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7be Economy in Perspective
http://clevelandfed.org/research/trends
April 1997
Best available copy
gregate supply :inel clemancl, althougli not always
\V%7atgoes- ~1t-01117d
con2e.s cr~.o/liir/... Uefore anyconforming to :ill iclealized condition of full emone gets the wrong icle;l, let's I,e clezir al,out one
ployment, might be tlie t m t the econonly can do
thing: This is not another essay cleclaring that
business cycles are cleacl. 7h p;traplmse a pop~llar ~lnclerthe circumstances of the moment.
Some contemporary researchers have reachecl
1,~11nper
sticker, recessions happen. 13i1t 1,usiness
anotller conclusion: lIistiir1,~unces in aggregate
cycles are commonly t h o ~ ~ g of
h t :IS recurring flucsupply account for a conside~a1,leamount of the
t~izitionsin economic actixity. Consiclering that we
variation in economic activity. This observation
are non. in the seventh ye:ir of an expansion, and
inlplies that periocls of s l o ~ vgrowth may result
have experienced growth for 14 of the last 15
fro111 adverse supply conditions, such as those
years. who could fault us for re;ippraising the
caiisecl by an oil cartel, anel t11;lt periods of fast
I,i~siness cycle concept?
gro\vth m:ly be clue to ka~;or-al,le supply concliI3usiness cycles hzi1.e never l ~ e e nreg:arcleci as foltions, lilie those follo\ving large-scale technologilo\\-ing a fixed periodicity. ?'heir earliest chronical innovation.
clers. \XIesley blitchell ancl Arthur Bur11s.fo~unclpatWhy does the distinction l~et\veensupply ancl
terns of co-mo\ieruent ;inel secluencing in economic
clen~anclclist~~rl,ances
matter? Consicler econonlic
activity th;lt tenclecl to be stahle o\.er time. For exconclitions over the past two years. Accorcling to
~umple,in the reco\.ery phase of the cycle, labor
~xuductivityrises sharply as firms esp:unci ~ i ~ t p i i t the tl-aclitional clemand-oriented view. the economy reachecl f i l l 1 employment ~ v h e nthe unemn.ithout having to expand labor ho~irsproportionployment rate hit 6%; full employment coulcl be
:itely. Furthernlore, overtime ho~irstencl to increase
maintained only if aggreg:ite demancl grew \;at the
first. with aclclitional employment coming only
economy's potential rate of al~out2%. i\lIore rapicl
later, as co~lficlencein the esp;insion cleepens. Outgrowth \vcioulcl p ~ l s haggregate demancl beyond the
put gets :in aclcled boost froill the neeel to restocli
economy's ability to supply output, creating inflainventories :inel increase clistril~~~tion
lines.
tion pressures. In this view, the Fecl ~voulclneeel to
Analysis sho\vs that a cycle tencis to peak \\-hen
dampen aggregate clemancl by allowing the feclimbalances clevelop. The classic encl to the espzinera1 fiintls rate to rise. Money growth \vould then
sion phase materi~alizesxvhen firms seek to ess l o ~ vc l o ~ ~
enough
~ n to lieep inflation in checli.
panel capacity and 1,olster inventories. They fiHut econo~llicgro~vtllh;is l x e n esceecling 2%
nance this spending by horroxving, ;inel their
for a while, ancl the iinenlploy~.ilentrate has fallen
c:lpacity for repayrrlent becomes incre;isingly ctuwell below 6%. The nhsence of inflation pressures
bious as pressures on resource availal~ilitypush up
might res~iltfrom transitory factors that will soon
interest rates ancl adcl to clel3t-sen.ice costs. Typidissipate. Alternatively. we coulcl he I>enefiting
cally. inflation accelelxtes.
from positive developments in aggregate supply.
Eventually, economic conclitions hecome subThe current exixuilsion has been r~larlieclby a capstantially incompatil~le~vithpeople's prior especital spencli11gboom, which may signal the onset of
tations ancl plans: C o n s ~ ~ m eclo
r s not ~ ~ ~ \ l.v\lhat
ant
lxoductivity-e~lll~ancing
1,~isinesstools ~ulclpracretailers are stocking, retailers do not neeel what
tices. h/Ioreover, this investment \\rave follows a
manufacturers are proclucing, factories refuse
periocl in which several important inclustries bel c , clehtors
to hire people 'i\iho want to ~ ~ ~ o rancl
came cieregulatecl, ancl tr:tcle restrictions \\{ere reczinnot repay creclitors. The longer the inconsiscluceci, both of which iruprovecl marketplace flesitency in planning persists. :Inel the greater the
bility. Lal,or force participation I-ates have reachecl
resource mismatch. the sharper ;inel cleeper the
record levels, ancl hours \\iorlied senlain very
correction periocl.
strong. There are even some signs that procluctivFor nlost of the pxst 50 years, m;ainstrez~meconity growth has finally picliecl 1117 its pace. This is
omists have tencled to thinli that recessions coiild
~lnusualfor the latter stages of ;i clemancl-clriven,
he explaineel 11y insufficient aggregate clemancl,
supply-constraineel expansion.
zancl that monetary anel fiscal policies coulcl stinIf aggregate supply is gro~ving,and productivity
m alate enough cle~llandto put total spending on
trencls are improl.ing, tlie cl~~icliened
pace of dethe f~il1-employmentpath. Of course. policy mism:lncl will now match ih:it of supply, creating n o
talces coulcl t ~ responsi1,le
e
for both over- ancl uninterest rate pressure. In this c:Ise, ho~vever,the
dershooting this ideal output level. ancl quite
public would recluire more money to support inoften were hlamecl for inadetluzite macroecocreased spending, s o :In unchanged fiincls rate
nomic perfcjrmance.
\vould actually recluce inflation.
