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http://clevelandfed.org/research/trends August 1997 Best available copy i-'iscnl policr), ill the hc~l~itzce.. . Earlier this month, I'resiclent Clinton signed into law two hills that collectively airn to bal~ul~ce the fecleral huclget ancl slash the puhlic's tax obligations by the year 2002. This legislation caps a long that beganmarch toivarcl fiscal ecl~~ilibrium depending on one's partisa~lship-solnetime in the 1980s. Many people oppose large huclget deficits hecause they 1,elieve that fiscal imbalances soak up savings from a lilnitecl nation~llpool-savings that would othel~visebe clirectecl toivarcl private capital formation. Ileficits have also heen unpopular because they represent a federal government \\;hose operations have espanclecl over t i ~ n eyet gone u~~checltecl by any fiscal discipline. NO\T that the cleficit is poisecl to elisappear in a fen, years. at least some perennial buclget critics map be zble to sleep more sounclly. 0thers! however, are having had clreams over the buclget cleal, and economists are prominent among the insomniacs. WIost economists have long believeel that national tax ancl spending policies affect the economy in tivo clistinct w\i:tys:by affecting the overall level of economic activity, 2nd by affecting the allocation of resources at any given level of activity. While tnost texthooks still claim that major changes it1 the governtner~t'sfiscal position czul have stim~~lative or contractionary effects on the level of eco~lomicactivity, econolnists are Ixcoming increasingly skeptical about their signifi~ullceuncler ordinary circumstances. More and more, the profession is coming to IIelieve that the most important I~clclgetarpeffects stem fronl the alloc;~tiveimpact of fiscal policy. Indiviclual policies create incentives and penalties for engaging in particular l<incls of activities. Activities that are heavily tasecl are discoulxged. wjhile those that are subsidized become more attractive. Fecleral spencling or creclit programs also channel more resources in specific clirections. Economists refer to these many ancl variecl effects on resource uti1iz:ltion as allocative effects. Governments can incluce allocative effects through regulation, without taxing or spending per se. The fecleral budget can be in balance at either higll or low levels of activity. lnea~li~lg that the size of the deficit says little about the size of government ancl its overall allocati\.e impact. Any set of fiscal policies gives rise to aggregate revenue ancl spencling streams, with the clifference inclicating n-hether the governlnellt rr7ust borron- or retire outstanding clebt. These streams include pure transfer programs (like Social Security) as tijell as direct purchases of goods and services. Deficits require the government to finance its current activities hy drawing on the savings of others (through deht issuance)-savings that would have bee11 channelecl else\vllere, liltely adcling to private capital forllx~tion. Fiscal policy changes enacted in 1990 and 1993 laic1 the fountlation for a balanced buclget. Incleed, the tas receipts being generateel by O L I ~ currently booming economy have already clriven deficits as a share of GDIJ below 1 percent. Consecluently, the 1997 budget plan recluirecl less "heavy lifting" t11a1-1 many realize. The macroeconomic effects of this huclget plan are not vely significant. The allocative effects are an entirely different matter. The buclget legislation contains hundrecls of pages, setting forth a host of com11le.u tax creclits. decl~~ctions: and rate changes, along xi~ith spe~lclingcaps on a variety of fecleral programs. Each of these changes will affect the public's 17ehavior ancl leacl to a seepence of other consecluences. To name just one, college tuition creclits \\.ill liltely encourage more spencling on higl-~ereclucation, perhaps IIoosting tuition for all students. They may also reduce the number of people interestecl in pursuing skilled tracles. The legislation's allocative effects will spreact sloivly ancl \vill play out in complex ways that are now only dimly unclerstoocl. Clearly. the new l~uclgetpackage is not a step in the clirection of t:lx simplification for indivicl~~nls or corpomtions. N o r does it tackle the impending Social Security or Meclicare shortfalls in any substantive way. I-Iere. reforln ivill still have to \\lait for the political sc:iles to come into balance. http://clevelandfed.org/research/trends August 1997 Best available copy Monetary Policy Percent, weekly averages 6.5 IRESERVE MARKET RATES Intended federal funds rate . . 4 53 April g - . A - - - --+ The semian~lcl~ll Fecleral Rcser\.e System rnonetal-)- polic!. testimony t o Cor~gress.cleli\-creel I,y Chairman Greenspan o n Jul!. 22. d o n g lvith the 1Joarcl of Go\-ernors' report, summarizes the Feel's \.ic\\- of current econolnic conelitions :rnd monetary 1x)lic)-;is \veil 21s its outlook for economic perfor1i1:ince througli 1998. Chairlnan Greenslxin reporteel tllat "the recent perform:lnce o f the economy. c1i:ir:icterizeci 1)). strong growth nncl lo\\. inflation, has I x e n escel?tior~:rl-a~~clI~ettcrthan 11ios[ :inticipatecl." I-lc notecl that the fJoarcl, as \\.ell as many ohser\~ers. May June h:~\.e I x e n puzzlecl by the co~iil,ination of a n economy oper;rting :at high le\.els of real activity ancl lo\\. inflation. Since the Febnlaly report on rnonetary policy. the centlal tenclerrcy of fi)recasts hy the 13oarcl of Governors ancl tile Reserve 13;inl.r presiclents has incl-easecl to 3 - 3 %(Hi for real o i ~ t ~ gx r~o t~ v t h ,ancl has klllen to 2 %(Hi-2 YYWi for inflation. 