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August 2008
(Covering July 10, 2008 to August 14, 2008)

In This Issue
Inﬂation and Prices
June Price Statistics
Money, Financial Markets, and Monetary Policy
What is the Yield Curve Telling Us?
Another Steady Rate Decision
International Markets
Net International Investment Position
Economic Activity and Labor Markets
Will We Have Another “Jobless” Recovery?
The Employment Situation July
Aggregate Labor Force Participation
Real GDP: Second-Quarter Advance Estimate and Benchmark Revisions
Regional Activity
Fourth District Employment Conditions
State Labor Markets
Banking and Financial Markets
Fourth District Bank Holding Company Conditions

Inﬂation and Prices

June Price Statistics
07.25.08
by Michael F. Bryan and Brent Meyer

June Price Statistics
Percent change, last
1mo.a

3mo.a

6mo.a

12mo.

5yr.a

2007 avg.

All items

13.4

7.9

5.5

5.0

3.6

4.2

Less food and
energy

3.9

2.5

2.3

2.4

2.2

2.4

Medianb

4.6

3.2

3.1

2.8

3.1

16% trimmed
meanb

5.4

4.0

3.5

3.2

2.6

2.8

Finished goods

23.8

14.1

12.4

9.1

5.0

7.1

Less food and
energy

2.9

3.7

4.5

3.1

2.1

Consumer Price Index

Producer Price Index

a. Annualized.
b. Calculated by the Federal Reserve Bank of Cleveland.
Sources: U.S. Department of Labor, Bureau of Labor Statistics; and Federal Reserve
Bank of Cleveland.

CPI Component Price-Change Distributions
Weighted frequency
50
June 2008
45
Average over 12 months prior
40
35
30
25
20
15
10
5
0
<0

0 to 1
1 to 2
2 to 3
3 to 4
4 to 5
Annualized monthly percent change

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

The CPI rose at an annualized rate of 13.4 percent
in June, outpacing all of its longer-term trends
and pushed up by a 116.3 percent spike in energy
prices and a 9.6 percent increase in food prices.
The CPI excluding food and energy (core CPI) rose
3.9 percent during the month, its largest monthly
increase since November 2001. Both the median
and trimmed-mean measures were elevated as well,
rising 4.6 percent and 5.4 percent, respectively.
Price pressures were not just restricted to consumers
in June, as the Producer Price Index (PPI) jumped
23.8 percent during the month. Over the past
12 months, the PPI has increased 9.1 percent, its
largest growth rate in 27 years. Excluding food and
energy, the PPI increased 2.9 percent in June, compared to 4.5 percent over the past 6 months.
Digging deeper into the price-change distribution,
we see that nearly two-thirds of the CPI’s components increased at rates exceeding 3.0 percent, with
45 percent rising at rates greater than 5.0 percent.
Over the 12 months prior to this report, only
23.6 percent of the CPI’s components increased at
rates greater than 5.0 percent on average. Of the
45 components that the Federal Reserve Bank of
Cleveland uses to compute the median CPI, 10
increased at an annualized rate of 10.0 percent or
greater.
The longer-term trend (the 12-month percent
change) in all consumer price measures ticked up
during the month. Since August 2007, the longerterm trend in the CPI has increased from 2.0 percent to 5.0 percent today. Over the past 12 months,
the median CPI has increased 3.1 percent, while
the 16 percent trimmed mean is up 3.2 percent.
The prices of both core goods (goods excluding
food and energy commodities) and core services
(services excluding energy services) jumped up
in June, increasing 1.3 percent and 5.0 percent,
respectively. Over the past 12 months, core services
prices are up 3.3 percent, while core goods are only

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

CPI, Core CPI, and Trimmed-Mean CPI
Measures
12-month percent change
5.25
5.00
4.75
4.50
4.25
CPI
4.00
3.75
3.50
Median CPIa
3.25
3.00
2.75
2.50
2.25
2.00
1.75
16% trimmed1.50
C ore C P I
mean CPIa
1.25
1.00
1998
2000
2002
2004
2006

up 0.2 percent on a year-over-year basis.
Average inﬂation expectations, as measured by the
University of Michigan’s Survey of Consumers,
have been holding near recent highs. One-yearahead average inﬂation expectations increased 0.4
percentage point to 6.9 percent, according to the
preliminary report for July. Longer-term (5–10
year-ahead) average expectations ticked down to
3.8 percent in July from 4.0 percent in June, but
this is still above the series’ recent trend.

2008

a. Calculated by the Federal Reserve Bank of Cleveland.
Sources: U.S. Department of Labor, Bureau of Labor Statistics, and Federal Reserve
Bank of Cleveland.

Core CPI Goods and Core CPI Services
12-month percent change
8.0
One-month annualized
7.0
perc ent c hange
6.0
C ore s ervic es
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
C ore goods
-4.0
One-month
-5.0
annualized perc ent c hange
-6.0
1998
2000
2002
2004
2006
2008
Sources: U.S. Department of Labor; Bureau of Labor Statistics.

Money, Financial Markets, and Monetary Policy

What Is the Yield Curve Telling Us?
07.16.08
by Joseph G. Haubrich and Kent Cherny
Since last month, the yield curve has taken a parallel downward shift, with both short-term and longterm interest rates falling. One reason for noting
this is that the slope of the yield curve has achieved
some notoriety as a simple forecaster of economic
growth. The rule of thumb is that an inverted yield
curve (short rates above long rates) indicates a
recession in about a year, and yield curve inversions
Federal Reserve Bank of Cleveland, Economic Trends | August 2008

Yield Spread and Real GDP Growth
Percent
12
R eal G DP
growth
(year-to-year
perc ent
change)

10
8
6
4
2
0

Ten-year minus three-month
yield spread

-2
-4
1953

1963

1973

1983

1993

2003

Note: Shaded bars represent recessions.
Sources: Bureau of Economic Analysis; Federal Reserve Board.