Research concli~cteciin the last 20 years h:as
Differentiating I,et\\ieen these t\vo possil~ilitiesis
aclcled ne\v insights. For esarnple, instez~dof ree:lsy in theory, b ~ i tclifficult in practice. In ang;irding a11 biasiness cycle tluctuations as clisequilibrium events, it allows that a significant p r ~ p o r - noiuncing an incre:lse it1 the I-~LII~C~Srate last ~llonth,
the Federal Open Mzlrliet Comnlittee seenlecl to
tion might arise fro111 people simply making
favor the clernancl-sick h\.pothesis. \Vhether it
clecisions in tlleir oxvn self-interest, folloxving ranholds firnlly to that view \vill clcpend on how robat
clom economic shoclis. The prevailing levels of aggoe.~~arortndcomes clo\i<~i~.
http://clevelandfed.org/research/trends
April 1997
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Monetary Policy
Percent, weekly averages
1
6.5 RESERVE MARKET RATES
Jan
Percent weekly averages
[CAPITAL MARKET RATES
Feb.
March
April
May
June
July
Auq
Sepi
Percent
I
INFLATION AND THE FEDERAL FUNDS RATE
a. Estimate of the yield on a recently offered, A-rated utility bond with a maturity of 30 years and call protection of five years.
b. Bond Buyer Index, general obligation. 20 years to maturity, mixed quality.
NOTE: All data are seasonally adjusted.
SOURCES: Board of Governors of the Federal Reserve System; U.S. Department of Labor, Bureau of Labor Statistics; and the Chicago Board of Trade.
Imrnecliately after its hl1:irch 25 meeti ~ l gthe
, Federal Open Marliet Com~liittee(FOMC) of the Fecler:il Reserve Syste111allno~irlceclth~itit hacl
"cleciclecl to tighten money marlcet
conclitions slightly. expecting the
federal luncls rate to rise I/$ percentage point to aro~lncl5% percent."
This was the Committee's first policy move in almost 14 motlths ancl
the first increase since Jan~la1-y19'15.
This :~cLion\XIS no surprise to financial m:~rl<ets.The feel f~lnclsfutures marliet, for inst;lnce, hacl corne
to anticipate the rate increase in the
\\-eelis h e k ~ r ethe meeting. Altl~ough
f ~ ~ t u r eprices
s
it1 Janual-y hacl inclic:~teclthe lilielihoocl of a rate hilie in
blarch. Febr~laryevents lecl filt~lres
investors to cloubt that any policy acLion \\:o~llcl occur before midyear.
C:~pit:il rn:irliets in February also
seemed to cliscount any imrnecliate
move by the FOMC. However, concerns :11>out growing inflation2iry
p r e s s ~ ~ r e:irose
s
by mid-March, aricl
the lilielihoocl of a modest Ixte hilie
increasecl.
In :~nno~lncingits action, the
FOMC statecl that "... the slight firming ol' monetary conclitions is
vie\\-eel :is a pr~iclentstep that :ifforcls greater assutxnce of prolonging the current economic exp;u~~sion
by sustaining the esistirlg lo\v iilfl:iLion environment through the rest of
this y c : ~ancl nest. The experience
of the 1:ist s e v e ~ i lyears has reink)rcecl the conviction that low inklation is essential to realizing the
economy's f'ullest growth potential.''
(coi7ti,/~icdoil 17e~*1
pqy)
http://clevelandfed.org/research/trends
April 1997
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Monetary Policy (cont.)
Percent
14
NOMINAL GDP GROWTH AND KEY INTEREST RATES
-
Percent change annual rate
8
7
6
5
4
3
2
1
a. As projected by the FOMC and nonvoting Reserve Bank presidents in February 1997.
b. Core inflation is measured as the 15% trimmed mean of the CPI. Green lines represent trends.
SOURCES: Board of Governors of the Federal Reserve System: and the Federal Reserve Bank of Cleveland.
To i~nclerstanclthis perspective. it
is usefi~lto review monetzlry policy
over the past fen. decacles. From the
micl-lC)60s to the late 1970s, each
business cycle enclecl ccjith inflation
higher than the previous peak ancl
l,eg;~n \vith inflation higher than the
previous trough. This ~~pv,.ard
trend
was accompanied by increasing
structur~ilim11al:tnce and a general
deterioration in the economy's
gro\\~thpotential. Assets considerecl
to 1,e inflation hedges (such as housing ancl golcl) appreciatecl I>eyond
sustainal,le levels. In 1979, uncert fiiture of the dollar
tainty a h o ~ i the
let1 to a sharp clecline in its \-alile ancl
precipitated a sigilificant FObIC conllnlitnlent to :I policy of disinflation.
1)isinflation climaxed in 1982 anel
evas followeel l ~ ya prolongecl period
of rob~istgrowth and relatively low
inflation. Both nominal ancl seal interest rates, however, stayecl relatively high as investors in long-term
clel~tinstr-uments rer~laineclleery of
the Fed's commitment to price stahility. Indeed. nlarltet rates rose
sharply throughout 1983 and early
1984. Many attril>uteclthis. in part, to
a high rate of return on new hi~siness invest~nentresulting froill fiscal
incentives ancl reduced [as rates.
I-Iowever, many also believed that
p;wt of the increase reflected an inflation scare, as investors n.aitecl for
e\,idence that inflation was not accelerating. In 1985, financial marl\-ets
became Illore confident that inflation cvas containecl, and interest
rates generally fell.
Inflationary pressures elnergecl
again in 1987, and the Fed acloptecl
an anti-inflationar)~stance. A sharp
drop in stock prices in Octol,es,
hocvever, ;~roilsed concern about
marliet licluidity ancl intel-rupted antiinflationary efforts. Eventilally, policy
w;ts reclirectecl to containing inflation. but not in time to heact off a
Icot~ti~zrred
of7 17extpa~qc.)
http://clevelandfed.org/research/trends
April 1997
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Monetary Policy (cont.)