7'he c e n t ~ i l tenclency forecasts for 1998 2u.e 2(H/;,-2Y2Y) h r re;ll GIII' ancl 2 Y21H/o-3(H)for inflation. The intenclecl fecleral funcls r:rte has remainecl at 5M%i since 1;lte I\I;irch. \.hen the Fecleral O p e n July Aug Sept Oct Contract month Nov Dec Jan Feb LLIarliet Committee (FOh,IC) ~riseclit from 5 '/,(H)lhecause. as the 13oarcl re1x)rt explaineel. .'the Committee w:~s concerneel : ~ l x ) i ~the t risk th:lt if the oiltsizecl gains it1 real oi~tputcontinilecl. pressures on costs zinc1 prices \vo~~lcl emerge t1i:it coi~lcle\.enti~ally ilnclermine the esp:~nsion." While the leclel-al S~tnclsmte has been steacly, interest rates 1i:lve killen. Since late April, tile I-year Trcasi~ryconstant maturity sate has fallen Inore than 50 Ixlsis points, \\.bile the 3-month constant mat~lr.ity Kite has cleclined 9 !>asis points. So111e~wrceive:in implicit tightening (cot~tii/~ 0 1 i1 ~I ~ I ~l . Y ~ / I L ! ~ ~ I http://clevelandfed.org/research/trends August 1997 Best available copy Monetary Policy (cont.) Billions of dollars 4,050 THE M2 AGGREGATE MONETARY AGGREGATES 5% M1 = Currency + Traveler's checks + Demand deposits + Other checkable deposits M2 = M1 + Savings deposits + Small-denomination time deposits + Retail money market mutual funds M3 = M2 + Large-denomination time deposits + Institutional money market mutual funds + Repurchase agreement liabil~ties + Eurodollars Debt = Outstanding credit-market debt of the domestic nonfinancial sectors Billions of dollars 5,200 THE M3 AGGREGATE 1 6%. . I B~llionsoi dollars 16,000 DOMESTIC NONFINANCIAL-SECTOR DEBT 1 I a. Growth rates are percentage rates calculated on a fourth-quarter over fourth-quarter basis. Annualized growth rate for 1997 is calculated on an estimated July over 1996:IVQ basis. b. Growth rates are percentage rates calculated on a fourth-quarter over fourth-quarter basis. Annualized growth rate for 1997 is calculated on a preliminary May over 1996:IVQ basis. NOTE: All data are seasonally adjusted. For M2 and M3, the last plot is estimated for July 1997. For domestic nonfinancial-sector debt, the last plot is preliminary for May 1997. Dotted lines are FOMC-determined provisional ranges. SOURCE: Board of Governors of the Federal Reserve System. o f polic!- \\-hen m:irliet inter-est sates are falling ancl the intenclecl l'eclel-al funcls rate is helcl constant. At the same time that short-ter-n1 rates h:~\-ccleclinecl, the inlpliecl yielcl o n fecler:il funcls S~ltureshas flatteneel out, inc1ic:tting that earlier exlxct:~tionsoSa n ir1crc:ise in tlie fecter2il filnds rate ha\-c grextly climinislled. The Fecler:~l Reseri-e 13oarcl's report to Congress also pro\.icles provisional xinges for the monet:u-y aggregates for 199': :incl 1WX At its meeting i11 earl!. ./ul!.. t l ~ e f:OAjIC seaffismecl the 1997 gr.o\vtIi r.anges for the inoneta1-y aggregates :inel clornestic nonfinancial debt that it hacl set in Fet>ruary. These Ianges are 1?4- 5%) for hf2, 2%)-6?4) f01- M3, :111cl 3'!'i1-7'!41 for clebt. I'so~~isionalranges for 1998 \yere set at the same lei-els. Fsoru I996:IVQ through JLIIIC 1997. &IS gse\v ;at a 4.9%)annual rxe. just l~elo\\jthe upper I,o~lndof its 12nge. \\-hile M 3 expaneled at an :inn~i;ilmte o f 7.196, \\-ell :iho\-e its L L ~ ~I,o~rncl. I N Through ~'I:IJ., clomcstic nonfinancial tlel,t increasecl at a Li.S(X/ii :lnnual rate o-vcr its 1 9 9 6 : I V Q lev-el, near the center of its mnge. In e\.:iliiating the policy significance of gro\vth in the rnonet:uy :kggregates, the I3oarcl's report notccl that "the corresponclcnce betr\.een changes in &IT! \.elocity ancl in opportunity cost cl~rringrecent years ma!- represent :i return to the r o ~ ~ g h skll>le ly relationship ol,ser\.ecl for se\.el.al clec:icles until 1990alheit at a higher le\.el of \.elocity." I-lo\\.e\.er. Chairman C;reenspan testified th:~t "sufficient e\.iclence has ( c o ~ l t i i ~ ~011 ~ eI Zc Pi . Y / ~ C ! ~ P ) http://clevelandfed.org/research/trends August 1997 Best available copy Monetary Policy (cont.) Percent 13 0 Ratio 2 07 11 5 2 02 10 0 1 96 85 1 91 70 1 85 55 1 80 40 1 74 25 1 69 10 1 63 -0 5 1978 1 58 1980 1982 1984 1986 B~llionsof dollars 1988 1990 1992 1994 1996 Billions oi dollars 72 TOTAL RESERVES Reserve growth 1992-97a 52 - 48 -10%' . 4 4 - f ' l l ' l i r 1 1 f 1 1 ' 1 1 1 1 1 1 1 i l 1 1 1 1 1 1 1 1 1 1 1 f t l 1995 1996 1997 1995 1996 1997 a. Growth rates are percentage rates calculated on a fourth-quarter over fourth-quarter basis. Annualized growth rate for 1997 IS calculated on an estimated July over 1996:IVQ basis. NOTE: All data are seasonally adjusted. Last plot is estimated for July 1997. Dotted lines represent growth rates and are for reference only. SOURCES: Board of Governors of the Federal Reserve System; and U.S. Department of Commerce, Bureau of Economic Analysis. not yet acc~~m~ulatecl" to put more weight o n such monetary clilantitics in concl~uctingpolicy. Finally. the Boat-d's report noted that M I contin~uedto contlxct het!veen 1996:IVQ anel June 1997. falling at a n :unn~u:ll r:ute of 2.7"/;).It statecl that tliis clecline is psol);ul~ly due t o cicpository institutions' continuing tenclcncy to "sn.eep" 1x1ances in t~.iltis;~ctioti : I C C O L I~vhich ~~S. are subject to sesen.e recl~iiscments, into sa\ings ziccoLints. n.hicii :ire not. The clecline in the c1~u:lntity of cleposits helcl in transaction accounts lee1 total reserves to hill ;kt ;I ().S%/i,anncial sate. But because o f slul>stanrialgrowth in currency holclings. the monetary I x s e (which eclcials currency plus resen.es) increasecl at ;in annual rate o f ~t.jCH/i,. .l*lie report sounclecl a \i.;urning a l I o ~ tliis ~ t clecline ill reserves. stating that "fiurther