n o ~ v
conficlent that the lxunlcing system is
recovering. 17~itthe ultimate cost to
the government is unclear.
The Bank of i\lexico is no longer
recl~lireclto intervene in clefense of
the previthe peso, as it was ~111der
ous exchange-rate regime. 1-Io\vever,
events in late I995 clemonstr-;utecla
c o n t i n ~ ~ i n gpotential conflict between exchange-rate policy ancl the
~ e c o \ ~ e of
r y the banking system and
g orcler to clefencl
real s p e n c l i ~ ~In
the peso, interest sates were increasecl sharply in Xovemher, further n.ealienill:,: the prospects for
hanking recovery. Investors ~ v o r r y
that contin~ling prol~lems in the
I3anking sector niay oreate a temptr~tion to ahanclon infl>utioncontrol as
the guicling principle of monetary
h
exchange
policy. A t h o ~ ~ gforeign
reserves neecl n o longer i ~ elarge
e n o ~ i g hto maintain the exchange
late, they must be capable o f meet\vhose potential
ing capital o~~tflo\\.s
magnitudes :use 1.e1atecl to the size of
monetary aggregates.
http://clevelandfed.org/research/trends
April 1996
Best available copy
@FedFRASER