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August 1996
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The Economy in Perspective
Whither governt?zerzt?.. . Welfare as we know it
is encling. The same can he saicl for agricult~ire,
national defense, health care, ancl (though few
public officials will openly aclmit it) Social Security. After many decades of vigorous expansion,
big governlnent has become politically cliscreclited. What next?
Voters call on governnlent to participate in
econotnic life in various ways. Private-marltet
transactions cannot always provicle the right
amount of what economists call public goocls,
like national defense or a space program. These
goods and services benefit all, and excluding
people from them is clifficult. But we also asli
government to provicle such ~ l o ~ l p i ~ bgoocls
lic
as school lunches, grants to artists, highway and
airport construction, ancl loans to snlall ixisinesses. We use the tax system to channel benefits to particular groups without spending
money clirectly. For example, home nlortgage
deductions benefit homeonmers who iternize
on their tax returns! but clo nothing to help
renters or homeownel-s who do not itemize.
A~nericansalso use government to transfer
resources among people through tax ancl
spending programs. The largest colnponellt of
Social Security, for instance, transfers resources
f r o ~ younger,
~l
worlting people to older, retired
individuals. Insurance progralns form another
class of government activities. &lost employers
and e~nployeesare obliged to purchase workers' cornpensation and unemployment itlsurance, and most banks are forced to carry deposit i~lsurance. The government provides
insurance only when it thinks that private cornpanies will not (or cannot) insure the risk at a
reasonable price.
During the past several decades, we have increasingly aslied the government to use transfer, insurance, credit, ancl direct-spending prog r a ~ n s to alter private-marliet outcomes.
Current public disaffection with governrnent
appears to stell1 prinlarily from a belief that too
many goods ancl services are being proviclecl,
that the benefici:~riesof some tr:insfer progrzlms
are receiving Inore than they cleserve, ancl that
the distorting effects of these myriad government progralns on the private economy have
become too large. Voters now seen1 more willing to alloxv private firms to supply many of the
goocls ancl services traditionally proviclecl by
government agencies. At a minimum, this cornpetition motivates gover~lmentto operate Inore

efficiently. At the extreme, it calls into question
all government participation.
Other clevelop~nentshave also forcecl serious
consideration of private-marliet alternatives.
Many people do not recognize how changes in
capital marliets and risk rnanagelnent are extending the scope of private enterprise. The U.S.
space program illustrates the confluence of
these forces. In its early years, the space prograin was a purely governmental affair, with
government committing the f ~ ~ n cancl
l s bearing
the rislts-both
of which were substantial.
Later, after the R&D costs were paicl, commercial ventures became more practical. Now that
global capital and insurance ~narketshave cleveloped, enabling private co~npaniesto send
satellites ancl other cargo into space and to
hedge against the rislt of launch 2nd equipnlent
failure, the government's role has climinishecl.
Highways provide yet another example. The
traditional method of funding a new state highway r e q ~ ~ i r voters
es
to approve the sale of longterrn boncls to be repaicl through either general
tax revenues or toll charges. But private companies are perfectly capable of raising highway
construction f~indsin capital marltets. Motorists
using the highway can be billecl auto~natically
after a scanner records their presence. Furthermore, with private funding, voters need not
worr)~about the state using tax dollars to build
unnecessaly roacls. California ancl Virginia have
already grantee1 permission to private firms to
I~uilcland operate segrnents of state highways.
These clevelop~nentspoint to the wick range
of options available to the American public as it
reconsiclers how government should fit into the
nation's econornic life. It will be interesting to
see whether the public wants to circu~~lscribe
the size of government or to recluce the role
that governlnent plays. There is a big difference. The government can stop cloing many
things and allow private ~narltetsto b e c o ~ n e
~lnoreactive. 13ut it can also instruct the private
sector to d o what it \cants done. The government can order businesses to pay a minim~un
wage, tell broadcast companies to provicle chilclren's programming. or force colnpaniesto purchase insurance from private carriers. The government can-ancl does-influence resource
allocation without spending taxpayer funds or
employing people.
So ~uhifhelgoverment? It's too early to tell.
But government rr~itfxt-?
Not necessarily.

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Monetary Policy
Billions of dollars

420ICURRENCY
OUTSIDE BANKS

1

Billions of dollars

1

480 1 MONETARY BASE

Billions oi dollars

a. Growth rates are percentage rates calculated on a fourth-quarter over fourth-quarter basis. Annualized gwwth rate for 1996 IS calculated on an estimated
July over 1995:IVQ basis.
b. Adjusted for sweep accounts.
NOTE: Ali data are seasonally adjusted. Last plot IS estimated for July 1996. Dotted lines represent growth ranges and are for reference only.
SOURCE: Board of Governors of the Federal Reserve System.

The semirlnni~al I:ecler;~l Iieser-v-e
monctar!. polic). testimony :inel report to Congress. clcliverecl 11)i
Chairm;~n Greenspan o n July 18.
sutunlarizes [lie Fecl's viwv of ~ L I S rent economic conclitions ancl its
outlooli for econo~nicperformance
tl~rougki1997. The report :~lsoprovicles pro\.isionxl ~.angesfor inonet ; ~ yaggrcg:ites in 1997.
Ch;~ir~n:inGreenspan reportecl
that the econoln). performecl lvell in

the first lialf o f 1996. After rising only
0.5041 in 199S:IVQ. real Gl>P incre;isecl :it a 2.29/0 annual Kite in
1996:IQ. ancl plrtial chta for 1996:IIQ
inc1ic;kte significantly stronger growth
since then. Ahout 1.4 nill lion \vorliers \yere ;~clcleclto nonfarm p a ~ ~ o l l s
in the first six inonths of 1996, ;lucl
Ji~nc's ~lncmploytllent rate fell to
5.3'%1.
a sis-year low.
At the s;imc tirne, the core intlation r;ltc. measureci I,y the Consumer

I'rice Incles (CI'I) less foocl ancl energy [xices. increased :lt a 2.8% annual nlte over the first h:llf of 1996,
a l ~ o u t0.6 percentage point lower
t11:ln the srrlile periocl a year carlier.
'I'lie coesislence of ~nocleratcinflarate
tion ;iilcl lo\\- i~nernploy~nent
contraclicts the tratlitional supposirates
tion th:~t Ion. ~~nemployment
:uid/or higll c:~p:~cit)utilizr~tionrates
necess;iril\; leacl to I~igherinf1;ition.
( L - O I ? ~ ~ ? I L K Y C/ N I

71e.xtp~g~)

B,

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ES

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BB

(B

Monetary Policy jcont.)
Percent change, annual rate

Economic Projections by FOMC Members and
Other Reserve Bank Presidents, 1996

1 REAL GDP GROWTH

1

Change, fourth quarter
to fourth quarter, percent
February
central
tendency
for1996

July
central
tendency
for1996

July
central
tendency
for1997

4.25-4.75

5-5.5

4.25-5

Real GDP

2-2.25

2.5-2.75

1.75-2.25

CPI

2.75-3

3-3.25

2.75-3

Nominal GDP

Average level, fourth quarter, percent

Civilian
unemployment
rate

5.55.75

About
5.5

5.55.75

12-month percent change

1

CONSUMER PRICE

INDEX^

a. Shaded area represents the FOMC's central tendency for 1996. set in July 1996.
b. Vertical line indicates break in data series due to survey redesign.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; U.S. Department of Labor, Bureau of Labor Statistics; and Board of Governors of
the Federal Reserve System.