Billions oi dollars
830 COMMERCIAL BANK LOANS
I
Billions of dollars
B~llionsof dollars
590
Billions of dollars
Bill~onsof dollars
a. Growth rates are percentage rates calculated on a fourth-quarter over fourth-quarter basis.
b. MZM is an alternative measure of money that IS equal to M2 plus institutional money market funds less small time deposits.
NOTE: All data are seasonally adjusted. Last plot is estimated for March 1997. Dotted lines for the M2 and M3 aggregates are FOMC-determined provisional
ranges. Dotted lines for MZM represent growth ranges and are for reference only.
SOURCE: Board of Governors of the Federal Reserve System.
jurllp in the trencl of core inflation to
nearly 5% it1 the spring of 1988. The
inflation rate eventually clroppecl
sharply with the resolution of the
Gulf \Wir in 1991 and trenclecl clonm
to just 1,elow 3%. where it has remained since ~nicl-1992.
Although the 1991 recovery
started slowly, it jiainecl lllolnentilln
as the last vestiges of high inflation
were worliecl out. In 1994, the threat
of inflation producecl a preeinptive
policy stance that elid not interfere
with continuecl econoinic espansion.
Incleecl, the economy accelerated in
1996, while inflation renlainecl ~vell
hehavecl. This experience clemonstrates that the FOMC's comniitment
t o price stability since 1982 has enabled extenclecl periocls of high
gro\vth ancl employment, along with
low inflation. Consistent policy
tl~roughoutthis period has also been
:issociated with a general decline in
nominal GDI? but only one recession. i\ioreover, real interest rates
have killen from their 1980s highs as
the Feel's credibility has increased.
Vigilance in the pursuit of price
s policymaliers
stability r e q ~ ~ i r ethat
pay close attention to any sign of inflationary pressures. Although the
Feel de-empl~asizeclnloney growth
targeting in 1993. M2 growth since
then has been in line with its historical relationship to economic :~ctivity. Over the past )7ear, there has
been an accelelation across the M2,
M3. :~tlclMZh4 aggregates. 'I'he recent upticlc in the federal funcls sate
recluces the likelihoocl that M 2 ancl
ill13 n;ill c o n t i n ~ ~toe esceecl their announcecl growth ranges.
http://clevelandfed.org/research/trends
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The Federal Budget
Billions 01 dollars
Billions of dollars
2,500
DEFICIT PROJECTIONS
170
-
160
-
150
-
2,000
Administration projections
1,500
1,000
500
110 -
0
B~llionsof dollars
2'000 ( REVENUE PROJECTIONS
Comparison of CBO and Administration
Economic Projections
1998
2000
2002
Real GDP growtha
CBO
Administration
2.1
2.0
2.2
2.3
2.1
2.3
CPI inflationa
CBO
Administration
2.9
2.7
3.0
2.7
3.0
2.7
Wage and salary shareb
CBO
47.7
Administration
47.9
47.4
47.8
47.3
47.7
Corporate profit shareb
CBO
8.1
Administration
8.6
7.8
8.7
7.8
8.4
a. Percent change, year over year.
b. Percentage of GDP.
NOTE: All projections assume no change in policy.
SOURCE: Congressional Budget Office.
If economic models :ire economists'
stocli-in-tracle, then the assumptions
usecl to construct them are their crit~
These assumpical 1 - a ~materials.
tions 1i:lve long provoliecl pointed
barl~sat rhe expense of the profession :me1 its conclusions. hut in the
real \i~orlclof policy, assumptions
are no jolie.
As t l ~ elecleral government's t>~idget prowss 11egins in earnest. reconof
ciling the iinclerlyi~lgass~imptio~ls
competing proposals becomes a11
important conelition for reaching an
:~greement.111 practical terms, this
means reconciling the assilmptions
of the Clinton administration ancl the
Congressional Uuclget Office (C130).
In Felbrc~ary.the CBO began analyzing the administration's prelimiThe first step,
nary b~tclgetpro~>osals.
of coLlrse. is to cletet-mine the starting
point of tlle deliberations: Without
any change in policy, what \\rill be
the path of the fecleral deficit? The
answer tlepends critically on the assumed paths of eco~lolllicgro~vth,
inflation. ;tncl income distribution.
i\ltho~~gh
they may appear slight,
clil'ferenccs Ixt\\-een the assumpthe aclministnttions of the CBO ~111cl
tion have a significmt impact o n the
projecteci path o f outlays, revenues,
:tnd the cleficit. Given its economic
:tssumptions. the administntion has
projectetl that s t : ~ t ~ cluo
~ s policy
\voulcl lcacl to a S597 billion curnulativc shortfall in revenues over the
1998-2002 periocl. U~lclerthe C13O's
:dtern:tti\-e assumptions, the corses ~ x ) ~ l d i npsojection
g
is a cleficit o f
ahout S787 hillion.
http://clevelandfed.org/research/trends
April 1997
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http://clevelandfed.org/research/trends
April 1997
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Inflation and Prices
Percent of forecasts
70
DISTRIBUTION OF BLUE CHIP CPI FORECASTS FOR 1998'
February Price Statistics
Annualized percent
change, last:
Year avg.:
I mo.
6 mo.
5 yr.