recluctions in secl~~irecl seserws have the potenti;il to ciitninish the f'ecleral Reserve's ability to control the fecleral funcls rate closely o n a clay-to-clay !?asis.'' hloreover, the report ;irgiies that "the clecline in rec.l~~irecl reser\.es over the past several years has not createcl s e r i o ~ ~ s pol)lems in the fecleral fiincls marliet, l)ut f~tncls-rite volatility has risen a little. atlcl the sisli of i i ~ ~ u c h greater vo1:~tility\~:o~lld increase if recli~iseclreser\.es xvere to full s~117stantially further." It \ ~ u - n that s adclitional incre:ises in \.olatilit!. co~llcl have negative conseclluences for the perSosmance of the economy. e . . . . . . Interest Rates http://clevelandfed.org/research/trends August 1997 Best available copy Percent, weekly averages [YIELD CURVES~ a. Ail instruments are constant-maturity Series. b. End-of-period quaflerly averages d daily data. All obselvatlons .a founh-quaner data except the final one, which is for 1997:llQ. SOURCE: Board of Governors of the Federal Reserve System. The yield curve h ~ l sflattened since last lnonth. \\~ithlong r:ites f:~lling ancl short rates rising. 'The oftenwatclled 3-!-ear. 3-mo11th spread ancl lo-year. 3-month spread stand at G j 2nd 36 hasis points. l)elo\v tlleir historical a\-eragcs of SO anel 12j. This flattening suggests a s l o \ ~ clowt~of real ecol~omicgro\\-th over tJle nest yeltr, : ~ l t h o ~ ~the g h yielcl curve is still f'rr fl-om all illversion (short rates above long sates), \v\;hich w o ~ l l dsignal recession. A looli at the ver!. long ;inel \.el-y short r:ites collfirllls a pattun-thztt long rates account for most of the change in the spread. Contilluing tile trend I,egun in April, the federal funcis I.:lte l.emains slightly above its target of 5.50%. Trac.I.' tlng spreads is con\-enicnt, 1 7 ~ l tit filils 10 captilre the true threeclimensional nature of the yield curve o\-er time. Shifts in the curve 2u.e ~.arelyparallel: They also involve tlvists, l l c c a ~ ~ smaturities e rise anel L'Ilk1 at cliM'erent rates. Uicl interest rates peak in 1981 o r 19325 I t clepends on whether one loolis at loilg r:lLes or short. The inversion of 15'81 occurred \\;hen :[I1 Utes where risillg r'ipiclly, I711t the 1989 inversio11 S Z ~ W long ancl short rates moving in (>I>posite directions. l-'inance experts t1is;lgree On ho\V [Test 10 characterize the tivists and tuytyj of the yield curve. 81c)st thinli th:lt three 1iu11-rbers are needed: Ic\.el. steepless, and cilrvatc1r.e.This three-climension;ll perspective emphasizes the relative tranciuility of rates sillce 195'4, \vith txvists and turns that look tame compared to the times. gyrations of more turbi~~ent Gold Futures, January 1980 -July 1997 Dollars per troy ouncea http://clevelandfed.org/research/trends August 1997 Best available copy Dollars oer trov ouncea GOLD SPOT AND FUTURES CONTRACT P R I C E S ~ Log difference Ratio 50 1980 1985 1990 1995 VARIANCE OF GOLD FUTURES RETURNS 40 - 30 - 20 - 10 - 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Contract months a Monthly averages of daily data b Gold futures contracts have settlement dates at least seven months ~nthe future c The basls IS the spot price of gold less the futures contract prlce d Continuously compounded SOURCE DRIiMcGraw-Hill One encl~lringcl~iestional,o~~t my I3otl1 spot ancl fi~turesprices of golcl asset price (golcl f~lturesincludeel) have heen cleclining f;lil.ly steaclily concerns preclictahility: D o prices since blarch, clropping t o le\.els not follo~va mnclom walk? The ;uns\\,er seen since the first montl~sof I993 I,oils clo\vn t o two clifferent possibilWhile this may inclicate a s:ungi~ine ities: I'rice c1nalzge.s ((or s e t u r ~ ~ s . zkttitucle :Imong internation:kl inn.tiicli are the log of changes) may vestors (golcl Ixing a traclition:ll have a n itle11tical ancl inclepenclent safe-h:lrl,or asset in stormy times), it clistril)ution e:~ch periocl. or they may :~lsoreflect the strength of :titernatives such its clollar-clenoi~~i~~:itecl may 17e uncorrelated over time. A chart of golcl f~lturesreturns strongl). assets and w~orlclstocli illarliets. The cliscreclits the first possibility. Ix1,asis-the clif'Serence hetween spot cause golcl returns' varial~ilityseeins ancl f~lturesprices-remains negato h:tve ch21ngecl over time, tive, but it too has been climinishing rn:irkedly clecreasing since the since April. 1980s. One \\.a): to assess the correlation ol' returns is to look at the L ~ I - i a t ~mtio. c e If returns are uncorre1:ttecl-if prices fc)llo\v 21 andom om \v:klli--~~early returns s h o ~ ~ l have cl 12: times the variance of monthly returns, six tiilles the variance of trvomonth returns, mcl s o on. 111the actual clata. however, the v:~ri:~nceof' ).earl\. returns is closer to 21 tir~les t1i:kt o f monthly ret~~rns. suggesting a correlation. This evidence inclicates tllat goicl prices are at 1e:kst partially preclict;~l~le. http://clevelandfed.org/research/trends August 1997 Best available copy Inflation and Prices Diffusion index, net percent rising IPURCHASING MANAGERS' June Price Statistics Annualized percent change, last: Irno. 6 rno. 12 rno. 5 yr. 1 PRICE SURVEY 1996 avg. Consumer Prices All items 1.5 1.4 2.3 2.7 3.3 Less food and energy 1.4 2.4 2.5 2.9 2.6 Mediana 2.8 3.0 2.8 2.9 2.7 Finished goods -0.9 -3.4 -0.1 1.2 2.9 Less food and energy -0.3 0.1 1.2 0.7 Producer Prices 1.7 Commodity futures pricesb -27.7 1.0 -2.4 3.0 12-monlh percenl change 3.6 -0.7 Percenl of forecasts 70 DISTRIBUTION OF ECONOMISTS~1998 CPI FORECASTS~ February 10,1997 July 10, 1997 1993 1994 1995 1996 1997 1998 Below 2.5 2.5-3.0 Annual percenl change Above 3.0 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. 