Looliing 21hc:lcl. the report fincis
"gootl reasons to I,elieve that economic gron-th will mocle~ltesome.
althoi~glithe ti~ningancl extent of
the clon-rlturn :Ire ~lncertain."?'he
psojections of the Fecleral Reserve
Go\,-ernors :urlcl Reserve I3:lnk I'resiclents "reflect the 1 . i that
~ ~ sustainable economic growth is likely in
store." l'lieir for.ec:ists for real GIII'
growth center ~tro~incl
2.5%)for 1996
;tticl 2.0'i/ir tor 1997. linemployn~ent

n~tesare espected to remain aroilnd
5.50% to 5.75% through 1997.
The forecasts for inflation. nieas~lreclI,y tlle four-cluarter change in
the CI'I, :Ire for 3% to 3.25% in 1996
ancl 2.75%) to 3% in 1997. These
h)recasts are consiste~ltwith 199195 infkltion rates.
While there is little eviclence of an
imminent inflation spike, the report
cites "rno~lnting pressures in the
Izti~orrnarliet" that must be closely

monitoretl. It emphasizes that the
Federal Reserve has hecome "especially vigilant to incipient inflationary
j>ressures that coulti ultimately
threaten tlle health of the expansion." In pursuit of lo\\- inflation, "the
Fecleral Reser-ve res~iai~ls
committee1
to preventing a sustained pickup in
inflation ant1 ultimately :ichieving
and preserving price st:tl,ility."
(cor7fi1lrlcd or2 IIL~~PLI,:IC')

e

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,

lMonetary Policy (cont.)
I
Billions of dollars

Billions of dollars

3950 THE M2 AGGREGATEa

Billions 01 dollars

15,000 [ DOMESTIC NONFINANCIAL DEBT

Percent

I

1

23 GROSS SAVINGS AS A SHARE OF GDP

a. Data for July 1996 are estimated.
b. Growth rates are calculated on a fourth-quarter over fourth-quarter basis. Annualized growth rates for 1996 are calculated on a July over 1995:IVQ basis for
M2 and M3, and on a May over 1995:lVQ basis for domestic nonfinancial debt.
NOTE: All data are seasonally adjusted. Dotted lines are target ranges.
SOURCES: Board of Governors of the Federal Reserve System; and U.S. Department of Commerce, Bureau of Econom~cAnalysis.

T h e report inclucles tile P'ecler:il
O p e n klarliet Colnmittee's (1;OhlC;)
prc-)visional r-anges lor cle1)t ;ind the
monetary aggregates in 1997: 1% to
7% for hI2 ancl 2U.i) to 6%)for M3,
along xvith 3% to 7 %f'or clel~tin the
clomcstic nonfinancial sec~tors.The
s:ime sanges \\-cl-e set for 1990. In
the first l1:iIf of tll:it !-ear. h I 1 ancl M3
growtll rates \Yere at the ilpper enel
of their xinges, \\.llilc tile gro\\.til
r.:ttc for c l c l ~\\.as ne;ii- its mielpoint.

l'lw FOhl(;'s fosec;ists of inf1:ition
ancl seal C;I)I' growth suggest that it
\\-oLIIcI not 13e s~lrprisingto see M2
ancl hl3 gron.th rates :it the upper
ericls of' their ranges througlio~~t
1996 >inel 1 9 9 7 .
Cll:iil.rn:in Grecnsp;in once again
c~nphasizecl"the critical importance
to our nation's economic n.elkire of
e fecleral
continuing to r e c l ~ ~ cour
I~ucigetcleficit." [He noted that furtller efforts ;it cleficit reduction will

ine\'it:iI>ly recj~~ire
Congress to acldl-ess the increase in entitlement
spencling that \\-ill result from shifts
in the ;ige composition of the na. statecl
tion's :iclult p o p ~ ~ l a t i o nHe
th;it "Ion-er i)uclget cleficits are the
surest anci most ciirect \\/a!. to increase national saving," ~vllich in
turn \\-ill Ion-es real interest rates.
increase in\-cstment, ancl strengthen
Americ:uns' ability "to compete even
nlor-e etfecti\-cly in \vorlcl m;u.liets."

1

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--

B)

Q

e

c

r

Interest Rates
Percent, u~eeklyaverages
75

YIELD CURVES~

Percent

lo 130-YEAR TREASURY YIELD AND FEDERAL FUNDS RATE

1

a. Three-month and six-month instruments are quoted from the secondary market on a yield basis; other instruments are constant-maturity series.
b. End-of-period quarterly averages of daily data. All observations are fourth-quarter data except 1996, which is for the second quarter.
SOURCE: Board of Governors of the Federal Reserve System.

The yielcl cur\.e lias Ilattenecl sliglltly
in the past month. \\.it11 shot-1 I-:ltes
rising ancl long sates uncl1:inged.
'I'he r:lte on 3-nlontll Tre:ls~~ry
bills
movecl up se\-en I~asis points to
5.3W1.Ixit .%-yearI)ontls slion-eel 110
change. !'lie closel!- \\-:~tchecl3-ycxr.
3-month spre:icl st:~nclsat 114 Ixlsis
pc~ints.\\-ell al,o\-e the historical a\,emge of SO. ancl the 1>op~11:tr
1O-).e;~r,
3-month spreacl st:~nclsx t 155.:llso
:lhove its mean of 120. As a ro~igh
inclicator of fut~lrceconomic gro\\.th,
the relati\.cl). stc'ep ).ielcl cur\-e is

consistent n.ith al~ove-avemge:icti~.ity over the nest four cl~iartel-s.
Althoc~gli the yield cur\;e h:ls
stccl'enecl since 1995, it may still
1001.: flat in relation to the extreme
\.slues re:~checlearlier this clecatle, as
tlie cl1:u.t comparing 30-year Tre:lsL I S ~yielcls ancl tlie federal funcis r:ltc
(litel.;llIy the long ancl the short o f it)
shonx. It's \vorth noting that in contrast to 11iucli o f the decacle. \\,hen
the federal fi~nclsrate was positi\,ely
associatecl with thc long rate. in 1996
the rates have clivergecl.

,c1.'\in# the >.ieiclcLlIve is funclamentally I: three-cli~iiensio~~l
pro1~lem. I,eca~~se
the cur-ve 110th t\\;ists
ancl shifis up ancl do\vn over tirne. A
3-1) pesspective inclicates that the big
rise in I994 \\-as not a parallel shift.
I t also shon-s ho\v the high 1x1~
invertecl ctil-\-eof 1981 first steepc11ccl
in 1982 ancl then clropped do\vn\varcl. On tile other 2i:~nd.it allows is
to see hen- in\,ersions occurrecl as :t
res~iltof short ntes rising, not long
rates fillling.