Yield Spread and One-Year Lagged Real
GDP Growth
Percent
12
10

One year lagged real G DP growth
(year-to-year perc ent c hange)

8
6
4
2
0
Ten-year minus three-month
yield spread

-2
-4
1953

1963

1973

1983

1993

2003

Sources: Bureau of Economic Analysis; Federal Reserve Board.

Yield Spread and Predicted GDP Growth
Percent
6
5

R eal G DP growth
(year-to-year perc ent c hange)

P redic ted
G DP growth

3
2
1
0

Ten-year minus three-month
yield s pread

-1
-2
2002

2003

2004

2005

2006

2007

2008

Sources: Bureau of Economic Analysis; Federal Reserve Board.

have preceded each of the last six recessions (as deﬁned by the NBER). Very ﬂat yield curves preceded
the previous two, and there have been two notable
false positives: an inversion in late 1966 and a very
ﬂat curve in late 1998. More generally, though, a
ﬂat curve indicates weak growth, and conversely, a
steep curve indicates strong growth. One measure
of slope, the spread between 10-year bonds and
3-month T-bills, bears out this relation, particularly
when real GDP growth is lagged a year to line up
growth with the spread that predicts it.
The yield curve slope became slightly ﬂatter, with
both long and short rates moving down. The spread
remains positive, with the 10-year rate moving
down 25 basis points to 3.90 percent and the
3-month rate down 20 basis points to 1.77 percent
(both for the week ending July 11). Standing at 213
basis points, the spread is just below the 218 seen
in June and the 221 in May. Projecting forward
using past values of the spread and GDP growth
suggests that real GDP will grow at about a 3.0
percent rate over the next year. This remains on the
high side of other forecasts.
While such an approach predicts when growth is
above or below average, it does not do so well in
predicting the actual number, especially in the case
of recessions. Thus, it is sometimes preferable to
focus on using the yield curve to predict a discrete
event: whether or not the economy is in recession.
Looking at that relationship, the expected chance of
the economy being in a recession next July stands
at 1.1 percent, equal to June’s prediction and just
above May’s 0.9 percent.
The probability of recession is below several recent
estimates, and perhaps seems strange the in the
midst of recent ﬁnancial concerns. But one aspect
of those concerns has been a ﬂight to quality, which
lowers Treasury yields. Also working to steepen the
yield curve are the reductions in both the federal
funds target rate and the discount rate by the Federal Reserve. Furthermore, the forecast is for where
the economy will be next July, not earlier in the
year.
To compare the 1.1 percent to some other probabilities, and learn more about diﬀerent techniques
of predicting recessions, head on over to the Econ-

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

browser blog.

Probability of Recession Based on the
Yield Spread
Percent
100
90
P robability of
rec es s ion

80
70

F orec as t

60
50
40
30
20
10
0
1960

1966

1972

1978

1984

1990

1996

2002

2008

Note: Estimated using probit model.
Sources: Bureau of Economic Analysis; Federal Reserve Board; author’s calculations.

Of course, it might not be advisable to take this
number quite so literally, for two reasons. First,
this probability is itself subject to error, as is the
case with all statistical estimates. Second, other
researchers have postulated that the underlying
determinants of the yield spread today are materially diﬀerent from the determinants that generated
yield spreads during prior decades. Diﬀerences
could arise from changes in international capital
ﬂows and inﬂation expectations, for example. The
bottom line is that yield curves contain important
information for business cycle analysis, but, like
other indicators, should be interpreted with caution.
For more detail on these and other issues related to
using the yield curve to predict recessions, see the
Commentary “Does the Yield Curve Signal Recession? ”

Money, Financial Markets, and Monetary Policy

Another Steady Rate Decision
Reserve Market Rates
Percent

08.07.08
by Charles T. Carlstrom and Sarah Wakeﬁeld

8
Effective federal funds ratea
7
6
5

Primary credit rateb

4
3
2
Discount rateb
1

Intended federal funds rateb
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
a. Weekly average of daily figures.
b. Daily observations.
Sources: Board of Governors of the Federal Reserve System, “Selected Interest
Rates,” Federal Reserve Statistical Releases, H.15.

On August 5, 2008, the Federal Open Market
Committee (FOMC) voted to keep its target for
the federal funds rate at 2%. The committee’s statement noted that tight credit conditions, the ongoing housing contraction, and elevated energy prices
are likely to weigh on economic growth over the
next few quarters. However, it added that upside
risks to inﬂation are also of signiﬁcant concern.
The committee’s decision did not surprise market
participants, who had placed the probability of the
steady rate decision at 90%, whereas only 7% of
participants had expected an increase of 25 basis
points at the August meeting. The likelihood of a
25-point rate increase at the September 16 meeting
is slightly above 20%, while the probability that
rates will again remain at 2% is just under 60%.
Following the June 25 FOMC meeting, implied
yields on federal funds futures reached nearly
3.25% for August 2009. Between the June and
August meetings, implied yields for August 2009

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

August Meeting Outcomes
Implied probability
1.0

Employment Report (July); ISM Manufacturing (July)

0.9
0.8

gradually fell nearly 50 basis points to just above
2.75%. After both the June and August meetings,
implied yields dropped from their levels the day
before the FOMC meeting.