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. Blue Chip panel of economists. SOURCES: U.S. Department of Labor, Bureau of Labor Statist~cs;the Federal Reserve Bank of Cleveland; the Commodity Reseatch Bureau; the National Association of Purchasing Management; and Blue Chip Economic Indicators, February 10 and July 10, 1997. - 3 -u -- - 111 June, the Consu~nerI'rice Index (CI'l) rose :kt a mere l.j(b6 :lnnualized sate, nearly the s:tme pace it has f'ollo\vccl since 1:lst I>ecenlher. Incleecl. the six-month 211-ewgerise in the CI'I (I..(i(H>/ir)is the lo\vest sixmonth posting in al~nost11 1.e:lrs. Price incre:~ses S~irtherclo~vnthe prodtiction chain ha\.e ;~lsoIxen very sul~cluecl.O\.er the p;lst year. the I'rocluces I'rice Incles has rernainecl essentially ~~nchangecl. :~ncl reports f r o ~ n~xisc1i;tsiing1nan:Lgcrs hint that little ~ip\\-arclpressure \\'ill I,e coming frorll inclustry in the irnmecliate f ~ ~ t u r e . The moclerate rate of price increase this ye:kr prompteel the Feclera1 Open Market Co~nmittee (I:OhIC) to revise do\v~~\v;~rcl its central tenclency forecast Sor the 1997 CI'I growth rate-from L?'c04~-30/(~ last Febr~iary,to 2%?(I2Y~0/i1in July. For next year. the f:O?vIC sees the rate of CI'I increase in the LMx-3% range. I:conomists participati~lgin the 1Sl~1e Chip survey have also recl~~cecl their expect;~tionsfor inflatio~~. Last Febl-u~~l-y. al)out 38% of them prcclictecl that the CI'I \vo~ilclincre;lse more than 3%)in 1998. c(111117:1redto only 5%) \vho expecteel gro\vtli l,elo\v 2';~~Hl.In J~lly.the shzlre of economists projecting that 1998's CI'I gro\vth Ixte \\.o~llclexceecl 3% 11:~clklllen to 260/(1,\\.bile the proportion expecting less than a 2'/LiH1increase hacl risen to a17o~1t12iH/i,. In his July semiannual report to Reserve Chairman Congress. 17ecle~.;~l ( c o 1 1 t i 1 1 l 1 c c I oti IIC.YI ~JLI,:'c) I e s s e http://clevelandfed.org/research/trends August 1997 Best available copy e Inflation and Prices (cont.) Annualized f~ve-veararowlh. oercent I Compensation per hour percent changea lb INVESTMENT TREND: REAL PRODUCERS' DURABLE E~ulPMEN-r UNEMPLOYMENT AND COMPENSATION 2 - m O3 6 7 8 Average unemploymenl rate percent 5 Percent of labor force Four-quarler percent change O 4 1 COMPONENTS OF THE EMPLOYMENT COST INDEX I 9 10 Percenl of Iabci force 1JOB SEPARATION RATES I50 a. Fourth quarter over fourth quarter. SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; and U.S. Department of Commerce. Bureau of Economic Analysis -, - s - Greenspan notecl thiit monetary 1x11icyrn:tliers "ha\.e been pllzzlecl ahout ho\\- a n economy. operating at high le\-els and cl~.a\\.inginto enlployment increasingly less esperiencecl \\-orliers. c:tn still 1>rodi1ce subcli~ecl. . . inflation nttes." Althoi~gh the relationship Ixtween the cincmployment rate ancl the rate of compensation gro\vth has l x e n erratic since 1900. the jol)less r:ttc for 1996 (just al>o\-e5(!41)is associ:ttecl ~vitho n e of the lo\\-est mtes of co~npenxttiongrolvth in the pxst 15 years i;i17o~it2%',?4:).In 1964. for esample, when i~nemployment~ v a s ;ilso iiro~~ncl5'81, compens:ition grocvtli topped .4O/i 111 1970. a similar jol>less n t e coincicled with compensiltion gro\vth of more than 6%:. ancl in 197.i. SYE41unemployment Lvas :issoci:ttecl with a comperlsation gro\vth rate of ahout 11941,. .Ihe . Chairman notecl t1i:it se\.eGtl fiictors 11x1yl ~ helping e to hold clo\\-n \\-age ancl price increases. Firnls appear to I>e profiting from uni~sually str-ong prc~di~ctivity gains, which [nay ha\.e resultecl fro111the c:tpitzil investment surge of recent years. Gro\vth in I)i~sinesspurcl~asesof ecluipment cli~ringthe pitst five y e a s h:ts e s cecclecl 10(!4)anni~:~lly-its Ixst perfi)rm:i~lcesince the 1 ~ 6 0 s . .'Certainly." h e said, "changes in tile 11e:tlth care inclustry ancl the pricing of I~ealtli services have greatly- contril>i~tccl to liolcling clo~vn gron-th in the cost of I~enefits,ancl hence o\-er:tll lal>or compens:ttion." I-Ie also ol~ser\.eclthat jo17 i ~ ~ s e c i ~ r i t y is 1xul)at)l~helping to si~bclucn x g e clcm:tncls ztncl citecl several inclicaloss, inclutling the klct th:tt "the nun~t>er of \\.orliers voluntarily leaving their jolx to seek other employlncrlt hits not risen in this period of tight 1:1l?or m:trliets." l ' h e c;tution here is tI1:it to the estelit th:it these f'orccs :u.e tempolxly, "cost anel price 17ressures \vo111cl tend t o reemerge," a situation the I:ecler.:tl Itese1-1.e '.pl:lns to monitor closely" this year ancl nest. e . 0 0 e 0 http://clevelandfed.org/research/trends August 1997 Best available copy e EconomicActivity Percent chanae " from ,orecedina auarter 4 , GDP AND BLUE CHIP FORECAST Real GDP and Components, 1 9 9 7 : l l ~ ~ (Preliminary e ~ t i r n a t e ) ~ change, b~llions of 1992 $ Real GDP Consumer spending Durables Nondurables Percent change, last: Four Quarter quarters 38.1 9.8 -9.3 -7.7 24.9 2.2 0.8 -5.7 -2.1 3.7 3.1 2.5 2.2 1.3 3.1 investment 31.9 Equipment 29.3 Structures 1.I R e s i d e n t i a l investment 3.8 Government spend~ng 11.8 National defense 7.5 Net exports -21.6 Exports 31.4 Imports 53.1 Change in business ~nventories 3.1 12.4 20.4 2.3 5.7 3.8 10.2 14.3 21.8 7.3 11.9 6.1 0.0 0.6 -3.7 - - Servlces B u s i n e s s fixed 12.6 14.8 Percent change from corresponding month of previous year 6 REAL PERSONAL INCOME AND SPENDING TRENDS I -I R 4 n C] Real personal consumption expenditures - Real disposable personal lncorne a. Chain-weighted data in billions of 1992 dollars. b. Seasonally adjusted annual rate. c. 1997 data represent the average of the first two quarters. 