1995
1996
All ~tems
3.1
3.1
2.9
2.5
3.3
Less food
and energy
2.9
2.5
2.9
3.0
2.6
Mediana
3.4
2.8
2.9
3.4
2.7
F~nishedgoods -4.4
1.4
1.6
2.2
2.9
Less food
and energy
0.0
1.3
2.6
0.6
2.6
5.4
-0.7
60
Consumer Prices
t1
0 January 10,1997
March 10,1997
Producer Prices
-1.7
Cornmod~tyfutures
prlcesb
-8.8
-6.7
1.8-2.2
12-monlli percent change
38
ITRENDS
IN THE CPI
2.3-2.7
2.8-3.2
33-3.7
Annualized percent change
3.8-4.2
Oilfusion index, net percent rising
1
JPURCHASINGMANAGERS' PRICE SURVEY
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 Commod~tyResearch Bureau, a Knight-Ridder
Business lnformat~onService.
c. Forecast of the Blue Chip panel of economists.
d. Upper and lower bounds for CPI inflation path as implied by the central tendency growth ranges issued by the FOMC and nonvoting Reserve Bank presidents.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; Board of Governors of the Federal Reserve System; the Federal Reserve Bank of Cleveland; the
Commodity Research Bureau; National Association of Purchasing Management; and Blue Chip Economic Indicators, January 10 and March 10, 1997.
O n hlarch 25, the Iedelxl Open
PIarket Committee (FObIC) took a
s ~ n a l l:inel perhaps cautious step
toward monetasy restmint by raising
the fecler~llfuncls target by
percentage point, its first o\.ert policy
action since January 1996. 111 21 psess
release, the Committee clescribecl the
sate hike :IS a psuclent step aimecl 11t
prolonging the l ~ ~ ~ s i nespansion
css
by maintaining the existing low inf1:ltion r;lte throi~glithe encl of this
vear ancl nest.
At the molnent: the inflation inclicators are showing n o cle:tr sign of
mo~.ingalvay from the 3% trencl
they have ti)llowecl over the course
of the current expansion. In Fehr~i2117, the Consun~erPrice Illclex (C1'1)
rose :~t:t 3.1% a11nu:ll rate. just a
shacle ;tbove its average since 1991
(2.9'X)).7 ' 1 meclian
~
CI'I, n-hich measures ilnclerlying inflation, aclvancecl
at a 3.4Wi pace, btit was still not his
horn its five-).ear trencl.
The consensus :tmong economists. ho\ve\:er, is th:tt it can take
tn.o years or Inore for inflation to re-
s l x ) ~ ~tod:Lmonetary policy action.
ancl that this lag forces po1icym:ll;ers
to be for~v-;isel-looliingin their fight
to keep prices st:tl>le. Incleed, the
co1nment:lry accompanying he rate
hilie suggests that the FOMC's mo\-e
\IGIS i~ltendeclto hc:lcl off a growing
[)ote~?lkrl
for higher inflation, rather
than to stem an irnmecliate uptick in
the price clatx.
The POMC's central tendency
~xojectionsho\vs CPI gro\vth Iiolding :I[ just tlncler 3'% this year-:t
(coi!ti~l~ied
011I I L J . X ~ ~ L W C )
http://clevelandfed.org/research/trends
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InfZation and Prices (cont.)
lndex, 1991=1
20
GOLD
lndex 1991=1
PRICES AND THE CPI
HOUSING PRICES AND THE CPI
116
-
t14
-
112t 10
-
1 08
-
106
-
1991
Index, 1991=1
1992
1993
1994
1995
1996
lndex, 1991=1
(FARM REAL ESTATE VALUES AND THE CPI
I
2.2
ISTOCK
PRICES AND THE CPI
a. Handy and Harman base price, New York.
b. Med~ansales price, existing single-family homes.
c. Nominal value of land and buildings, per acre.
d. Standard &Poor's stock price index, composite.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; U.S. Department Of Agriculture, Economic Research Service, Natural Resources and
Environment Division; National Association of Realtors; Standard & Poor's Corporation; and Metals Week, various issues.
few tenths of a percentage point
I,eloxv last yezir's rise. The latest Blue
Chip sur\.cy o f economists preclicts
the inflation trencl \\.ill ren1:iin stead)at arouncl S%Iin 1998 as \\-ell.
The leacling inclic:itors of inflxtion
continue to he inconclusive ancl estremely rnixecl. Survey clata from
purchasing rn:tnagers indicate that
presscire on costs
the net clo~vn\\.;~rcl
tliay hx\-e clissipatecl, I x i t as of' yet,
there has Ixen no significzint zicceleration in inelustrial prices.
Economists often cite the price
movements of' "inflation-lledged" assets as el-iclence of a growing itlflationziry psychology among investors.
I3ut of these, there appears to be an
incliczltor fat. eve177 conceival~lepoint
of view. Golcl prices, a highly toutecl
infl;ltiot~ preclictor, 11:tve killen in
real terms since 1991. ancl sharply so
since earl). last year. By contmst, median home s:lle prices have clim1,ecl
at ~ipprositn~ite~y
the same rate as
the CI'I since 1993, ancl the price of
farm 1:lnd has risen t~viceas fast.
But perh:kps the most tro~~bling
inclicator of potential inflation has been
the dr;lmatic rise it1 equity prices.
s
Although higher ecluity v a l ~ ~ e(or
any asset price rise, for that mzitter)
may reflect "real" clevelopments lilie
greater economic potential, some
part of this increase may be zissociatetl n.ith investor anticipation of
~al
clue to f ~ i higher t z o t ~ ~ i tearnings
ture inflation.
I
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EconomicActivity
Peicent oi iorecasts
33
Real GDP and Components, 1996:lvQa
(Final estlrnate)
change,
b~ll~ons
of 1992 $
Real GDP
Consumer s p e n d i n g
Durables
Nondurables
Serv~ces
Busrness fixed
investment
Equipment
Structures
Resrdent~alinvestment
Government s p e n d l n g
N a t i o n a l defense
Net e x p o r t s
Exports
Imports
Change in business
inventories
Percent change, last:
Four
Quarter
quarters
65.2
39.0
7.5
6.4
25.0
3.8
3.4
5.0
1.8
3.8
3.1
2.7
5.4
1.8
2.6
10.6
-1.3
11.2
-1.2
-2.7
-5.5
39.0
46.8
7.8
5.5
-0.9
26.0
-1.7
-0.8
-6.8
25.0
3.3
9.5
9.7
9.1
3.9
1.9
0.2
7.4
8.3
-1 7.2
-
-
50
CI
DISTRIBUTION OF ECONOMISTS' REAL GDP
FORECASTS FOR 1997
December 1996
II
Annual percent change
Percent change irom correspond in^ month 01 prevlous yeai
Millions oi units
3-monii: nioving aveiage, n~iliionsof units
[HOUSING INDICATORS
-
118
Real personal
consumption expenditures
Real disposable personal Income
a. Chain-weighted data in bill~onsof 1992 dollars.