2.00%

0.7

Personal Income (June)

0.6
0.5
0.4
2.50%

0.3

2.25%

0.2
0.1

1.75%

2.75%

0.0
5/09

5/19

5/29

6/08

6/18

6/28

7/08

7/18

7/28

Note: Probabilities are calculated using trading-day closing prices from options on
federal funds futures that trade on the Chicago Board of Trade.
Sources: Chicago Board of Trade and Bloomberg Financial Services

Credit markets appear to be easing, as indicated by
the spread between the 3-month LIBOR and the
3-month Treasury bill. The spread has moderated
signiﬁcantly since its high in August 2007, despite
the spread’s increase since June. The Federal Reserve has taken further actions to improve liquidity:
On July 30, it announced that it will lengthen the
maturity of the Term Auction Facility and extend
the Primary Dealer Credit Facility and the Term
Securities Lending Facility through January 30,
2009. In the days following this announcement,
the spread declined, which indicates that credit
markets are improving.

3-Month LIBOR Spread
Percent
2.5

2.0

1.5

1.0

0.5

0.0
01/07

Implied Yields on Federal Funds Futures

04/07

07/07

10/07

01/08

04/08

07/08

Note: LIBOR spread is the 3-month LIBOR minus the 3-month T-Bill.
Source: Federal Reserve Board and Financial Times.

Percent
4.00

3-Month LIBOR Spread

3.50

Percent
2.5

June 26, 2008b

3.00
June 24, 2008a

2.0

2.50
b

August 6, 2008
2.00

August 4, 2008a

1.5

1.50
1.0

1.00
3/08

6/08

9/08

12/08

3/09

6/09

9/09

a. One day before FOMC meeting.
b. One day after FOMC meeting.
Sources: Chicago Board of Trade and Bloomberg Financial Services.

0.5

0.0
1997

1999

2001

2003

2005

2007

Note: LIBOR spread is the 3-month LIBOR minus the 3-month T-Bill.
Sources: Federal Reserve Board and Financial Times

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

International Markets

The Net International Investment Position
08.06.08
Owen F. Humpage and Michael Shenk

U.S. and Foreign Claims
Trillions of U.S. dollars
21
18

Foreign claims on U.S.

15
12
9
6
U.S. claims on foreigners

3
0

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

The United States has run a current account deﬁcit
almost continuously since 1982. We have ﬁnanced
this deﬁcit by issuing ﬁnancial claims, such as
stocks, bonds, and bank accounts, to the rest of
the world. Since 1986, foreigners have held more
claims on the United States than U.S. residents
have held on them, or, in the jargon of international ﬁnance, the United States has maintained a
negative net international investment position. Last
year, that negative position reached a record $2.5
trillion.

Source: Bureau of Economic Analysis.

Net International Investment Position
Percent of GDP
15

Trillions of U.S. dollars
1.5
1.0

0.5

0.0

-0.5

-5

-1.0

-10

-1.5

-15

-2.0

-20

-2.5
-25
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Source: Bureau of Economic Analysis

The Importance of Valuation Effects
Trillions of U.S. dollars
0
-1
-2
-3
-4

Net international investment position
Cumulative current account

-5
-6
2002

2003

2004

2005

2006

2007

These ﬁnancial instruments give foreigners a claim
on future U.S. output, so economists often gauge
them as a share of GDP. Last year, our negative
net international investment position reached 17.7
percent of GDP, down from a record 19.5 percent
in 2002.
In addition to annual current-account deﬁcits, yearto-year adjustments in the international investment
position reﬂect changes in the valuation of previously issued, outstanding ﬁnancial claims. Valuation changes can result from movements in the
market price of the underlying assets, but in recent
years a substantial proportion of the valuation
changes also resulted from the dollar’s depreciation. The dollar has depreciated approximately 26
percent on a trade-weighted basis against our key
trading partners since early 2002. When the dollar depreciates, a ﬁxed amount of foreign currency
translates into a greater number of dollars. Because
most U.S. claims on foreigners are denominated
in dollars, a dollar depreciation increases the dollar
value of U.S. claims on foreigners. On the other
hand, that depreciation has little eﬀect on the dollar
value of foreign claims on the United States, which
are typically denominated in dollars.
Valuation changes have had a profound eﬀect on
our net international investment position since
the end of 2001: Our cumulative current-account

Source: Bureau of Economic Analysis.

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

Globalization of Financial Markets
Percent of GDP
300

Trillions of U.S. dollars
40
U.S. claims on foreigners
Foreign claims on U.S.
35

250

deﬁcit has increased nearly $3.9 trillion, while our
net international investment position has increased
only $0.6 trillion. The diﬀerence primarily reﬂects
valuation changes that work in our favor.

30
200

25
20

150

100

10
50

5
0

0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Source: Bureau of Economic Analysis.

U.S. and Foreign Asset Shares
U.S. assets

Foreign assets

Securities
43%

Securities
34%

Other bank
and nonbank
29%

Other bank and
nonbank
32%
Direct
22%

Direct
14%

Other government
1%

Official reserves
2%

Reﬂecting the increased integration of global ﬁnancial markets, both U.S. and foreign ﬁnancial claims
have increased much faster than U.S. GDP since
the mid 1990s, especially since 2001. Contrary to
reports that some foreign governments have been
diversifying out of dollars, foreign oﬃcial holdings
of U.S assets have increased steadily by 5 percentage points since 2001. Oﬃcial reserves accounted
for 19 percent of foreign claims on the United
States in 2007. U.S. holdings of foreign securities
have also increased their share of total U.S. claims
on foreigners in recent years; they now account
for 43 percent of that total. Direct investments,
however, have been shrinking as a share of both
U.S. claims on foreigners and foreign claims on the
United States.