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, July 10, 1997. As espectecl. the pace of economic z~ctivityslowecl in lC)')7:IIQ. I'relimin:lrp estimates she\\. that the economy gre\\. 2.2?41iri the seconcl C~LILII-ter (clo\\.n fronl a re\.isecl 3.90/(1the ~xe\:ious clu;wtes). Seconcl-c1~1:1rter growth \\.as lecl 11). in\.estment in proclucer,~'clur-al~leecluiprnent, esports. rid feder:~l go\-esnmcnt spending. Offsetting these effccts w;ts 21 decline in consumes spencling for rllotor \.chicles :ind parts :uncl an incre:lse in irxiports. O\-er the four c l ~ ~ : ~ t e s x n din e c 1997:IIQ. l the economy grew : ~ ta strong ST S MI clip. 'The moclerate seconcl-clc~artes gro\vth rate was in line with the consensus of economists participating in the I3lue Chip survey. They foresee ~ h : ~:I t rel,ouncl in consumer spentling co~llcl procluce an ~lpticli in 1997:IIIQ gron.th, I I L I ~ they expect 21 return to the 2% GDP gson-th I-ange tllro~~gh 1988. I<e;ll person;tl cons~lmptione s penclit~rres\vere flat in the secontl c1u;wter. Srrorig acl\.ances in s e n k e s spentling offset sharp cleclines in PLISC~:IX"S)~ niotor vellicles and nonclu~tl~les. Litl~orclisputes th;~tlimited supplies o f popul:lr \.chicles rnay ha\.e aflectecl cxr s:lles. Real clispos:il>le perx)rx;~Iillcollie gro\\rth n-21shealthy in the seconcl clilartel; the employ~nent sitnation stayetl strong in July. ant1 consumer. sentiment reriKtins up1,eat. f c o ~ l t i t z l i e do i l IIP..';~ pqe) http://clevelandfed.org/research/trends August 1997 Best available copy Percent rising 70 [PURCHASING MANAGERS, OUTPUT AND ORDERS INDEXES I 3-:~arilh novini; a'ieragi', nillisrls ~iunits Millions of unils 0.90 1.8 0.85 1.7 0.80 16 0.75 15 0.70 14 0.65 1.3 0.60 12 0.55 1.1 0.50 1.O 0.45 0.9 0.40 1990 08 1991 1992 1993 1994 1995 1996 1997 Ratio IINVENTORIES/SALES Percent difference between real GDI and GDP 1.5 1.o 0.5 0.0 -0.5 -1.0 -1.5 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 a. 1997 data refer to first quarter only. NOTE: All data are seasonally adjusted. SOURCES: U.S. Department of Commerce, Bureau of the Census and Bureau of Economic Analysis; and the National Association of Purchas~ngManagement Conscrmers continue to clevote a growing sh:lre of their total spencling to cl~~ral,les. Tlle proportion has risen from approximately 3.5% in 1970 to more th;ln 13%)in the first half of 1997. The percentage spent o n motor \,chicles ;incl parts, however, has remaineel kiirly st;ltion;u-y (arouncl 5%). 7'he relative gain in clurables has come at the expense o f nonclurable goocls sales. Seniice's s1ia1-e o f total consiirner spencling has also gro\\.n. Industrial production continued to post strong gainsin June, led by high-tech clural~lesand conlmercial :lircl.aft. Procluction of nlotor vehicles ancl parts also advanceel in June, I ~ r twas off sharply for the quarter. The National Associatio~lof I'i~rchasing Management's July incleses of o i l t p ~ ~and t new orders continued to reveal a strong manu1 actusing ;. sector. Inventory-to-sales Gitios picliecl ilp in May, but are still low by historic standards. The ~cllueof a nation's output (GDI-') s110~1ldequal the income pic1 to all who procluced it (gross domestic incori~e or GDI). Since 1995. 1j.S. GI)I has exceecled GDI? leacling some to speculate that the Corn~nerce1)epartment may he uncleresti~natingoutput. The ~ilagnit~rde of the recent cliscrep:incy, however, and persistence is not ~~np:~rallelecl, in the signs of errors (albeit negative) is not i ~ n c o ~ i ~ l n o n . o e 0 e http://clevelandfed.org/research/trends August 1997 Best available copy o Durable Equipment Investment Billions oi 1992 dollars, chain-weighted 1 INFORMATION PROCESSING AND FIXED INVESTMENT^ I Investment Growth (Percent, annual rate) 19701989 1990- present Private nonresidential fixed investment 3.63 4.55 Producers' durable equipment 4.74 6.57 Computers and peripheral equipment 35.65 25.49 Private nonresidential fixed investment less computers and peripheral eaui~ment . . 3.36 2.21 Producers' durable equipment less computers and peripheral equipment 4.31 3.40 Index, 1992 = 1 25 SHARE OF NONRESIDENTIAL FIXED INVESTMENT 75 200 - - 65 - Comoutecsand oeri~l~eral 175 70 RELATIVE PRICE OF INVESTMENT GOODS - -075 I00 050 50 l 1970 l l l l 1974 i l l r 1978 l l l l 1982 l l l l l 1986 l I 1 1990 l l I 1 1994 l l ,, e ,c- <@* /'* *2 Nonres~dentialstriictures/GDP - 025 5 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 a. Private nonresidential fixed investment is composed of producers' durable equipment and nonresidential structures. Producers' durable equipment includes industrial equipment and transportation and related equipment, in addition to information processing and related equipment. b. Computers and peripheral equipment have been removed from both the numerator and the denominator. c. The relat~veprice of computers and peripheral equipment has fallen extremely rapidly from a 1970 value of 130. SOURCE: U.S. Department of Commerce. Bureau of Economic Analysis. During the 1990s. nonresiclential fixecl investri~ent (proclucers' clurable ecluipment plus nonresic1enti:ll str~ictures)has surgecl. The increase can be traced to cl~lrahle equipment sales. with 57% o f all fixed investment gains coming from computer and peripheral e q u i p ~ n e n t purchases. I-Iowever. clurable ecluip~nentsales began to grow long before computer sales 1,ec;lme signific;lnt. Since 1970. clurat~lesinvestment has increasecl fro111 53(%1 to 7 j% o f totz~lnonresidential fixecl investment. Over the same periocl, the relative price of jtstment In tlie past six months. in\,-: clur:ll,les has fallen 42?41, and the has increasecl 8%)for structures ;~ncl 2.7?4.i,fix clurable ecl~~ipment, c:lusing relative price of structures has climl~ecl13%.The drop in d~irables' dura1)les' share of in\jestment to kill prices. accorilpanied by an increase slightly. Mo\vever, dulable ecluipin their share of total investment, ment has Ixen otitpacing structures since 1990, even when computers inclicates that investment patterns h:~vc I)een dominated by s~111ply- are excliiclecl. In klct, o\.el.all investment in str~~ctnres sicle klctors. has declinecl XI. Since 1990, investment in comThe steacly clrop in computer ancl p~ttershas risen from 8% to 25(X1o f clural>le ecl~~ipment prices suggests all cl~irableecluipment. This g r o ~ ~ t h that I~oth\\?illcontinue t o increase as also seems to be fueled by supply:I share of tot:~l nonresiclential fixed siele factors, given the steacly clecline in~~estrnent. in the relative price of computers. . . .Labor . Markets . 0 http://clevelandfed.org/research/trends August 1997 Best available copy . Change, thousands of workers 1 600 AVERAGE MONTHLY NONFARM EMPLOYMENT GROWTH^ I 14 Local government 19 77 88 32 -14 33 -10 56 44 Average for period 5.4 -200 1991 1992 1993 1994 1995 1996 1997 lo dale 4.8 5.0 4.8 IlQ May June July 1997 Percent 64 4.9 1 LABOR MARKET INDICATORS~,~ Per~enl 85 Hours per week 37 36 35 34 33 1990 1991 1992 1993 1994 1995 1996 1997 a. Seasonally adjusted. b. Production and nonsupervisory workers. c. Vertical line indicates break in data series due to survey redesign SOURCE: U.S. Depactment of Labor, Bureau of Labor Statisl~cs. ? b + .5 -u -- - The nation's lat~ormarkets showed to 34.4 h o ~ l r s (down 0.3 ho~lr). rol~nstgro~vthin July-. lvith nonhlrm I-Iouseholcl survey data, which are Illore varial~le than establishment payrolls posting 21 higher-thanexpectecl gain o f 316,000 \\~orlters. clata. also point to strength in the l:~bor111:ukets-an estirllatecl aclcliThe civi1i:un ~ ~ n e m p l o y m e nrate t retion of 344,000 worliers. tclrnecl to its May level o f 4.8%-the In the goocls-proclucing sector, lowest since No\.en~lxr1973-ancl the e i ~ l p l o y n ~ ~ c n t - t o - ~ ~r:~tio ~ ) ~ ~ ~ ~manuf:~cturing li~tio~~ showeel a net erneclgecl i ~ pO.l"/o ol.er the s:une ployment clecline for the month periocl, reaching 63.896. Meanwhile, (clown 5.000 jobs) as cl~~rable-goods average hourly e21rnings rem:~ined 1xiyrolls aclclecl 20,000 jobs a n d i~nchangedat SlL.23. ancl nonfirm n o n c l ~ ~ r x l goocls ~le lost 25,000. Avemployees' average \vorkweeli fell erage weekly hours of ~vorliand overtime h0~11.s both continuecl their recent dowi~warcltrencls. The ing aver-age m a n u f : ~ c t ~ ~ r .cvorltr~eeli stoocl at 41.7 hours in July. d o w n 0.1 hour from a inontli earlier. Factory overtime also shortened by 0.1 hour to 4.6. Jobs i11 the sei-vice-proclucing sector grew at a healthy clip last month. Employment in retail tracle aclvanced 65.000. 1)uoyecl by a rise in restallrant jobs ( u p 35.000). Go\lernment continuecl to expanci its payrolls. aclcling 56.000 xvorliers in July. . . Marriage . . Penalties and Bonuses 0 . http://clevelandfed.org/research/trends August 1997 Best available copy . Percent Percent TAX RETURNS B Y INCOME CATEGORY O F MARRIED COUPLES C] W ~ t hpenalties I Unaffected 1 With bonuses 20 I I C] F ~ l ~ njo~nt g returns Filing indiv~dualreturns Similar incomes Disparate incomes Single earners U Less than 20 More than 50 20-50 Income. thousands of dollars All incomes B~llionsof dollars Percent 9 1 40 TOTAL PENALTIES AND BONUSES 8 7 6 5 4 3 2 1 0 Income, thousands of dollars Less than 20 20-50 More than 50 Income. thousands of dollars All incomes NOTE: All charts show projected data for 1996. SOURCE: Congressional Budget Office. Several featilres of the current income t:ls cocle result in ~narriage "penalties" ancl "l,onuses." Singleearner cociples n.ho file jointly pay lower aver;lge tas sates than those ancl two-earner filing incli\.icl~~ally. couples with spowses earning similar-sizecl incomes face higher average tas rates than couples earning clissimilar incomes. Marri:~ge penalties and bon~lses arise 1,ec:lllse of separate rate schedules ancl standarcl cled~ictions for marriecl versus single filers 2nd because the earned income tas credit (EITC) is appliecl irrespecti\ie of 11iarital statlls. G c n e ~ ~ l lcouples y, earn- ing similar inconles talie lo\ver deductions, pay higher marginal and aver;ige tax rates, and lose a major postion of their EITC. Such issues call affect incli\iiclual behavior regarding labor force participation, hours of ~vorli.marriage, and divorce. Toclay, riiore married couples are suhject to marriage pe~laltlesthan ever before. The reason? Despite a clecline in the share of lllarriecl couples among all fanlily and indiviclual tax units, the share of two-income couples among all ~llarrieclpeople has increasecl. Also, a larger fr:~ction of two-inconle couples have spouses .\\.it11 siruilar incomes. For 1996, the share of ho~iseholcls facing m;lrriage penalties is projec:ecl to increase \vith household income. xvllereas the share enjoying bonllses shoc~lcl 11e greater for lo\ver-income householcls. 130th pen;llties ant1 I)oni~ses:lrc ;I larger fraction of income for the lowestincome families than for the more 21ffluent.Although a I:~rgerni~nll>er of families are s i ~ l ~ j e to c t marriage pen;llties, the Tre:ts~~rystill loses more money on IIOIILIS~S than it malies on pen:llties: I'rojections show that tas-cock featilres genesating marriage ~xn:lltiesancl 1x)nuses \\;ill cost a l ~ o i S4.1 ~ t 1)illion in 1906. . . e m e m http://clevelandfed.org/research/trends August 1997 Best available copy . Unemployment and Job Vacancies NOTE: All data are seasonally adjusted. Years are labeled at the approximate month of the trough or peak. SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; and the National Bureau of Economic Research - ? 