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Inflation and P r i m
Difiusion index, net percent rising

loo PURCHASING MANAGERS' PRICE SURVEY

June Price Statistics
Annualized percent
change, last:

1995

6 mo. 12 mo. 5 yr.

avg.

0.8

3.5

2.8

2.9

2.6

2.2

2.8

2.7

3.1

3.0

2.1

2.9

2.9

3.1

3.2

7.2

2.3

2.6

1.5

2.1

0.7

1.6

1.7

2.6

4.4

6.3

3.1

5.4

Irno.

Consumer Prices

All items
Less food
and energy

Mediana
Producer Prices
Finished goods

Less food
and energy
2.9
Commodity futures
pricesb
-32.2

12-rnontli percent change

Percent oi iorecasts
GO

ITRENDS
IN THE CPI

IDISTRIBUTIONOF ECONOMISTS' 1997 CPI FORECASTS~ 1

FOiAC central tendency as oCJuly199GC
FOMC central tendency as 01 February 1996'

1993

1994

1995

1996

1997

18-22

23-2 7
28-32
3.3-3.7
Annualized percent change

3.8-42

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 KnightRidder Business Information Service.
c. 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.
d. Consensus forecast of the Biue Chip panel of economists.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; the Federal Reserve Bank of Cleveland; the Commodity Research Bureau; the National
Association of Purchasing Management; and Blue Chip Economic Indicators, January 16 and July 10, 1996.

After- Incrc,L\lng '11 .I ~ ~ \irglltl\
t e
above -t'W) clu~rng the f r~st f ~ c\
month4 of I990 tile Cons~~rncr
1'1 Ice
Inclex (CI'I) rnocle~~~tcci
to .t11 .Innuahzed r,ite of le\\ th,m I('(, In 1i11lc
The core ret'l~l pllcc ~ncllc'~to~\
the
C1'1 e\cluclrng foocl .me1 energ) ,~ncl
the nncd1,111(:1'1 \\ere 1117 2 2'kt id
2 100, r espectn el\
Whole\,lle p11c e 111~1e.1ses
IK)\\evc.1, .~ccele~,ltecl
.I 1)1t rn Iilnc Aftel
legr\tellng e\scr~tr~~Il\
n o cll,tnge
c l i ~ t ~ ttl~~gcf115t fi\e montll4 of the
ye,ir. the 1'1 ocli~cer1'1 Ice Incle\ excl~~cling
fooci .inel energ! goocls lose

at a 2.9% clip. A sirriilar pattern ~ 2 1 1 1
I)e seen in reports from iiicli~strial
~>~~ctlasiing
managers. i\Rer posting
nine consecutive monthly I-eaclings
I~elo\\;550 (which suggest net price
cleclines). the purch:ising 111anagess'
price incles movecl bacli up to the
50 m:tsli. In other \vorcls, the proportion oi' p ~ ~ r c l ~ a s im:ln:lgers
ng
n-ho
note rising prices is now :tl)out e\.en
\vitli those \\.ho see thern cleclining.
7he steppeel-up pace of consumer
price increases this year prompteel
the Feelel-a1Open M:lrliet Committee
(FObiC) to revise its 1096 C11
' projec-

tions i~pwarcl.from :I centl.al tencleric). range centesecl o n 2.3% to
one ce~ltesetlon 3. 1%. 7'he group
sees the 1997 gro\\-th rate o f the CI'I
slo\ving to l,et\\-een 2XiW! anel 3%.
?'he 1:ltest Uli~cChip survey inclicates that ccono~nistsexpect next
)-ear's inflxtion rates lo I,e similar to
this yc:lr's. As o f Ji111-,more than
iii%t
of thc 13lue Chip economists
projectecl CI'I ir7cre:lses i11 the 2.3%
ro 3.204) range. Cotltr:lry o p i ~ l i o ap~~s
pe:ls to be few anel evenly balanced.
22?0 of the respoilcients
Only al>oi~t
(cotziiiz~rc~d
otz tzc~.xlp~~gej

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Inflation and Prices (cant.)
Annualized 12-ciiarier percent change
-ION MEASURES

Investment Price Changes
(Data through 1996:lQ)
Annualized percent
change, last:
4

qtrs.

1.2

1.1

1.6

Structures

2.5

3.1

2.7

Producers' durable
equipment

0.8

0.4

1.7

Computers

GDP

Nonres~deniial PCE
~nvestmenl

40
qtrs.

Nonresidential
investment

Information processing -3.4

CPI

12
qtrs.

-12.6

-3.1

-2.5

-11.5 -11.0

Industrial equipment

2.9

2.6

3.3

Transportation
equipment

2.3

1.8

2.7

Government Residential
expend~iures invesirnent

Percenl oi toial weight

IRELATIVE WEIGHTS O F MAJOR CPI AND PCE COMPONENTS I

4-quarier percent change

Durables

1 Nondurables
Medical services
Other servlces

CPI
NOTES: CPI represents the all-items Consumer Price Index for all urban consumers. All other measures are chain-weighted price deflators for GDP and
selected major components. PCE represents the chain-weighted price deflator for the Personal Consumption Expenditures component of GDP
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; and U.S. Department of Commerce, Bureau of Economic Analysis.

cspect ini'i:~tion lo lop j.2'l.i~ nest
t~~:lllyhzt1.e continuecl to eclge
ch:~in-weighteel incles have I,een
year. \.irti~:~Il).
iclentical to the prolon.er." Incleecl, the average incre:tse
r~~rining
I>elo\\-the CI'I, partll- t ~ e portion th:kt especl ii1~'iationto he
in the GI>I' chain-~i~eightecl
price
cause the former 17uts clifferent
less t1i:ln 2.800.
incles has been almost percentage
\\.eights o n certain co~nnloclities.
With consunier price increzlses
point less than the CI'I over tlie past
Among the iinpol.tant clifferences is
scerningl\. S L L I C I ~ iri the neigh1)orthree yc;lrs. A large share of' that clifthat housing is \veightecl more
l1oocl o f 3'l.il. sorile Iix\-c \\-onclereci ference stellis from prices of nonres11e:tvily i n tlie CI'I, nhile meclical
icleiltial in\.estrnent goocls, \vhich
whether the CI'I is acc~~r:ltel\.
me:isc;ue receives a smzlller ~veight.Still,
have Ixxn strongly affecteel 1,); co~i- the imp:~cl of computer prices is
r ring the econor~i!-'sunclerlying infl:ltionar). tlirusl. In his recent testiiinuccl sharp cleclines in co~nputer clear here also. Using the cli:linmony I~efol-e Congress, l:eclcr.:~l prices. This is not a p:lrticul;~rl\.11e\\. \\.eighteel ~~ppro;lch.
consumer ciurItesel-1.e I3oarcl Chairman Alan
elex-elopment. In klct, accorciirig to
al~legoocls prices have incrcasecl at
C;reensp;in noreel that "incrc:~sesin
C~I)I)-l~;~secl
price data, c o m l ~ ~ ~ t e21r mte o f about I/L tu 1 ~~ercent:lge
rnol-e co~nprehensi\.c.anel 1xrll:117s
["'ices ha\.e avel.agccl an 11?/11ann~lal point less tli:ln CI'I dul-ahle goocls
more representati\.c..cl~:~in-\\.ci~hted mte of clccline for the past clecacle.
~xicessince 1992.
rncasures 01 consull1c.r prices ... :LCE\rn \\.itliin the consun~iergoocls
:ires. price increases reportecl hy the