Official reserves
19%

Other Treasury
4%

Source: Bureau of Economic Analysis

Economic Activity

Will We Have Another “Jobless” Recovery?
Nonfarm Labor Productivity, Current Expansion
Year-over-year growth
5
4
3
2
1

0
2001

2003

2005

2007

2009

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

07.30.08
by Paul W. Bauer
After the last business cycle peak—still oﬃcially
March 2001—labor productivity remained strong,
but employment took longer than usual to recover.
Some of the labor productivity gains had come
from the high-tech capital boom of the late 1990s,
which in turn was partially fueled by the need to
address potential y2k problems. As we continue
through what is at least another soft economic
patch, an important question is whether labor
productivity will repeat the same relatively strong
performance observed after the last business cycle
peak. While this would be good for real wages and
living standards in the long run, it could again lead
7

to a slow recovery in employment growth in the
short run.

Typical Postwar Expansion
Annual growth rate, seasonally adjusted
6
Output

Hours

Labor productivity

2
0
–2
–4
0

Quarter since last peak

To answer this question, we look ﬁrst at past trends.
The ﬁrst chart below plots growth in nonfarm
labor productivity since the ﬁrst quarter of 2001.
As the chart shows, labor productivity is a fairly
volatile series—even when viewed as year-over-year
ﬁgures. Consequently, it is easier to tease out the
underlying patterns if the raw data are statistically
smoothed. The second chart plots the smoothed
annualized quarterly growth rate for nonfarm labor
productivity, output, and hours for a typical postwar expansion.
In a typical expansion, labor productivity, output,
and hours all fall sharply after the peak but by
diﬀerent amounts. More signiﬁcantly, they recover
at diﬀerent rates. Output growth plunges the most
but then recovers quickly. It reaches its peak about
10 quarters after the previous peak, after which it
tends to decline over the rest of the cycle. Growth
in hours worked follows a similar path but does not
tank quite as much. It recovers more slowly, about
14 quarters out. This slow recovery is evidence of
a phenomenon called labor hoarding: Firms are reluctant to let skilled workers go during a temporary
downturn because they may ﬁnd other employment
and thus not be available once conditions recover.
The net result is that labor productivity (output per
hour) recovers quickly at ﬁrst (as output growth
outpaces hours growth), but tends to slow once the
recovery is well under way (as hours growth catches
up with output growth).

Nonfarm Labor Productivity Growth
Annual growth rate, seasonally adjusted
Upper bound

Current cycle

2
Average cycle
0
Lower bound
–2
0

Quarter since last peak
Federal Reserve Bank of Cleveland, Economic Trends | August 2008

The next chart illustrates the unusual trend of the
current cycle. A smoothed version of labor productivity growth in the current cycle is plotted, along
with the average of the previous postwar cycles and
a corresponding 95 percent conﬁdence interval.
Productivity growth through the ﬁrst 15 quarters
after the peak was abnormally strong, just above the
upper end of the range of the 95 percent conﬁdence interval. The latest available value for yearover-year growth in nonfarm business labor productivity (2008:Q1) is 3.3 percent, the largest since
the 3.8 percent reported for the 2003:Q2–2004:Q2
period.
Note that this analysis treats the current period as
8

part of an ongoing expansion. This period would
be even more unusual if it were treated as the
beginning of the next period, as labor productivity has not dropped oﬀ as it usually does after a
business cycle peak. Even though employment has
declined for the past six months, real GDP has not
fallen in any quarter, so it will be interesting to see
how the NBER dating committee treats this period
once all the data revisions are in.

Nonfarm Output Growth
Annual growth rate, seasonally adjusted
10
Average cycle

Upper bound

0
Current cycle
Lower bound
–5

–10
0

Quarter since last peak

Nonfarm Hours
Annual growth rate, seasonally adjusted
5
Average cycle

Upper bound

Lower bound
5

Current cycle
–5
0

10
20
Quarter since last peak

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

How did this unusually strong labor productivity
growth come about? First, output growth did not
fall as much after the peak as it normally does, but
over the cycle it has tracked at the lower bound of
the 95 percent conﬁdence interval. In the most
recent observations it has even dropped below.
This weak output performance has been accompanied by even weaker growth in hours worked than
normal. Some of this weaker-than-average growth
is due to demographics: The labor force is growing more slowly this cycle than in previous postwar
cycles—a trend that is likely to continue. Since the
1950s, labor force growth has averaged 1.6 percent,
but it is widely expected to continue to slow to no
more than 0.7 or 0.8 percent by the middle of the
next decade.
Going forward, labor productivity’s growth rate will
depend, in part, on whether the economy continues
to expand or whether it enters a recession. It will
also depend on which sectors experience relatively
more growth. Currently, exports, of which manufactured goods comprise a large share, are doing
relatively well given the continued growth overseas
and the weak dollar. As manufacturing’s gains in
labor productivity have tended to be stronger than
the service sector’s, this should result in at least a
modest boost to overall labor productivity. With
the economy in transition, adjusting to higher
energy prices and lower housing prices, overall output demand is likely to be weak. Combined with
robust labor productivity growth, this could lead to
weak employment growth as well.

Economic Activity

The Employment Situation July
08.04.08
by Murat Tasci and Beth Mowry

Average Nonfarm Employment Change
Change, thousands of jobs
250

Revised
Previous estimate

200
150
100
50
0
–50
–100

2005 2006 2007 2008
YTD

Q3 Q4
2007

Q1 Q2
2008

May June July

Source: Bureau of Labor Statistics.