3 d -" -- The 1 i . S . labor marliet is characterizecl Ily tremenclous churning. with a p p r o s i ~ x ~ t e7l ymillion people entering or leaXing in a single month. In adelition to 11eople moving between jolx, snI,st:ur~tial nurnl,ers of jolx :use createcl or clestroyecl each month. 130th ltincls of changes occur cluring cyclical upswings 21s \v-ell as clownturns. This suggests that 211 :uny given time. unelnployed u.orliers coexist \vitli ~~nfillecl job \.ac;uncies. 'The relationship bet\veen ~lnemployment zul~tl jot, \~ac:uncies is sho\vn in the 13eversiclge curve. which is usef~11for i~nderstancling how well the lal~or~ n a l t e tmatches ~uneniployecl worliers n.ith openings. The curve for the U.S. reveals sevelal clo.c\.nwartl-slo~~ing. countercloclt\vise loops. Eviclently, these loops tmce o ~ a~ bt ~ ~ s i n e scycle s \\;hose naclir ro~lghlycorresponcls to the most southeasterly points. Since 1992. \ve have been lnoving north\vest. ancl the pas1 three ye;~rssuggest that we 11121y 1i:uvc reachecl the p 4 i of the cycle. Notice also th:tt there seem to be many different t3e\.criclge curves. shifting out anel right until tlie midto-late 1980s ancl then shifting hack to~vard the origin. As tlie curve shifts to the sight, the i~nemploy~iientrate is higher for any given This rriay reflect level of v~~cancies. a worsening joll-matching process, sloni adj~~stments to a changing ~ i l i s of inclustries. or possibly an increase in ~~nemployrnent insi~rallcebenefits. The opposite \i~oulcl11e true of shifts tonrard the origin. http://clevelandfed.org/research/trends August 1997 Best available copy Kentucky Tobacco Farming Number oi lobacco farms (thousands) 1 P e r m i oi for-s ,c d ~ c i i i qlcbacco 75 TOBACCO FARMS BY STATE, 1992 1 75 Dollars 1 5'000 KENTUCKY CROP VALUES PER ACRE, 1990-95 AVERAGE Hay Wheat Soybeans Corn 1 Tobacco Acres 18 16 14 12 10 8 6 4 2 0 SOURCES: U.S. Department of Agriculture, Economic Research Service; U.S. Department of Commerce, Bureau of the Census; and Will Snell and Stephan Goetz, "Overview of Kentucky's Tobacco Economy," Univers~tyof Kentucky, Kentucky Cooperative Extension Service, June 1997. Tobacco is nothing to sneeze at in Kentucky, \vllicli is home to half of the nation's 124.270 tohacco fitrms. In fact. 66(% of Iientuclcy's k~rmers g r o w tol,;lcco, m:tliing the state's zigricult~~ral economy the no st tobacco clepenclent in the IJnion. Tobacco production accounts for ahout 5OCfi o f the state's crop receipts ancl 25% o f its agrici~ltural cztsh. An acre of toi>acco 21-erages $4,000 in gross returns to the Kentucliy farmer, far surpassing returns on the state's other traditional crops. Several counties clerive more than 10'H) of their total personal incorrle frorll tolxtcco farming. Historically, tobacco farms are small-scale operations. In 1992, the n~ecliansize of a U.S. tobacco far111 TWIS 6.7 acres. versus the national average for all crops of 491 acres per farm. In iVort11 Carolina, the nation's to17 tohacco proclucer, farnls plzintecl in this crop averxge 16.1 acres. nearly ~ O L I Stitlles the 4.2--I ' C,I- C 211.e~age of Iier~tuclcy'stobacco farms. This size clifferencc c:in I,e attributeel to lient~lcky'stopogsaphic lirnitations allel its labor-intensive rnet'nocis. North Carolina's vast, capitalintensive tol7acco klrms give it an edge over Iientuclcy in total o~ltput. http://clevelandfed.org/research/trends August 1997 Best available copy Banking Conditions Ratio 150 135 165 ASSET YIELD AND INTEREST INCOME 30 - 45 15 1972 I I I I I I 1976 1980 1984 1988 1992 1996 Ratio 1 NON-INTEREST INCOME AND SERVICE CHARGES I Ratio 5 4 3 2 1 0 1972 1976 1980 1984 1988 1992 1996 NOTE: All data are for FDIC-insured commercial banks SOURCE: Federal Deposit Insurance Corporation. I)eregulation, new fin:~nci:~lprodi ~ c t s , ancl ne\\. competitors :ire s o m e o f the esp1;tnations for the significxnt changes that have occurrecl in the lJ.S. 11:lnliing incl~1st1-y. These changes have :llterecl the relprofative import:lnce of incl~~stry itability components. The 111ai11 colnponents usi~ally consiclerecl in evaluating l>:~nl<s' prol'its are asset yields, the cost of filnding e:lrning assets, non-interest income. ancl non-interest expense. 'Tliese \.ariahles have s h o ~ vtwo ~~ clear trencls in the recent past: Since the early 1970s, the non-interest components of banks' profits have hecome more significant. Starting in 1981, the importance of the interest components-the yield on assets : ~ n d the cost of funding earning assets-has been declining. The yield on earning assets and the cost of fullcling earning assets have followed a conlmon pattern, cleterrnined largely I,y ~narketinter- est rates. The same is true of the variables' nlain components-the interest income o n loans and leases ancl the interest on cleposits. These variables reached their highest values in 1981, when the yield o n earning assets was 14.1% and the cost of funding assets was 10.4%1. 13)' 1996, these variables hacl faller1 to 8.2% and 4.0%, respectively. In contrast to clownward trends in the yielcl on assets ancl the cost o f (colytintled on )zextpcige) http://clevelandfed.org/research/trends August 1997 Best available copy Banking Conditons (cont.) Ratio 6.5 Ratlo 1 YIELD O N EARNING ASSETS -. All banks Assets less than $100 m~llion --. Assets of $100 mill~on- $1 b~llion Assets of $1 b~llion-$10 bill~on Ass3ts greater illan $10 biilion 99 --. Assets less than $100 mill~on Assets of $100 m~llion- $ I billion Assets of $1 b~llion-$10bill~on - Asskis greaier illail $10 biilioii 94 - 89 84 79 74 1991 I 1992 1993 1994 1995 Ratio I I I I 1996 Ratio 50 NON-INTEREST EXPENSWEARNING ASSETS 48 - 43 Assets of $100 m~llion- $1 billion 38 - 35 1991 Assets less than $100m1llrdn. . I I I I I 1992 1993 1994 1995 1996 NOTE: All data are for FDIC-insured commercial banks. SOURCE: Federal Deposit Insurance Corporation. funding is the growing importance of the non-interest components. 