NOTE: All data are seasonally adjusted.
SOURCES: U.S. Department of Commerce, Bureau of the Census and Bureau of Economic Analysis; and Blue Chip Economic Indicators, December 10, 1996
and March 10, 1997.
The nineteenth-cerit~~r).11istori;ln
'rhomas C:arlyle once suggestecl tli;lt
economics was siri111ly :I matter of
supply ancl cleinxncl. i\lthoi~ghthis
may he true, cletermining \\.hether
economic changes rellect s u ~ ~ p or
l>.
demancl is n o simple Iii:ltter. The
clistinction is crucixl, lie\\-ever. because demancl pressures raise out1 ~ 1 ancl
t
lift prices, hereas as si~pply
pressures raise oiitpiit
lo\\.er
prices. ?'lie kict that recent strength
in :~ctual (ancl projectecl) oiltpcit
growth w:ls not accomp:uniecl Iy :LCcelerating inflation suggests that
s~lpplyeffects may he especizdly im1x)rt;~nt.?'he ciifficulty, of course, lies
in assessing their fituse strength ancl
contribution to gro\vth.
With a strong push from esports
ant1 consumer spending, real GI)l'
:~d\.ancecl3.8% in 1996:IV(). raising
last year's overall GDI-' gro\\.th to
2./t%i ().ear over pear) horn 2.0%1in
1995. Ilespite the faster pace of output gro\\-th. the GDP price incies increasecl only 2.l(H) in 1996. comp:~~ecl
\\-it11 2.4%) in 1995. Continilecl
strength in the consumer ~inci111ani1k~ct~iring
sectors, together with lorv
inventory le\.els, have ~ x ~ n i i ~ t e d
economists l~articipatingin March's
I31~1eChip s~ir\.eyto revise their outlooli for 1997 econo~iiicgro\\-th up\varcl, \vithoiit raising their inflation
projections.
Real clispos:~t)le personal income
contini~edto climh in Fel,r~lary. acl\.ancing 3.7?41 on :I !;ex-over-year
tx~sis.lvhile consumer outlays, slo~ving slightly, \Yere up 2.8°/0. Consumer attitudes remain positi1.e. as
sales oi' nen. :me1 esisting homes attest. Housing st;~rtsclirnbecl 12.2% in
Icorltirzcled 012 ico..'if / I L I ~ O )
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Economic Activity (cont.)
Percent change irom corresponding month 01 prevlous year
Percent
Percent change iron1 corresponding month oi previous year
Ratio
1 INDUSTRIAL PRODUCTION AND CAPACITY UTILIZATION 1 86
Percent change
Percent
IPRODUCTIVITY
TRENDS IN MANUFACTURING~
I
1961
1966
1971
1976
1981
1986
1991
1996
a. Output per houc
b. Chain-weighted data in 1992 dollars.
NOTE: All data are seasonally adjusted.
SOURCES: U.S. Department of Commerce, Bureau of the Census; U.S. Department of Labor, Bureau of Labor Statistics: and Board of Governors of the
Federal Reserve System.
February. their highest level in aln ~ o s three
t
years, while permits g r e ~ v
3%, reversing J:un~i:usy's decline.
Industrial outp~lt continued to
show surprising strength in Febru;uy,rising 3.8941o n a year-over-year
basis. New coreless for clural~legoocls
were up 1.5(!4),following January's
4.1o/ii gain. Factory orders for all
man~lkuct~lreclproclucts increased
2.5% in January. 'The ratio of unfillecl
orders to shipnients rem;uins low.
giving little ex-iclence that hottlelleclis ;ire cleveloping. Incleecl.
cap2ucity ~~tilization
re~llains~ ~ n c l e r
35%. a level often associatecl with
capacity constmints.
The economy's ability to accornnloclate growing de~ilancl withoclt
price increases clepencls largely on
the pace of labor productivity ancl
the acc~~mulation
of capital. Overall
nonfarm productivity gro\vth has
11een a lackluster 1.1%per 17c~u1
-,- over
the current business expansion. The
nc~nfarmsector, however, inclucles a
growing se~vice coni1ponent, in
w~hichprocluctivity is notoriously clifficult to measure ancl prol~ablyun-
derstatecl. I-'rocluctivity in the manufacturing sector, which is easier to
gauge, has grown at a healthy 3.4%
:~nnualrate over the s a n e pesiocl.
In aciclition, the U.S. is esperietlcing an unprececlentecl 1,oom in
business fixed investment. Most of
this is attributable to computers,
which shc)~lld enhance xvorliers'
procluctivity, especially in many service industries. In view of these clevelopments, nlaIly econo~llistsI ~ O T V
woncler whether we acc~~rately
capture supply-sicle contributions to the
econo~nicoutlook.
http://clevelandfed.org/research/trends
April 1997
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Labor Markets
Change, thousands o l workersa
IAVERAGE
MONTHLY NONFARM EMPLOYMENT GROWH
I
Labor Market Conditionsa
Average monthly change
(thousands of employees)
1996
Payroll employment
Goods-produc~ng
Manufacturing
Construction
Service-producing
Serv~ces
Retatl trade
Government
Household employment
1997
Year
10
Jan.
Feb.
Mar.