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WageTrends
Percent change, year over year
8
AVERAGE HOURLY EARNINGS AND INFLATION

Percent change year over year
7
LABOR COMPENSATION AND PRODUCTIVITY

I

Percent change, year over year
9
EMPLOYMENT COST INDEX

[

Percent change, year over yea1

8

UNIT LABOR COSTS

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics.

June from their year-ago le\.el. ancl
\When inflation acceler;~tes,so clocs
lia\.e generally outpaced gains in the
the pace 'at which lal,or costs inConsumer Price Index (CI'I) since
crease. The con\.crse, i~owc\.er.is
micl-1995. Similarly, the Lvages ancl
not tnie: that is, rising lal>orcosts clo
sal;~riesco~llponentof the eniploynot lencl to inf1:ation. \Vage-push
ment cost illdex increasecl 3.2?41in
theories of i11fl:ation ignore the CSLI1996:IQ. These narrow lal~or-price
ci:al role of money: \Vitlio~~t
esccsmeasures, however, d o not incl~lcle
sive money growth. high \\rages
cannot translate into :1 s~istainecl, Ixnefit costs. which have model.atecl
clclrirlg [he current business exp:angener:d rise in oiitp~itprices.
sion. Combining both, the total emRecent incre:lses in Ir11,or compensatior~may encoutagc er-ror~eo~~sployment cost illelex has matcl~ed
the economy's 3% underlying inflaxv;~ge-baseclviews o f infl:ation. Avertion rate since 1993.
age hourly earnings rose 3:tOf1 in
.1,he most comprehensi\.e meas-

ure of the price of I:~l,os-total cornpensation per ho~ir-aclv:1ncccl
3.6% on a yea~-over-)~e;1r
basis in
S')')h:IQ, folloxving gains o f 3.8%
;~ncl3.6% in the final bvo cluarters of
1995. Ho\vever the effect of ch:lnges
in tot:d labor compensation o11 o ~ l t put also clepencls on cliang,-, in
lat~orprocluctivity. In 1996:IQ. gains
in 1:abor proeluctivity helpecl holcl
unit l:~borcosts to a ~ n o c l e ~2.5'!4).
~te
1ncre:ases in unit l a l ~ o rcosts have
genesxlly lagged the unclerlying
pace of inflation since 1991.

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EconomicActivity
Real GDP and Components, 1 9 9 6 : l l ~ ~
(Advance estimate, s.a.a.cb)
chanae.
billions
of 1992 $

I

70.8
Real GDP
Consumer spending
42.9
Durables
20.1
Nondurables
9.0
Services
14.4
Business fixed
investment
Equipment
Structures
Residential investment
Government spending
National defense
Net exports
Exports
Imports
Change in business
inventories

Percent change from preced~ngquarter s a a r
50

/

GDP AND BLUE CHIP FORECAST"

Percent change, last:
Quarter

quarters

4.2
3.7
14.1
2.5
2.2

2.6
1.6
2.2

Percent chanoe, s a.a.r

i

a. Chain-weighted data In 1992 dollars.
b. Seasonally adjusted annual rate.
c. Seasonally adjusted.
SOURCES: U.S. Depadment of Commerce, Bureau of the Census and Bureau of Economic Analysis: and Blue Chip Economic Indicators, April 10 and July 10,
1996.

.,

h;l\;e spillecl into the current clc1;irter:
I hen, lollowiilg the strong monthly
'I'he acl\.arice esrilnate Lor scconclI-Io~isingstarts have bee11 f l ~ ~ c t ~ ~ a t i nclata
g that c:Ime o u t I>et~v-\ieetl
April
clwirter GI)f' gro\\-th is a strong
near the relatively high level of' 1.5
:incl June, tiley revisetl their first-half
4.2%), i111 n ~ ) r et11;ui 2 perwnt;ige
million units since early spring.
gro\v-th projections up\\-3rd by more
pc>ints from the first clu:lrter :~ncl:iIOther areas of spending strength
t11a11 one-thirci (to .30/0). From ~niclmost l\\;ice the gro\\-th r~ktcaiitici).ear. Iio\vever. the prevailing vie\\.
last q~larter included consumer
172ted by rllosl an:ilysts \vhen the
clur.al>Ies,i ~ i ~ s i n e ecluipment,
ss
and
among anal!,sts has the econo~ny's
cparter began. 'i'irt~lallye\.eq. major
the go\fernrnent sector. Of the clogro\\.th mte mocler-ating l~acli to
sector of the economy poslccl a
rnestic spending categories. only
~111oi1t
:I\-er;ige--or perh;ipssliightly
Iiealthy increase 1;ist c1~1:lrter.;I sign
conlnlercial construction sho\vecl :i
l>clo\\.-l~). early 1997. Eco~lonlic
that the proiongecl bi~sinessesp;knclccline from the first cluarter.
growth in the second half of 1996 is
sion rernnins \-igoroi~s.'I'lle 1;irgcst
~ s ~ x c t to
e d11e slightly under 2M%,
incrc;ise \vas in resiclential ~OIISISLIC- Wlle~ithe second quarter I>egan.
frilling to just l~elo\\-2%) in 1997.
lion, \vIlich gre\\. 15.1Oi1. f$i~sincss economists expected a first-llalf
gro\vtli rate 01' slightly less than 2?h.
(cot/tii/iied ot? iieL'vIJ I L I ~ C )
aclivit). in this sector ;lppe;krs to

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Net perceni rising

Index, 1987 = 1.00

1 INDUSTRIAL PRODUCTION

B~llionsof current dollars
270

I

B~ll~ans
of curreni dollars
50

NONDEFENSE CAPITAL GOODS ORDERS AND BACKLOGS

70

PURCHASING MANAGERS' INDEXES

Percent of forecasts
Rn ,

BLUE CHIP INDUSTRIAL PRODUCTION FORECAST
(JULY 10, 1996)

I

Annualized percent change
NOTE: All data are seasonally adjusted.
SOURCES: U.S. Department of Commerce. Bureau of the Census; Board of Governors of the Federal Reserve System; the National Association of Purchasing
Management; and Blue Chip Economic Indicators, July 10, 1996.