The economy lost a fewer-than-expected 51,000
jobs in July, marking the seventh consecutive
month of payroll decline. Revisions for May and
June also lessened those months’ losses collectively
by 26,000. The unemployment rate increased from
5.5 percent to 5.7 percent in July, reaching its highest point since March 2004. The diﬀusion index
of employment change edged lower, from 42.2 to
41.2, having remained below 50 since November
2007. A reading below the 50 threshold indicates
that a greater number of businesses are subtracting
from payrolls than adding to them.
The goods-producing sector shed 46,000 jobs in
July, compared to June’s larger loss of 77,000. This
improvement resulted even though the manufacturing industry lost the same number of jobs as last
month (35,000), because construction lost fewer
(22,000 versus 49,000) this month, and natural
resources and mining added more (11,000 versus
7,000). Service-providing industries lost 5,000
jobs from their payrolls, despite the government’s
positive contribution of 25,000. However, June’s
initially reported gain of just 7,000 service jobs was
revised up to a gain of 26,000, and May’s loss of
8,000 was revised to a 4,000 gain.
Within the goods-producing sector, construction
shed 22,000 jobs and manufacturing shed 35,000.
Durable and nondurable goods manufacturing
again faced similar losses amounting to 17,000
and 18,000 jobs, respectively. Leading the pack for
losses in durables was transportation equipment
(8,300) and wood products (3,900). Machinery
had the most positive inﬂuence on durables, adding
6,100 jobs. Within the nondurable goods segment,
the greatest losses were felt in food manufacturing (4,200), printing and related support activities
(3,300), plastics and rubber products (2,900), and
textile mills (2,600).

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

Labor Market Conditions
Average monthly change (thousands of employees, NAICS)
2005

2006

2007

2008

July 2008

Payroll employment

211

175

−66

−51

Goods-producing

−38

−75

−46

−19

−41

−22

Construction
Heavy and civil engineering

−1

−5

−1.3

Residentiala

−5

−20

−27

−14.1

Nonresidentialb

−1

−9

−6.7

Manufacturing

−7

−14

−22

−39

−35

Durable goods

−4

−16

−26

−17

Nondurable goods

−8

−10

−6

−13

−18

Service-providing

179

172

130

−5

Retail trade

−26

−16.5

Financial activitiesc

−9

−6

PBSd

−30

−7

−27

−29

Leisure and hospitality

Government

Temporary help services
Education and health services

Local educational services
Civilian unemployment rate

2.2

5.1

4.6

5.2

5.7

a. Includes construction of residential buildings and residential specialty trade contractors.
b. Includes construction of nonresidential buildings and nonresidential specialty trade contractors.
c. Financial activities include the finance, insurance, and real estate sector and the rental and leasing sector.
d. PBS is professional business services (professional, scientific, and technical services, management of companies
and enterprises, administrative and support, and waste management and remediation services.
Source: Bureau of Labor Statistics.

Private Sector Employment Growth
Change, thousands of jobs*
350
300
250
200
150
100
50
0
–50
–100
–150
–200
2003

2004

2005

2006

2007

2008

*Three-month moving average.
Source: Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

Education and health services continued to be a
large, lone pillar of strength for the service-providing sector. Health services accounted for the bulk
of the gain, adding 34,300 jobs last month, while
education added 5,300. Leisure and hospitality
(+1,000) and ﬁnancial services (0) held their own,
making no signiﬁcant contribution either way. This
virtual standstill in the two sectors marks both a
slowdown of job gains in recent months for leisure
and hospitality and an improvement over recent job
losses in ﬁnancial services. Service-industry losses
were concentrated in professional business services
(24,000), retail trade (16,500), and information
services (13,000). Motor vehicles and parts dealers
suﬀered the largest losses within retail trade, shedding 10,600 jobs. Temporary help services, considered a leading indicator of overall employment
conditions, had yet another tough month in July,
dropping 29,000 jobs.
11

Unemployment Rate
Percent
8

Percent
22

20
Total

Ages 16–19

12
10

2
2000

2002

2004

2006

2008

Notes: Seasonally adjusted rates for the civilian population. Shaded barindicates
recession.
Source: Bureau of Labor Statistics.

The three-month moving average of private sector employment growth remains in the negative
territory it entered back in January, sitting roughly
unchanged from the previous report at -90,000.
This moving average removes some of the volatility
in monthly employment numbers and discounts
the government’s consistent addition of jobs.
The three-month moving average of the unemployment rate has been consistently increasing since
the ﬁrst quarter of 2007. It now stands at 5.56
percent relative to 4.46 percent in March 2007. For
the past several months, the unemployment rate
for teenagers (ages 16-19) was quite volatile and
contributed to the rise in the overall unemployment rate. In July, the unemployment rate for this
group increased to 20.3 percent from 18.1 percent
in June, which might be partly responsible for the
increase in the overall unemployment rate in July
to 5.7 percent. However, household data suggest
that most of the rise in unemployment could be
due to a larger labor force. In July, the labor force
increased by 213,000, while an additional 72,000
workers became unemployed, resulting in an increase of 285,000 in the unemployment pool.

Economic Activity

Aggregate Labor Force Participation
08.14.08
by Yoonsoo Lee and Beth Mowry

Labor Force Participation Rate, 1948-2008
Percent
68
67
66
65
64
63
62
61
60
59
58
1948

1955

1962

1969

1976

1983

1990

1997

2004

Notes: Data are quarterly and seasonally adjusted; Shaded bars indicate
recessions.
Source: Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

The labor force participation rate—the percentage
of the working-age population (16 years and older)
employed or looking for a job—rode an upward
trend for 30 years, rising from less than 60 percent
in the 1960s to about 67 percent in the late 1990s.
After peaking at 67.3 percent in the ﬁrst quarter of
2000, the participation rate fell steadily to around
66 percent by early 2005 and has remained at
around 66 percent since then.
The aggregate labor force participation rate typically reported is a more complicated measure than
a simple average. It is the weighted sum of the
labor force participation rates of all the separate age
groups tracked, where the weights are the population distributions of each age-speciﬁc group.
Because participation rates vary substantially across
12

diﬀerent age groups, compositional changes of the
population can aﬀect the aggregate participation
rates.