216
16
-8
25
199
100
50
15
232
242
48
15
32
194
109
13
15
440
259
43
26
15
216
150
-9
20
725
293
114
3
108
179
67
6
43
-150
175
-12
16
-27
187
111
43
-19
745
Average for period
Clvll~anunemployment
rate (%)
I
Manufacturing
workweek (hourdb
C""
1991 1992 1993 1994 1995 1996 1997
to date
Percent
I
l a Jan Feb Mar
1997
Percent
5.4
41.5
41.9 41.7
41.9
42.1
Labor force partlclpation
66.8
rate (%)
67 2 67 2
67.0
67.3
1
Percent of households surveyed
60
50
40
30
20
10
0
198i
1989
1991
1993
1995
1997
a. Seasonally adjusted.
b. Production and nonsupervisory workers.
c. Vertical line ind~catesbreak in data series due to survey redesign.
SOURCE: U.S. De~artmentof Labor, Bureau of Labor Statistics: and The Conference Board, Consumer Confidence Survey, March 1997.
Ilespite slo\ver emplo)ment gro~vth
in March, the lal,or sitcitltion continues to brighten. Nonfarm p~tprolls aclvancecl at a modelxte pace
(175,000 net new jotxi). Average
hourly earnings showecl their
largest year-o\rer-year increase since
1970 (LIP4.0%. to S12.15). \ \ M e
the unemployment rate tleclinecl
0.10/0, to j.2%,. In ;tclclition. the labor
force particip;~tionrate (67.30/i,)ancl
e n ~ p l o y m e n t - t o - p o p ~ ~ l a t i ratio
on
(63.8%)hit recorcl highs last month.
Goocls-psoclucing employment
was weak in ivIarc11 (clorvn 12,000).
as the construction inclustry parecl
27.000 jobs. This drop hllowecl an
un~lsuallylarge February gain. With
2111 overall increase of 187.000, the
service-proclucing sector Inore than
accou~ltedfor jobs growth in blarcli.
Within the narrow services c;ttegor-y,
which encompasses L: Eunge of establishme~lts.i~lclclclinghospitals. engineering firms, and hotels, the gain
resultecl prim:trily froin growth in
health 211lclI>~isinessservices. 111contrast, governinent trinlmed its payrolls hy 19.000 last month. after
aclcling 43.000 jobs in Fehrciary.
Ovelxll, the pul>lic appears more
optimistic about the ei-nployment picture. A survey of consumer conficlence put the percentage of responclents ~ v h obelieve jolx xre plentif~il
at 32.30/0,ahout 14 percentage points
al>ove those who think jobs are
scarce. This is the survey's 11lost (iivolable sho~vingsince Jiily 1989.
http://clevelandfed.org/research/trends
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WorkplaceFatalities
W O R K P L A C E FATALITIES BY O C C U P A T I O N , 1995
ri-~->I
Managerla1 and proress~onaispecialty
-
,
/
d
r
.
l
.-
Service occupat~ons
,
"
- "5$+
,
,
Technical sales and adrninistrat~vesupport
Precis~onproduction crait and repair
i~
,-
Operators
iabr~caiors
and laborers
i
Farming ioresiry and fishtng
hi
Mlllrary
0
I
I
5
10
I
15
I
20
I
25
I
30
I
35
I
40
Percent 01 total
Occupations with a High Incidence
of Workplace Fatalities, 1995
Occupation
Truck drivers
Farm workers
Construction laborers
Supervisors, proprietors,
and sales workers
Nonconstruction laborers
Police, detectives,
and supervisors
Electricians
Cashiers
Airplane pilots
Taxicab drivers
Leading
fatal
event
Percent of
occupational
group deaths
Highway
crashes
Vehicular
Vehicular
68
50
28
Homicide
Vehicular
63
36
Homicide
Electrocutions
Homicide
Plane crashes
Homicide
47
59
92
98
70
a. Dotted line represents break in data series due to change in estimating procedure.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics. Census of Fatal Occupational Injuries; and National Safety Council
Real wages relxesent only o n e aspect of tlie employment contract.
Arlotlier aspect is \vorliing conditions, especiall>.the safety o f the environment. An estreme measure of
on the job. These
safety is k~t~ilities
h a v e fiillen inesom1,ly since 1965.
s o that the chance of clying 0 1 1 tile
job is noxv only one-fifth of what it
was a generation go.
T h e n ~ i r n l x rol' total n.orliplace
fatalities is very Ion. (.:I per 100.000
worliers in 1995). This is less than
tile Kite of cleziths ll.0111 acciclental
kills (5.1) ancl is much smaller th:ln
the cle:~thrates fsor11 accicle~ltsor \rialence (57.3) \vhen rneasurecl for the
during hoth n.orkentire pop~~l:itiori
ing and non\\iorliing 11o~lr.s.The
\vorliplacc of toclay clearly is a siifer
pl:~ce\\.hen measurecl hy fitalities.
The conlposition of fatalities has
also changeel, partly because of
shifts in the cornposition of the lahor
force. Forestry ancl fishing rernain
very clangerous occupations. I>ut
\ orce.
tiley employ less of the \vorl-f
so that acciclents ;~ssociatecl wit11
them (being str~lcliby ~ u ol>ject
~ i
or
clro\vning) are no\\- a sm;ill proportion of total worliplace cle:lths. In
spite of their prominence o n television ne\vscasts, fires >i~iclesplosions
cause only a minor fsaction of
cleiiths. Even without the occup:itional shifts. cl:ita from cl;i~igero~~s
o c c u p ; ~ t i o n s s ~ ~asc hmining, \\illen
a\.ail;ll>le. inclicate a clecline in fltality sates. Sow, the top t\\,o c:ulses of
n.orliplace cleaths are tr:insport:ition
acciclents ;mcl homicicles. by ;I fairly
I~irgemasgin.
http://clevelandfed.org/research/trends
April 1997
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Interstate Population Migration
Thousands of oersons
Changes in Industry Shares of Total Nonfarm
Employment, 1990-1995
(Percentage points)
OH
PA
KY
WV
-
Mining
-0.1
-0.2
-1.0
Construction
-0.3
-0.6
-0.1
0.7
Manufacturing
Durable goods
Nondurable goods
-3.0
-2.0
-1.0
-1.8
-1.0
-0.8
-0.5
0.1
-0.6
-1.2
-0.7
-0.6
Transportation and
public ut~l~ties
-0.1
0.0
0.3
-0.3
Trade
-1.0
0.0
0.2
1.4
FIREa
-0.2
-0.1
-0.2
0.0
Services
2.2
2.5
State and local
government
1.8
0.4
1.7
-0.5
-1.5
1.5
-0.7
a. Finance, insurance, and real estate.