1'eril:lps the biggest change in
th:~n h0?6 indicatecl highel- orcless.
econo~llicgro\vtll cluring the past six
'I'his is the 1:trgest proportion noting
months has Ixen a slurp revival in
orclers growth in al~llostt~x-o
)-ears.
industri:~l acti\-ity. Af'ter sllo\ving
In the c:lpit:ll gootls :ma, n-llel-e
i?~~siness
:~cti\.ityin the past se\.el.al
only a small net incre~lsei l l 1995
(alwut 10/i,,), inclust~.i:~lo ~ ~ t p cex~t
).e;lrs 11:~sIxen phenomen:il, gro\\.tli
p;lnclccl an :lnnr~alizetl 5'?6 ~ILII-ing iiiclic:itors Ilzlve shown sol~icrecent
the first h:llf of 1996. Reports fl-om
signs o f le\.eling off. Nonclefcnsc
i~lclustrial~x~rchasing
~~xunagcrs
sugc.al?itlil goocis orciers have been flrlct ~ ~ : ~ t i naround
g
$45 billion per
gest that rli;~nuf:~cturing
strcngtll is
lilicly to continue over tile near
month lor i~l~out
eight 11iorltlls no\\.,
tcr[li, \While 55(% oS ~1~1rc1~:~sil~g
IIKLI~-:incl the l>acl<logof capital goocls Il:ls
:lgt't'S 11111from only ,4596in jan~iary) 1,een slon.i~~g
its rate of increase
repol-tecl o ~ ~ t prising
c ~ t in June, more
since Jar-u~ary.Still, the plateau in

1)usiness ini.estment is occ~~rring
at a
Ilistoric;~lly high level, perhaps I:
sign tli;lt these inclristries have finally
neared their capacit)..
'i'he oc~tioolifor the indusirk~lsector is reason;il~lyI~rigllt.Nearly 700/i1
of c.conosnists sul-\-ey-cclin July anticip:ite gro\\-ti1in I996 inclustrial outllllt L
o he i l l tile 2%1 to 3(!/i1range,
n.hilc, a l ~ o i ~
25%
t expect 3% to ~ ( W I
gron,tll. For 1997. about ~45% of'
tllose sur\~eyecl foresee inc1~1stsi;ll
gro\i.tll in the 2%) to 3% range. vcrsus
:~ro~lncl
"iOVii \vho expect 3% to 4%.

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@3

GrowthAccounting
Percent of GDP
36

Percent oi GDP
12
INVESTMENT-TO-GDPRATIOS~

I

Sources of Real GDP Growthb
(Average annual percent change)
19511959

19601969

19701979

19801989

19901993

19511993

3.5

4.1

2.9

2.5

1.5

3.1

= Capital
stock 1.1

1.3

1.1

0.8

0.5

1.0

1.0

1.6

1.1

1.1

0.2

1.2

1.4

1.2

0.7

0.6

0.8

0.9

GDP

+ Labor
hours

+ Productivity

Thousands o i 1987 dollars per employed person
45
CAPITAL-STOCK-TO-EMPLOYMENT RATIO

Sources of Labor Growthb
(Average annual percent change)

Labor
hours

19511959

19601969

19701979

19801989

19901993

19511993

1.0

1.6

1.1

1.1

0.2

1.2

1.1

1.4

0.9

0.7

1.1

0.1

0.4

0.0 -0.1

0.2

0.1 -0.2

0.3 -0.3

0.0

= Working-age
0.8
pop.

+ Labor force
participation
0.0
rate

+ Employment
rate

0.0

+ Hours per
worker 0.2

0.3 -0.5

-0.1

-0.1

-0.1

a. 1996 data are for the first quarter.
b. Components may not sum, due to rounding.
SOURCES: U.S. Department of Commerce. Bureau of Economic Analysis; and U.S. Department of Laboi, Bureau of Labor Statistics.

'I'he [J.S. is experiencing a c21pir;ll
spending i,oom, lee1 11); investlnent
in inform;ition processing equipment. ~xirn;iril!. colnputers. 13ilsiness fixed in\.estment has risen horn
90h ol' C;l)I1 in 1991 to 11%1t l i ~ ~
hiss
this year. ?'he espansion is partic~iI;isly \\'elcome after the torpid pace
o f capital accumulation in the 1930s.
i\ltliougii \.iral to a sust:lined economic exp;knsion, in\.e,strnent in
capital is not ils sole contributor,
ISconomists often identil'y tllree

l~roadsources of economic growth:
exp:~nsionof the capital stocli (in\.estment). increases in the availal>le
\\.orlif<)rce (labor hours), and ilnprovements in total factor productivity. Changes in this last component capture the effects on
econornic growth of such intangiI ~ l e s:is :tdvances in ec1uc;~tionancl
technology. which enhance the
:117ility of' capital ancl labor to procluce gootls ancl services.
13et\\-een 1951 and 1993. the I2.S.
economy grew at a 3% average an-

nual rate. ancl e:ich of these three
hietors contril~utecleclually to the ncl\.ante. The overall pace of C.S. economic gso\vth, ho~\.ever:has deceleratecl l ~ e c : ~ ~of~ the
s e s l o ~ ~ sate
e r of
capital accumulation and Inore hesitant :lclv:inces in total factor producti\.ity. t\ flattening of the capital-to1:il~orratio is also eviclent aftel- 1970.
O\.e~illgro~vthin lal~orilo~u-sh:is
ilclcl L-lirly steady, clespite tile en-:~tic
I~eh:l\.ior of many of its unclerlying
components.

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Labor Markets
Change, tiiousands of workers"
/AVERAGE MONTHLY NONFARM EMPLOYMENT GROWH

I

Labor Market Conditionsa
Average monthly change
(thousands of employees)
1995
Year

Payroll employment
Goods-produc~ng
Manufactur~ng
Construction
Service-producing
Services
Computer
R e t a l l trade
Federal govt.

185
-5
-12
9
190
110
11
36
9

1996
May
June

llQ

273 407
27 53
5 19
22 31
246 354
110 160
1 3 15
81 77
20 61

July

220
16
-4
22
204
90
9
86
-4

193
1
-20
25
192
28
10
89
37

Average for period

1

-200

1
1
1
1
1
1
1
1
1990 1991 1992 1993 1994 1995 1996

1

1

1

1

110 May June July

1996

to dale

Percent

Percent

64.5

I

Civilian unemployment
rate (%)
5.6 5.4 5.6 5.3 5.4
Nonfarm workweek
(hours)
34.5 34.4 34.2 34.7 34.3

ILABOR MARKET INDICATORS~'~:

Percent oi tolal unemployed

40 IDURATION OF UNEMPLOYMENT, 1996

EZ] January
July

1990

1991

1992

1993

1994

1995

1996

Less than 5 weeks

5 lo 14 weeks

15 to 26 weeks 27 weeks or more

a. Seasonally adjusted.
b. Production and nonsupervisory workers.
c. Vertical line indicates break in data series due to survey redesign
SOURCE: U.S. Department of Labor, Bureau of Labor Statistics.