Labor Force Participation Rate,
by Age and Gender
Percent
100
Men
Women

90
80
70
60
50
40
30
20
10
0

16-17

18-19

20-24

25-29

30-34

35-39 40-44

45-49

50-54

55-59

60-64

65-69

70+

Note: Data are 2007 annual data.
Source: Bureau of Labor Statistics.

Population Share by Age and Gender
Age 16-24
Prime age men, 25-54

Percent

Prime age w omen, 24-54
Age 55+

100
80

The aging of the baby-boom generation is causing
a key change in proportions of the diﬀerent age
groups comprising the U.S. population. For most
of the postwar period, the size of the labor force
rose steadily, pushed up by baby boomers entering
prime working age. As the baby-boom cohort starts
to retire, the population will shift from people with
higher participation rates toward older people with
lower participation rates.
When the baby-boom cohort entered the labor
force—from 1980 to 2000—the share of prime-age
workers (ages 25 to 54) in the population increased
from 53 percent to 56 percent. As this cohort starts
retiring, the Census Bureau projects that the share
of prime-age workers will decrease to 47 percent
in the 2020s, and the share of older people will
increase to 37 percent. Such a demographic change
is expected to push down the aggregate labor force
participation rate in the next decades.

60
40
20
0
1960s

1980s

2000s

2020s

Note: Population shares for 2020s are based on Census Bureau projections.
Source: Census Bureau.

Labor Force Participation Rate,
by Age and Gender
Age 16-24
Prime age women, 25-54

Percent
100

Prime age men, 24-54
Age 55+

20
1948

1958

1968

1978

1988

1998

2008

Notes: Data are quarterly and seasonally adjusted; Shaded bars indicate recessions.

Source: Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

Patterns in the labor force participation rates of different groups have changed in diﬀerent ways over
the past 30 years. The participation rate for men
in their prime working years (25 to 54 years) has
declined since the late 1970s. It has been fairly ﬂat
since 2002, after declining from 91.6 percent to
90.7 percent during the most recent labor market
downturn. Meanwhile, prime-age women helped
to drive up the aggregate labor force participation
rate over the past 30 years, as their participation
rate climbed. Since 1998, however, the rate for this
group has stayed ﬂat. From 2000 to 2005, their
labor force participation rate fell relative to previous
rates (from 76.9 percent to 75.1 percent), reﬂecting
the sluggish labor market.
Workers at opposite ends of the age spectrum have
been moving in diﬀerent directions in recent years.
The labor force participation rate of workers age 55
and older has been on the rise since the middle of
the 1990s. In fact, it has risen 2.8 percentage points
in the four years following the most recent recession. However, at below 40 percent, it is still lower
than the aggregate participation rate. On the other
hand, the rate for younger workers (16-24), which
13

rose in the 1970s, has dropped dramatically since
the 2001 recession.

Changes in the Labor Force Participation
Rate during Economic Downturns,
by Age and Gender

In fact, the sharpest decline in labor force participation since the 2001 recession occurred among
persons aged 16 to 24—a 5.1 percentage point
drop between the ﬁrst quarter of 2001 and the ﬁrst
quarter of 2005. According to a recent study, while
the share of this group in the aggregate labor supply
is relatively small (4.2 percent), it has played a large
role in aggregate labor force participation, accounting for almost two-thirds of its fall since 2000.

Percent
4
1990:Q3 to 1992:Q3
2001:Q1 to 2005:Q1
2
0
-2
-4
-6

Both sexes,
16-24

Men, 25-54

Women, 25-54

Both sexes,
55+

Source: Bureau of Labor Statistics.

Economic Activity

Real GDP: Second-Quarter Advance Estimate and Benchmark Revisions
08.11.08
by Brent Meyer

Real GDP and Components 2007:
Fourth-Quarter Advance Estimate
Annualized percent change, last:
Quarterly change
(billions of 2000$)

Quarter

Four quarters

Real GDP

54.6

1.9

1.8

Personal consumption

31.4

1.5

1.3

Durables

-9.3

-3.0

-1.2

Nondurables

23.8

4.0

1.3

13.1

1.1

1.8

Services
Business fixed investment

8.2

2.3

4.2

Equipment

-9.4

-3.4

0.1

Structures

11.1

14.3

12.9

Residential investment

-15.9

-15.6

-22.2

Government spending

17.2

3.4

2.5

National defense

9.3

7.4

5.9

Net exports

66.8

—

Exports

33.5

9.2

10.2

Imports

-33.4

-6.6

-1.7

-52.0

—

Change in business
inventories

Source: Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

Real GDP increased at an annualized rate of 1.9
percent in the second quarter of 2008, according to
the advance estimate released by the BEA, 0.1 percentage point higher than its growth over the last
four quarters. Personal consumption, aided by the
stimulus checks and driven mostly by consumption
of nondurables, rose 1.5 percent during the quarter.
Durable goods consumption fell 3.0 percent during
the second quarter, slightly less than the 4.3 percent
loss experienced in the ﬁrst quarter. Business ﬁxed
investment posted its smallest quarterly gain since
the fourth quarter of 2006, rising 2.3 percent. Even
though residential investment fell 15.6 percent in
the second quarter, this is much better than last
quarter’s 25.0 percent loss.
Real imports and real exports were the largest contributors to real GDP growth in the second quarter,
adding 1.3 percentage points and 1.2 percentage
points to growth, respectively. It has been nearly 28
years since net exports contributed that much to
growth. Business inventories shrank by $52 billion
in the second quarter, subtracting 1.9 percentage
points from growth. Stimulus–aided consumption
added 1.1 percentage points to real GDP growth,
slightly higher than its contribution over the past
four quarters.
14

Looking forward, professional forecasters are
expecting a slightly weaker second half of 2008, before a rebound in 2009 toward trend GDP growth.
Compared to the June Blue Chip Economic Forecast, 28 of the 50 respondents marked down their
2009 forecast.
The annual BEA benchmark revisions, which cover
the past three years (back to the ﬁrst quarter of
2005), were released along with the second-quarter
advance estimate. Over the entire time period,
real GDP growth was revised slightly down. The
revision to the fourth quarter of 2007, from 0.6
percent to −0.2 percent, garnered far more interest
and renewed some recession speculation.