SOURCES: U.S. Department of Commerce, Bureau of the Census; Ohio Bureau of Employment Services; Kentucky Department of Employment Services;
Pennsylvania Department of Labor and Industry; and West Virginia Bureau of Employment Programs.
Migration patterns o\.er tlle past
seven years show that Iiust Helt
states c o n t i n ~ l eto experience ~ L I L ~nigration.The largest net loss, ho\vever, occurrecl in C;~lifornia.\\-liere
ne:trly 2 million more people left
the state than entesecl. '['he otl~er.
big losers xvere Ken. Yorli. Illinois.
ancl New Jersey. The So~~tlleztst
~mcl
Southn.est were the biggest po17~1l;ktion g;ti~lers. T'he st;lte \\.ith the
lxrgest tin-migr:~tion \v:~s I:loricla.
which gainecl nc:trl!- SO0,OOO more
people than it lost.
I t is interesting t o note th;lt the
Sour states listecl ithove :is I ~ i gnet
111igr:ttion losers hat1 higher-tlian:kver:\ge unemployment r:ites. The
states \vith the lo\vest unemployment
rates, horn-ever (\\jliich :Ire rn~tinlyin
the Nficl\vest) \\.ere not the Iiggest
gxiners o f net migration.
th
Keseme IlisIn the F o ~ ~ rFecleral
trict, hoth Ohio and l'ennsyl\.:tnia
li;~veseen more people lea\.e than
enter since the beginning o f the
clecatle. xvhile for I<entucl;). mcl \Wst
Virgini:~the reverse w:~s trile. Ohio
;incl I'ennsylvania also experiencecl
the l;trgest m a n ~ ~ h ~ c ~sector
~ ~ r i cleng
clines, wit11 employment sh;~resin
rnanuf:lcturir~g inclustries htlling 3.0
anel 1.8 percentxge points. respectively. \Xiest Virgini;~gaineel employment in \i.holesale ancl retnil tracle,
ancl all the Fourth 1)istrict states increased their shares of enlployment
in the service sector. Go\.ernment
\\-;IS the only other sector to s h o w
any sulxtantial employment gains,
hut these were limited to Ohio ancl
I'ennsyl~lnia.
http://clevelandfed.org/research/trends
April 1997
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Banking Conditions
http://clevelandfed.org/research/trends
April 1997
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Monlhly average level
I
2'000
NASDAQ BANKING AND FINANCE NDEXESa
a. The last data point in both series is a daily quote for March 27.
SOURCES: DRI/McGraw-Hill; and Bank Rate Monitoc various issues.
The run-up i11I~anlishare prices 11;~s
recently abatecl. This is consistent
wit11 concerns al3oiit possil>le overvali~ationof banli stoclis ancl reports
that hanli i~lsiclershave heen selling
stocks for months. Insicler sales may
inclicate that those with superior int
prospects anformation a l ~ o u bank
ticipate weaker earnings clo~vnthe
road. Once made pul~lic.this infor-
mntion coulcl precipitate a drop in
prices. If this interpretation is correct,
news of insicler selling coulcl itself'
trigger a sell-off anel price decline.
Anticipation of higher interest
r:ltes ancl tighter loan markets nlay
also he dampening investors' enthusiasm. However, short-term marltet
interest rates have shown little
nlovenlent in the last few mot~ths.
Some commentators inclicate that
the recent firming of mortgage rates
may have been relatecl to anticipation of short-term interest rate hikes.
On the other hand, rates for both
personal anel home-ecluity loans
have clropped.
Creclit card rates have s h o ~ v nlittle
rno\;ement since last November;
such loans remain o n e of cornmer(cotzti~zuedon next pct~qo)
http://clevelandfed.org/research/trends
April 1997
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Banking Conditions (cont.)
0
RETURN ON ASSETS BY BANK ASSET SlZE
a
More than 10
I
J J
I
I
I
I
I
NON-INTEREST INCOMWEARNING ASSETS
BY BANK ASSET SlZE
-
30
1
,."
,H&4
/d4
,
--c #
a
,
" P,--
d
--7
/'
A%.""
#'/
More than 10
,,&
-
20
&@@="
15-
10
10
ecz
=---
I
IIQ
a
-
0 1 to1
s=
v W
H
--
-p-%
e--*e-4d
I
I
I
I
iila
iva
la
lia
I
IIIQ
I
iva
a. Net interest margin is the difference between the yield on earning assets and the cost of earning assets, expressed as a percentage of average earning assets.
NOTE: All bank asset size ranges are expressed in billions of dollars.
SOURCE: FDIC, Quarferiy Banking Profile, various issues.
cia1 Ixu~~liing's
most profit:ul~leareas.
News that creclit c;urcl clelincli~encies
reachecl a record high at the encl of
1996 comes as a clisappointrne~ltin
the \\.ztke of some hanlis' efforts to
tighten creclit cal-cl stancl;u.cls ;me1 recluce mail solici~~tions.