I.al,or mirliets contin~~ecl
to gron. at
goocl ~ ; I c in
" July. ;is nonkirnl
p;iyroll ct-nployment increasecl by
193,000. 'I'his I~ltesifig~lse/,rings
jolw gro\vth for 1996 to :in :i\.er-age
of 230.000 per month. \vhich is
n i u c l ~Ilighcr th;ln the 1995 rate.
Ernployrnent growth rvithirl the
goocls-produci~igsector was virt~l:tlly flat in July. <;onstrilction firrus
aclclvcl 25.000 \vorliers, I)ut tlianclk~ctciring trimmed payrolls for the seconel monrll in :I so\\. (-20.000). 1.JnLISLI:III\ ~111;11/joh ;idclitiot~sin 1ie;~lth
;~ncll,~~sincss
set-\.ices, as \vvll ;IS net
;i

cleclines in several other componellt
inclustries. lee1 to a particu1arl)- n.eali
~ x ~ s t i nfor
g the narrow setvices category last mo~ltli(28,000). E\.en so,
this incl~lstr).,\vhich incl~ltlesestablishments lilie hotels. hospitals. ancl
enginevring firms, h;is accounted for
ne;lrly half of all new jobs createcl so
fal-this );ear.
Itet:iil tmcle ernploymen1 contin~ ~ et co lespaticl strorigly in July. sisit~g
13)- S9.000, hle:inwhile, gor.wntnent
pa)-rolls p o s ~ e da n above-zivelage
rise I ~ e c a i ~of
s e eclucation-relatecl hiring fix tile tie\\- school year.

'I'he civili:in c~neti~ployment
sate
eclgecl LIPto 5.-I(%in July after hilling
to a sis-ye:ir lo\v in June. The proportion of nc\~;l).~lnemployetlIVOI-kcrs has ren~ainecl~~nchatlgecl
since
the heginning of the year. while
long-tertn jot~lessness(the sh:ire o f
persons iinrmployecl for 27 weeks
or longer) h:~s risen noticeaIAy. 111cleecl. 1i:ilf o f ;ill jol,less \vorl-LC[:.5 tlo\v
kice ;in ~rncmploymentspell of 8.0
eelis is or niore. nhich is some\\.h:~t
higli b). 1iistoric:il starlclards.

-

~ ~ O l l t i t i iOli
l ~ I~~~clJ " Y / ~ I ~ ~ < ~ c J )

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Labor Markets (cont.)
Median weekly earnings (dollars).1993

Median weekly earnings (dollars),1993

I

'""

EARNINGS BY INDUSTRY

1 EARNINGS BY OCCUPATION

I

Percent change 111total employmenl, 1989-95
Percent

1

l 6 CHANGE IN TOTAL EMPLOYMENT BY 1993 MEDIAN

EmpIoyment Change and Earnings in Selected
Occupations
Change in total
employment, 1989-95

Thousands
of jobs

Services
Managerial
Professional
specialty
Clerical
Sales
TPUa
Operators

Percent
change

Igg3
median
weekly
earnings ($)

1,302

27.6

598

2,214
563
184

19.2
9.0
20.4

578
305
250

315

13.3

463

FIRE^
Clerical

-392

-12.4

342

a. Transpodation and publlc utilities.
b. Finance, insurance, and real estate.
SOURCE: U.S. De~artrnentof Labor, Bureau of Labor Statistics.

What t!-pes o f ne\\- jolx are
emerging in tile clynamic U.S. econo ~ n y ?In tlie li\-el?-clcl~ateon this
cl~~estion,
some cite el-iclencc that
tlie openings arc nlostl\. in lower~xlyitlgintl~~stries.
I11 their \-ic\\-.the
counts). is losing higher-p:iying jolx
in dunilde manut~cturing:lncl gaining lon,-\\,i~gcservice sector jobs.
A less clis~n:il picture is painteel
when enlploynlent is consiclercd by
occupation. I<eccntly, higher-pilying
occulxltions hiive genenilly been 21ssociatecl n.ith tlle gre~itestemplo).-

ment growth. This is because the
t\\-o fastest-growing occupiltio~lsof
tlie last seven years are professional
speci:llists :i11ct managers. lmth of
\vhich 1i:ive i~bove-average~veekly
earnings. 'l'hese clata inclicate that
the Arncric:~~
job-creating machine
111:i). not neecl :I tune-up as badly as
m:my c1:iim.
Further investigation tells a richer
story. When occuprttio~lslvithin a
single industry are orclerecl hy
weelcly earnings in 1993 and classified into three roughly eclual

g r o ~ ~ p sthen
.
most of the jolx
growth o\.cr the 1989-75 period occurrecl in tlie highest-earning ancl
the lo~vest-earninggroups. ?'lie miclclle g r o ~ ~actually
p
lost employees
o n net. 'l'his is consistent with tlie
iclea that clianges in the occupation
ancl inclustry ]nix contril>utecl to the
increaseel ineq~~ality
of weelily earnings experienced during this time.
I-Io\~e\.~r.
tile trencl for 199.i ancl
I995 \\.as clifferent: I\lost of tlie jolx
growth n.:ls in the highest-e:lrning
occc~piitio~is
within a n inclustl-~7.

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Regional Conditions

Thousands o i claims
500
AVERAGE WEEKLY INITIAL UNEMPLOYMENT

I REASONS FOR SEPARATION, 1995: IVQ

1

I

cancelled

2%
J

F

M

A

M

J

J

A

S

O

N

D

a. F~ve-yearaverage, 1991-96.
SOURCE: U.S. Department of Labor, Bureau of Labor Statistics.

In nonrecession:is!, t i ~ ~ i enearl!,
s,
;i
tenth of :ill initial uncml,loyriierit insurance cl:ii~iisrcsillt horn iiiass layoffs. A m:iss l;iyofS, in \\.hicll a siiigle
plrint la!.s ott' :it least 50 I\-orliers Sor
more than 30 clays. puts consiclerable pressure o n a conil~ii~nit)-'s
social sel-vices. f3ccailse tlic 1:ist cluartes of 1995 \vas c1i:i~icterizecl1,). a n
cspancling cconoiii\. tliroi~gliout
riiost of the cotinti.)., ii o f i r s :in opportunity to stilcl!. thc features of'
Inass Iziyofls clusing ;i nonreccssion: I I ~pesiocl.