'The ratio of non-interest income to earning assets jumpecl horn 0.9% in 1972 to 2.5% in 1996. Iluring the same periocl, the satio of non-interest esp e n s e to earning assets rose fro111 3.0% to 4.3%. Note that these increases occurred clespite the steacliness of the varial~les'main components-service charges on deposit accounts and the cost of employee salaries ancl benefits, respectively. The change in the components of pmfits variecl with the size of the hank. Between 1991 and 1996, the variation in interest components hacl a similar pattern for all banks. Furthermore. the value of these components did not differ significantly with institution size except in the case of the largest banks, which had a higher cost of fi~nclingearning assets thro~ig110~1t the entire periocl. The evolution of non-interest components, however. clepencled more heavily on t~anlisize. as clid their values at each point in time. O n e clear clifference xmong banks of clifferent sizes is that non-interest incoine ancl non-interest espense are kir less important for smaller Ixnks than for la&~ ,L. o11es. I . . .US..Trade Balance 0 . http://clevelandfed.org/research/trends August 1997 Best available copy 0 Billions of U.S dollarsa Billions of U.S. dollars 5 1 U.S. TRADE BALANCE 0 -30 Latin Arner~ca Index, 1973=100 Billioris oi U S dollars 1 RELATIVE ECONOMIC GROWTH AND NET EXPORTS 1 Index. 1973=100 Japan China Eastern Europe Western Europe NAFTA Billions of U S,dollzrs 30 a. Seasonally adjusted. b. Through May. c. 1997 plot is an average of the first two quarters of the year. d. Ratio of foreign real GDP or GNP to U.S. real GDP Foreign countries and trade weights are those used to construct the Federal Reserve Board's trade-weighted dollar index. Projections for 1997 and 1998 are from The Economist, August 2-8, 1997. e. Annual average of monthly data; 1997 plot is an average of the first five months of the year SOURCES: Board of Governors of the Federal Reserve System; U.S. Department of Commerce, Bureau of the Census; International Monetary Fund, International Financial Statistics; and The Economist. August 2-8. 1997. < - - The U.S. trade cleficit has ~videnecl since 1991. Over the first five inonths of this >.ear. the shortk~ll was $48.1 billion. Our largest deficits are Ivith Japan, Cliina, ancl our NAFTA partners. The cleterioration in the IJ.S.trade lxdailce over the current husiness exp;lnsion largely reflects the more sapicl 11;ice of econoniic gro~vtllin the U.S. than al,ro:lcl. Since 1991, the inajor incl~~strializecl co~~ntries have see11 their O L I ~ I ~clii~ll> U ~ 1.5% on a trade-weighted I~asis,while the U.S.economy espanded 2.5% ( abcl,Lge .,-. annual rates). Our faster economic gro~vthhas attracteel foreign savings and financed clomestic investillent at levels unsustainable t h r ~ ~ ~cloinestic gh savings alone. Other things being eclual, foreign t at about economies i i i ~ ~ sgrow tli~icethe domestic rate in orcler to reverse this pattern ancl n;u.roxv the U.S. tr;lde cleficit. Although analysts expect foreign economic groxvth to :tccelerate t o 2.3% in 1997 and 2.7% in 1998, it xvill not surpass projected IJ.S.growth (3.5% in 1997 and 2.3%) in 1998) by the req~~isite margin. The relationship I~etween exchange sates anti the tracle cleficit is even more tenuous than that between growth rates ancl tr:tcle, hut a dollar appreciation can ~viclen the cleficit. The dollar's 14.4% real appreciation since 1995 has not klvorecl a narrower trade cleficit. The US. International Investment Position http://clevelandfed.org/research/trends August 1997 Best available copy Billions of dollars Billions of dollars 0 INTERNATIONAL INVESTMENT POSITION 5,000 ' I U S assets abroad iore~gnassets mthe U S a. Positive values indicate a net cap~talinflow. b. Includes direct investment at market value. SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis. &g. c T h e U.S. current account deficit has increasetl thirteenfolcl since 1982, reaching $148 billion in 1996 and nearly $164 billion (;lnnual rate) in 1997:IQ. Our nation has financed the surfeit of imports by selling assets ancl issiiing debt instruments to foreigners. This genemtes an inflow of foreign capital. I,ut it also gives the rest of the \vorlcl a clairll on our future output. In the late 198Os, when the stock of foreign assets held in the U.S. exceedecl our assets held abroacl, we b e c a ~ u ea debtor countly. The U.S. international investment positionour balance sheet with the rest of the world-reflects the history of our capital flows as well as cha~lges in the value of our external assets allel liabilities. Nearly 25% of the assets that foreigners hold in the U.S. are direct investme~lts, which entail some control over the mallageIllent of American businesses. The l~iggest stakeholders are the IJ.IC., Japan, the Setherlands, ancl Canada. Another 24% o f foreign-held U.S. ~1ssets are in corporate stocks :mcI boncls, which d o not confer any significant degree of managerial control. This is the share that has expanded the most since 1982. 1,ut foreigners have also increased the portion of their U.S. assets helcl in Treasu1-y securities.
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