Insurecl commercial l>anlis reported the thircl-highest earnings
total in histol-) for 1996:IVQ,Lmcl the
ret11s11 011 ;issets was the seconclhighest ever. The largest l~ooststo
earnings catlie from increasecl noninterest income (up 13.3% since
1')')j:IVQ) and net interest income
(LIP6%)).the latter being boostecl 11y
110th wider interest margins and
greater interest-earning assets. Net
interest margins at large h;mi<s rose
the most. mainly hecause of lo\ver
fi~nclingcosts.
Noncurrent loans (those 90 clays
or more p:tst due and those in
nonaccrual status) cleclinecl. rnainly
as a result of higher net charge-off:.;.
Mo\\~ever. noncurrent consulner
loans increased, and consumer
loans also hacl the largest share of
loans
the increase in cleli~lc~i~ent
(tliose nit11 interest payments 30 to
S9 clays ~ ~ 1clue).
s t
http://clevelandfed.org/research/trends
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Foreign Output and Prices
Perceni change from correspond~ngmonth oi previous year
ICONSUMER
Percent change from corresponding month of previous year
CONSUMER
PRICES
l5
Percent change from corresponding quarter of prevlous year
1992
1993
1994
1995
PRICES
Perceni change irom correspond~ngquarter oi prevlous year
1996
1992
1993
1994
1995
1996
SOURCES: Statistics Canada; lnstitut National de la Statistique et des ~ t u d e siconomiques (France); Statistiches Bundesamt; Deutsche Bundesbank
(Germany); lnstituto Centrale di Statistica (Italy);Statistics Bureau of the Japanese Prime Minister's Office; Bank of Japan; Office of National Statistics (U.K.);
U.S. Department of Labor; and U.S. Department of Commerce.
Foreign econornic acti\.ity continues
Irn.estment spencling slowecl. Inclusc;luse l2:lcl weather slo\\.ecl clown
tri:ll ~xocli~ction
increasecl a I>risl< construction activity. Germany's units moclesate exparlsion. \vhile inllation pressiiresswn:lin S L I I ~ C I L I 5.3%
~ ~ . in Jan~iary,wlihile the Llnememployment mte rose to a recorcl
Economists, \ ~ h onotchecl i ~ ptheir
ployment rate for the ruonth repost-\'orlcl \War I1 high of 11.3% in
oiit10c)li after a 17etter-than-es12ectccl
mainecl at 3.3(!41.only slightly helo\\.
Janiiary ancl rernainecl there in Fel2fourth qiiarter, anticilx~teth;~tgro\\~th
its post-\Vc)rlcl War I1 high of 3.5'!41. I.LI:IS~. Its huclget deficit \viclened to
Lunong our 10 lasgest industrial tl.;~cl- Inflation in Japan remains I,elo\\. 11!4). 3.9%~
of GlIP in 1996 from 3.5% the
ing partners ill aver:lgc ;lpprosiGerman output expaneled at a
previoiis year. With iinemployrnent
rnately 2.5% this year ancl next.
slr~ggish2.01!4)in 1996:IVQ (011 a
running at historically high levels,
yc:u--over-year basis). Concurrently,
the coilntiy \\-ill have difficulty meetJapanese real Gl)I1 rose XI o\.er
tlle f o i ~ r cluarters encling in
net e x p o r t w a n e l consumption
ing the 3% deficit t q e t h r the Euro199h:I\'Q. \vith consiln1er spencling
spencling (both private and go\.ernpe;ui rnonetary union. Inflation in
:mcl net exports leacling the gains.
rneni) \veal<enecl. Inclustrial proclucC;erm;)ny remains below 2%.
tion fell 1.7% in January, 1;urgely be-
http://clevelandfed.org/research/trends
April 1997
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Intrafirm Trade
Bill~onsor U S dollars
(U.S. INVESTMENT POSITION
Percent of total exports
45 [INTRAFIRM EXPORTS
A
E] Foreign d~rectinvestment in the U S
Total lntraflrm exports
U S direct lnveslment abroad
500
companies to foreign aif~liates
20
Percent
OU
I GEOGRAPHIC DISTRIBUTION OF U.S. INTRAFIRMTRADE I
Canada
Europe
Lat~n
America
Africa
Middle
East
Asia and
Pacilic
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; and Survey of Current Business, February 1997, pp. 23-28.
International clirect invest111ent
surgeel in the late 1980s. f%oth1i.S.
direct investments in hreign countries ancl foreign investments in the
U.S. have been gro~vingr:lpiclly,
with the former exceecling the latter by 21 xvicleni~lg111:trgin. Multinxtional corporations ~~nclertal<e
nlost of these norlclwicle invest~ u e n t sin order t o remain competitive in foreign 111arliets. to l o ~ v e r
their resource :lncl I:ll~orcosts, anel
to gain tax advantages.
kl~lltinationalfir111s also play a signific:tnt role in global tracle flo\vs.
Intrafirm trade, for example, accounts for over 35% of U.S. exports
and more than 40% of imports. This
trade seems to originate at the parent firm. U.S. intrafir~nesports consist mainly of shipme~ltsfrom parent
firms to their foreign affiliates, 21s opposed to esports of foreign-o\\.necl
firms in the U.S. Similarly. 1.J.S. int ~ l f i r ~i~t~portsflo\v
n
fro111 a loreign
parent t o its clomestic affiliate.
1J.S. intrafirm exports travel
in:~inl). to clevelopecl parts of the
glolx. whereas the nation's intl.,1' F'11.m imports are more widely clispersecl. The 1I.S. has m:~int:linecl 21
deficit in its intr-afirm tlacle. In 1994
(the l;ltest year for \\:hic11 c1:~ta :ire
availal~le),that cleficit ;urnoi~nteclt o
S97 l)illion, o r 65%)of the total tsxcle
deficit. The deficit is at its \i.iclest in
our intrafirm tracle lvith hfric;~ancl
the M i c l d East.
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