Real GDP Growth

Benchmark Revisions–Real GDP

Annualized quarterly percent change
6
Final estimate
Blue Chip consensus forecast
5

Annualized quarterly percent change
6
Revised
Prebenchmark
5
Average GDP growth
(1978:Q3-2008:Q2)

-1

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2007
2008
2006
2009
Source: Blue Chip Economic Indicators, July 2008; Bureau of Economic Analysis

Q1 Q2 Q3 Q4
2005

Q1 Q2 Q3 Q4
2006

Q1 Q2 Q3 Q4
2007

Q1 Q2
2008

Source: Bureau of Economic Analysis.

Regional Activity

Fourth District Employment Conditions
08.11.08
by Tim Dunne and Kyle Fee

Unemployment Rates
Percent
8
7
Fourth Districta
6

United States

5
4
3
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
a. Seasonally adjusted using the Census Bureau’s X-11 procedure.
Notes: Shaded bars represent recessions; Some data reflect revised inputs, reestimation,
and new statewide controls. For more information, see http://www.bls.gov/lau/launews1.htm.
Sources: U.S. Department of Labor, Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

The Fourth District’s unemployment rate notched
up 0.1 percent in June, reaching 6.2 percent. The
increase can be attributed to monthly increases in
the number of people unemployed (0.6 percent)
along with a decrease in the number of people
employed (−0.3 percent). The District’s rate was 0.7
percent higher than the nation’s in June, and it has
been consistently higher since early 2004. Since the
same time last year, the Fourth District’s unemployment rate has increased 0.6 percentage point, while
the nation’s has increased 1.1 percentage points.
15

County Unemployment Rates
U.S. unemployment rate = 5.5%

4.5% - 5.5%
5.6% - 6.4%

There are considerable diﬀerences in unemployment rates across counties in the Fourth District.
Of the 169 counties that make up the District, 29
had an unemployment rate below the national average in June, and 140 had a higher unemployment
rate than the national average. Rural Appalachian
counties continue to experience higher levels of
unemployment, while counties along the OhioMichigan border have begun to see rising rates of
unemployment.

6.5% - 7.3%
7.4% - 8.7%
8.8% - 11.0%
Note: Data are seasonally adjusted using the Census Bureau’s
X-11 procedure.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

County Unemployment Rates
Percent
12.0
11.0
10.0

Ohio
Kentucky
Pennsylvania
West Virginia

9.0
Median unemployment rate = 6.6%
8.0
7.0
6.0
5.0
4.0
3.0

County

Note: Data are seasonally adjusted using the Census Bureau’s X-11 procedure.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

Change in County Unemployment Rates,
May 2008–June 2008
Percentage points
2.8
Ohio
2.4
Kentucky
Pennsylvania
2.0
West Virginia
1.6
1.2

Median unemployment rate change = 0.07 percentage point

0.8
0.4
0.0
-0.4
-0.8
-1.2

County

Note: Data are seasonally adjusted using the Census Bureau’s X-11 procedure.
Sources: U.S. Department of Labor, Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

Unemployment rates in Fourth District counties
range from 4.5 percent to 11.0 percent, with a
median county unemployment rate of 6.6 percent.
Only one of Pennsylvania’s Fourth District counties
lies in the upper half of the distribution, compared
to 69 percent of Ohio counties and 63 percent of
Fourth District Kentucky counties.
The distribution of monthly changes in unemployment rates shows that the median county’s unemployment rate increased 0.07 percentage point from
May to June. The rise in county–level unemployment rates was concentrated in Ohio in the May to
June period. In fact, 83 percent of Ohio’s counties
experienced an increase in the unemployment rate.
On the other hand, the unemployment rate in 75
percent of Pennsylvania’s and Kentucky’s Fourth
District counties actually fell or remained the same
from May to June.
Since the beginning of 2007, employment in most
counties in the Fourth District has fallen. Of the
169 counties in the Fourth District, employment
fell in 120 and increased in only 49. The median
growth in county–level employment was −0.68 percent. Ohio counties experienced the weakest employment growth over the period, with 80 percent
of those counties losing employment. Moreover, 21
counties in Ohio had employment declines of more
than 2.0 percent, whereas only 3 counties in Fourth
District Kentucky, and no counties in Fourth
District Pennsylvania or West Virginia, experienced
similarly large employment declines. In fact, only
16 percent of Fourth District Pennsylvania counties
showed a decline in employment from January to
June.

Growth in County Employment,
January 2008–June 2008
Percent
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
-3.5
-4.0
-4.5
-5.0
-5.5
-6.0
-6.5

Ohio
Kentucky
Pennsylvania
West Virginia

Median employment growth = –0.68 percent

County

Note: Data are seasonally adjusted using the Census Bureau’s X-11 procedure.
Sources: U.S. Department of Labor, Bureau of Labor Statistics.

Regional Activity

State Labor Markets
08.15.08
by Kyle Fee and Tim Dunne

Change in the Unemployment Rate,
September 2007 to June 2008

Percentage points
-0.5 - 0.3
0.4 - 0.8
0.9 - 1.1
1.2 - 2.4
Source: Bureau of Labor Statistics.