States l>orclering the Great
si~rpsise.Incleeci. in 1795:IVQ tiearly
Ii:i\,c rel:iti\.cly high r:ites of mass
half of 2111 jol3 losses sesulteci psimarla).offs. pertlaps reflecting tlie
ily from the seasonal nature of tlie
greater prevalence of these e\.ents in
\vorli. This hictor is clearly shown in
the t ~ i n s ~ ~ o s t a t eq~iipiiierit
io~l
ancl
the p a t t e s ~of~ initial unemployment
c l u ~ i l ~ lgoocls
e
manuhictiiring seccompensation claims. However, it
tors. I3oth he~ivilysepresentecl in this
nay be e\.en more important th:in
region. On average, transportation
these clata suggest, since mass layec~iiipiiient171ants are three times the
offs [nay I>e Inore seasonal than
size of all m:inuf;rcti~siti plants, ancl
otller sepas:itio~i,s, or sorile of the
man~ificti~ringig
plants :iver-:igc three
season:ility of iiicli\-iclual layoffs ixmay
times the size of ~ionrnani~kict~~ringngI3e clncelled oiit \\.lien many layoff:.;
estzil~lishrncnts.
:ire aggreg:ltecl.
\i mass l;iyoff' is not necessarily :i
(cotztii~lied017 )re.~tpc~gc)

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Regional Conditions (cont.)
Percent

Perceni
60
UNEMPLOYED PROFESSIONALS AS
A SHARE OF ALL JOBLESS WORKERS

U S UNEMPLOYMENT RATE
Techn~calsales, and

Service occupations

Percent of labor ioice
50
CIVILIAN LABOR FORCE BY OCCUPATION: MID WEST^

Serwce occupaiions

Managerialand proiess~onalspecialty

- ----- -- -->-

-=

*

-"-/

--

___ _-

I_

"-a-

_l*

Operators labricators and laborers
= -~~"--A-+&-za.

x*~*-

"

C_"__
^ _

Preciston production crail and repalr
-

_-

*

-

-

?

S

s

-

-

_

-

a. Excludes agriculture, fishing, and forestry.
SOURCE: U.S. Department of Labor, Bureau of Labor Statistics

'The 1990 recession has heen clescrit>ecl as "\\.hire collar" 1,eca~ise of
the nlirnl>erof m:wagers ;mcl professionals \\.lie \\.ere I;iicl olt'. A looli ;it
Ilo\v this rcr.ession hit clitfercnt ret s just 1io\v the \\.bitegions ~ ~ o i nLIP
collar occupations n.ere ;itfectecl.
w i t i ~ ~ ~ \ \ . i d~ ei i, ; ~ ~ i ; i~incl
g ~ r sprofessionals Ilad a lon.er u~iemplo).rnent
rate than a n y other ni:tjor occupational g r o ~ ~cl~iring
p
[he entire period, inclctcling the n-01-st of' the recession. ( I Iistoric:~ll)-,ope~itorsoften
experience jol~less rates that zue

cl~~ziclruple
those of managers ancl
~xokssionais.)However, starting in
1990. tlie jol>less rate of managers
zinc1 17rofessionals increaseel relati~.e
to total 17.S. unemploy~ncnt.One
pussil>le re:ison is the regional nlix
of the recession. In recent years, the
cinemployment rates in Ne\v- 'l'orli
ancl California have incluclecl niore
managers ;i~-~d
profession;i1s t l i : ~clicl
~~
tile sates 1'0s the inclc~strialklici\vest.
Tile 1990 recession affecteel Xe\v
h ~ l (\\-hicli
i
hacl an utlemploymcnt
rate of 6.6%)in 1791) :incl Czilifo~.ni:i
(6.79/i,)more t1ia1-1it clicl Ohio (5.8*41).

gi\-ing the coast;ll states greater
n-eight among the regional components of t ~ n e ~ ~ ~ p l o y mIncleecl,
ent. iri
Ohio tlie satio of iinern1>lo)-eclmxnagers to :ill johless \ \ . o ~ l i e sfell
~ during tlie rccessiorl.
I-Io\\.e\.er. the indclstri:il Miclwest
still sho\\;s some of the nation's occup:ition:ll trencl to\\.arcl more man:igcrs ancl professionals. *l'liis may
\yell Ile rellectecl in future recessions. n.hen riianagers at-1~1engineers ~naiieup Inore of the region's
~inernpio\.ecl.

I

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Banking Conditions
FDIC-Insured Commercial Banks by Asset Size

Percent of all inslituiions
55
TOTAL ASSETS OF COMMERCIAL BANKS

I

(Number)

1986

1989

1992

1995

All institutions

14,181 12,707

Less than
$100 million

11,394

9,722

8,291 6,659

$100 million
to $1 billion

2,448

2,607

2,791 2,861

$1 billion to
$10 billion

306

334

329

346

Greater than
$10 billion

33

44

51

75

Percent of all inslitutions

11,462 9,941

Total instiiutions

700 1 CHANGES IN THE NUMBER OF INSURED

1

NOTE: Boundaries used to separate institutions by asset size are expressed in nominal terms, creating a distortion in the comparisons over time
SOURCE: Federal Deposit Insurance Corporation.

The consoliclation of the Ix~nliinginclustry that 1,egan in the micl-1980s
has been clri\.cn prim:trily I)y
changes in tile regi~l:~tions
o n 1,:mks'
g e o g ~ i p l ~expansion.
ic
At the beginning of i11e century,
most states reclc~iseclImnlis to be
unit I>at~Iis,
that is, to Ila\,c only one
office. In t i ~ n c ,states 1,cgan to
allon int12st:lte i)r:~ncliing,I>ut continueci to prohil~itinterst:ltc Ixinching :rncl the accluisiiion of' local
I):inlis 11y oi~t-of-statel>;lnlis. In the
1950s. 1,anlis atteml~tecl to avoicl
this prohi1,ition .!,I eleveloping 1,:inli

holcling companies (BHCs) xvith
I ~ a n k s locatecl in varioiis stcttes.
f-Io\vever, in 1956 the I>ouglas
Amendment to the Rank EIolcling
Company Act stoppeci this it~itiativ-c.
I t prohihiteel a BMC frolll :~ccluiring
a l~anlioutside the company's home
stste without autl~orizationf;.on~the
target h:rnl-',.
L s state.
Restrictions on banlts' geograpllic
es~>ansiotnhacl pushecl their ni~mber
to a post-Ile~>ressiol11
high o f al,out
14,500 in 1784, cvhen regul;~tolybar.riers on interstate banking I)eg;ln to
f r ~ l l . States startrcl to allo\\ oi~t-of-

state BEICs to accliiire home-st:1te
11:~nlts.I ~ u ~-n:iintainecl
t
the I,an o n interstate l>l-anchitlg;th:~t is, they clid
not :lllow the acck~iirecl1,anlis to be
converteel into 1,t;lnches o f the o i ~ t of-st:~tc I~anks.In p;lrallel nith these
regulatory changes, the number of
1,anlis steaclily clroppecl, mainly 1,ecause of incre:~seclmerger activity.
One implic:~tion o f banking consolielation. p;lrticillarly in the 1990s,
is the greater i~llportarlce of the
I:~rgest iristitiitiol1s. l'heir number
has increasetl significantly. as has
(co~ititiiled011 I I ~ ' . Y ~ ~ I

~ C )

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Banking Conditions (cont.)
Percen!

Percenl

?

RETURN ON ASSETS

j

1 >

Noh-INTEREST INCOMC EARNINGS ASSETS

0.6

03
00
Percent

1991
Percent
"

I NON-INTEREST EXPENSVEARNINGSASSETS

Percent
14

Percent

12

25

10

2.0

30

8

1.5

6

1

4

.o

05
0

0. 0.

1991

Percenl
30

Percenl
14

All ~nst~tut~ons

Less than $100 rnill~onIn assets

$1 b ~ l l ~ to
o n$10 b ~ l l ~ olnnassets
SOURCE Federal Depos~tInsurance Corporation

their share of tlie industry's clelxxits
:tnd assets.
Banliing consolicl:~tion has affected the inelustry's perfor~~lance
hecause 1,anlcs of clifferent sizes I1:~ve
clilferent \\-:tys of cloing tx~siness.For
instance, larger I,anlis tcncl to Il:tve
higher op".;tting costs. 7'he)- malie
1110re lo:tns th:it turn oiit to he i~ncollectable. have higher [~lnclingcosts.
:tiid i n c ~ ~
gre:lter
r
non-interest expenses. Hon.ever. their non-interest
income is si~fficientlyhigh to overcwme these costs. In aclclition, their

1991

$100 million to $1 b~llionIn assets
More than $10 b~llionin assets

easier :tccess to capital marliets allo\\:s the111 to opervte with lo\ver
capita1,'asset mtios. This explains
~ . h tiley
y
clo better in terms of return
o n equity hilt not (in the case of the
very largest banks) in ternls of return
on assets. These results seein to :LCcorcl \\.ith recent research that fails to
fincl economies of scale for the very
l~lrgest1,anks.
As espectccl, the 1994 en:lctment
of the lilterstate Uanlcitlg and
13ranching Efficiency Act bt,- w n a
ne\v w:lve of bank mergers. I-fo\\,-

ever. the effects of this consoliclation will cliffer from those clri\,en 11y
the regi~lato~y
changes of the 1980s.
Tlie 1994 act's trlost important
change is that it permits BHCs to
convert their hanlis. even if they :ire
loc.ated in sevelxl states, into a single network of I~ranches.This will
illost liliely have a greater i~npacton
larger banliing organizations by giving them an opportunity to recluce
their non-interest expenses. an are21
in which smaller 1,anlis ll:l\-e traclition;llly 11:icl more success.

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August 1996
Best available copy

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International Developments

Index, January 1971 = 100
600

IPURCHASING POWER PARITY~

Percent change from correspond~ngmonth oi prevlous year

I

30 CONSUMER PRICES

I

a. Purchasing power parity IS calculated by combining exchange-rate changes with Consumer Price Index movements for the U.S. and Japan or Germany,
respectively.
NOTE: Prior to January 1991, German data represent West German figures.
SOURCES: DRIIMcGraw-Hill: and Board of Governors of the Federal Reserve System.

Nomin:il exchange rates fl~rctuate
substantially ancl often seem unrelatecl to short-run movemenis in
such f~rnclamentals: ~ sincome o r
tracle l,:rlances. Nonetheless. ccrtain long-run relationships itr\.ol\-ing exchange mtes may he relial~le.
I11 pastic~ilar. many economists
view exchange rates ;is 1.csponcling
t o clifferences in price le\.els. 1 lowever, exchange rates m:i!. lalie
rriore t i ~ n e to responcl frilly to
price-level clifferences than once
\v:is tlro~rglit.Since 1971. I:.S. inf1:i-

tion rates have usually been higher
than Germany's or Japan's, ancl the
cloll;rr has \veakened against 1,oth
the 11iark ancl the yen.
Calculations of purchasing p o n e s
parit). inclicate that relative inflation
sates ancl exchange-rate movements
have a cornl~inecleffect o n the U.S.
competitive position relative to Germany :il~dJapan. Both strength in
the clollar ancl higher 1J.S. inflation
~ x t e swealien the IJ.S. posilion. The
Gerlrlan marli has helcl its gro~rncl
~ig:rinstthe clollar since 1992, despite

higher i~lflatiollrates in ~rnifieclGermany. Over the same periocl. the yen
has gelierally giinecl against tile dollar, with lower Japzrnese inflation
sates. 'I'hus, C.S. parity :igaitrst Germany has impso\.ecl relative to o u r
position against Jap:i11.
Since 1995, both the mark :ind the
yen have n~ealieneclagainst the clollar. Although U.S. inflation rates have
I x e n higher. the relative strength of
the American economy makes the
clollar an attractive invest~nent.
(cot?/ir~lred0 1 2 1ze.xtp~~gc~1

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International Developments (cont.)

http://clevelandfed.org/research/trends
August 1996
Best available copy

Percent change froni corresponding quarter oi previous year

Percent change iron^ corresponding month o i previous year
30

Percent
[LONG-TERM INTEREST RATES

a. Seasonally adjusted.
NOTE: Prior to January 1991, German data represent West German figures.
SOURCES: DRIIMcGraw-Hill: and Board of Governors of the Federal Reserve System

Long- anel short-I-LI~
mo\.emcnts
in exch:lnge rates, in~erest~ t c s ancl
,
inflation rates ma). be conncctccl
through the rnech:tnisn1 of monetary
policy. I-Iigher r:ltes o f money
growth tencl to prodilce higher infl:ltion, ancl the expectation of grc:lter
inflation incre;ises long-term interest
rates ;is Icnclers clcm;incl colnpensation for lost purchasing power. News
that a central b;lnli m a y tighten tcncls
to l>oost tile v;~l~le
of' a nation's ciwrcncy 21s people anticipare higher
sllorl-term interest rates.
Since r~nific~ition.
C;errn;iny 11:~s
hacl higher sates of' Inonel. gron-th

th:un both Ja17;~nancl the U.S., yet l ~ y may tighten in response to strong
1994 Gertllan econonlic gro\vth hael
first-cluarter g r o \ \ ~ hhas s ~ ~ p p o r t e d
recoveretl t o near the U.S. rate. And
the yen, while Germany's ongoing
while Japanese money gro\vth has
sluggishness has lecl to talk of loosbeen only slightly belotv that of the
ening ;lncl has \vealieneti the marl<.
L.S., Jap;m's long-term interest rates
Efforts by centlxl I~;unlisto stimulate
1x11.e been much lower. These patgrowth 13); manipulating short-term
terns may 1,e related to u~lanticipatecl interest rates are cluiclily reflected in
cle~.eloi>~nents
in output. Gerirlatl
lower currency \.slues if they are
GIII-' d s o p ~ x dsharply after unificaperceiveel as an acceptance of higher
tion, 1 ~ 1then
t
reboundect. Japanese
inflation. Accostling to this vien., the
economic gro~vthfinally began to re1on.e~interest Kites in Japan might
cover in late 1995 from problems
be cli~et o that nzltion's \villingness to
causecl 11y Ixld assets at many of the
hold the line against inflation clespite
counL~-!.'sfinancial institutions.
21 fen- !.cars of less-than-stellar ecoSpeculation that the Banli ofJ~ipan norllic gro~vth.


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