Since the start of the credit crisis, labor markets
in the 50 states have generally weakened. As the
national unemployment rate rose from 4.7 percent to 5.5 percent from September 2007 to June
2008, the vast majority of U.S. states also saw rising
unemployment rates. Rhode Island led the country
with an increase of 2.4 percentage points, followed
by Tennessee and Illinois, each with 1.5. Regions
of the country that saw the largest percentage point
increases were in the Midwest and Southeast. In
the West, California and Nevada—states relatively
hard–hit by the housing slump—also saw relatively
sharp increases in unemployment rates.
Underlying these changes in state unemployment rates is both an expansion in the number of
people unemployed as well as a contraction in the
number of people employed. According to household survey data, U.S. employment declined 0.26
percent between September 2007 and June 2008,
with 28 states experiencing a decline in the number
of people employed. Within the Fourth District,
Pennsylvania was the only state adding employment
over the period.
While employment growth was mixed across the
50 states, there has been a substantial rise in the

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

Growth in the Number of People Employed,
September 2007 to June 2008
Percent
3
2
1
0
-1
-2
-3
-4

ID
TN

MO IL
AL MA NC MN WA DE SC NJ CT AZ UT OR NY IA ME VA KS MD AR TX AK NV
MI
IN
KY OH VT FL CA MT US WV WI GA MS CO NM SD WY NH OK LA NE PA
HI ND

Source: Bureau of Labor Statistics.

Growth in the Number of People Unemployed,
September 2007 to June 2008
Percent
50
40
30
20
10
0
-10

OK WI LA OR SC IA KS AK WY WV OH KY NM CT NH MA VT NJ GA DE CO IN VA AL HI RI
AR SD ND TX NE MO ME MS MD MN MI UT US WA NY PA CA NC AZ MT FL TN NV IL
ID

Source: Bureau of Labor Statistics.

Growth in Non-Farm Payroll Employment,
September 2007 to June 2008
Percent
3

-1

-2

TN
AZ

M I KS M E SC IN
ID
WI OH IA
PA KY M N VA NC VT M A SD WA NE ND CO OK M T TX
M O CA GA NJ OR M S NV
IL
AL DE US CT NY AR HI WV NH NM UT LA M D AK WY

Source: Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

number of people unemployed in most states.
This is due to the fact that labor force growth has
remained relatively strong in comparison to employment growth in most states. For the United
States as a whole, employment fell by 370,000 from
September 2007 to June 2008, while the number
of people in the labor force rose by 880,000. As a
result, the number of unemployed workers rose by
1.25 million—a 17.3 percent increase. The substantial growth in unemployment is seen across the
50 states, with 44 out of the 50 states experiencing
a rise in the number of people unemployed from
September to June.
An alternative measure of the health of state–
level labor markets comes from the payroll survey
conducted by the Bureau of Labor Statistics. This
survey of ﬁrms paints a somewhat more optimistic
view of labor markets over the September 2007–
June 2008 period. According to it, only 10 states
experienced contractions in employment. However,
it is important to note that the payroll survey is
subject to revisions and that these revisions can be
substantial.
The Federal Reserve Bank of Philadelphia constructs an index of state economic activity that is
based on a combination of labor market data—the
state’s unemployment rates, nonfarm payroll employment, average hours worked in manufacturing,
and real wages and salaries. Using these data series,
the Philadelphia Fed constructs an index for each
state, as well as a diﬀusion index that summarizes
economic activity across the states. The 50–state
diﬀusion index is simply the percentage of states in
which the index is rising minus the percentage of
states in which the index is declining. Two versions
of the index are constructed, each with a diﬀerent
time horizon. One reﬂects one–month changes and
the other, three–month changes. A reading below
zero implies that more than half of the 50 states
have declining index values, while a reading above
implies the opposite. For example, a diﬀusion index
of −60 could be generated if 20 percent of the state
indexes rose while 80 percent fell (−60=20-80).
The Philadelphia Fed’s diﬀusion index moves with
the overall business cycle, and in each of the previous recessions it bottomed out at values in the
18

Philadelphia Fed Diffusion Index for the 50 States
Index
110
100
90
80
70
60
50
40
30
20
10
0
-10
-20
-30
-40
-50
-60
-70
-80
1979

3-month

range of −40 to −70. The one-month index turned
negative in March, and the three-month index
turned negative in April. The June 2008 readings
of the one- and three-month diﬀusion indexes are
−28 and −48, respectively. Given that these indexes
are based primarily on labor market data, they show
that labor market weakness spread across states,
especially during the second quarter of 2008.

1-month

1983

1987

1991

1995

1999

2003

2007

Note: Shaded bars represent recessions.
Source: Federal Reserve Bank of Philadelphia.

Banking and Financial Markets

Fourth District Bank Holding Company Conditions
07.30.08
by Joseph G. Haubrich and Saeed Zaman

Annual Asset Growth
Percent
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Authors’ calculation from Federal Financial Institutions Examination
Council, Quarterly Banking Reports of Condition and Income, first quarter
2008.

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

A BHC is an organization that consists of a parent company and one or more commercial bank
subsidiaries. Other depository institutions and
nonbank subsidiaries may also be included. As of
the ﬁrst quarter of 2008, there are 21 bank holding
companies (BHCs) headquartered in the Fourth
District whose consolidated assets total more than
$1 billion, including ﬁve of the top ﬁfty BHCs in
the United States.
As a consequence of the ongoing consolidation in
the banking system, the number of BHCs in the
Fourth District with assets over $1 billion fell from
24 to 21 from 1999 to 2008, but their total assets
have increased every year with one exception. That
was in 2000, when Charter One Financial was acquired by a BHC headquartered in another Federal
Reserve District (Citizens Financial Group in the
First District).
The largest ﬁve BHCs in the Fourth District rank
in the top 50 of the largest banking organizations
in the nation. Fourth District BHCs of all asset
sizes account for roughly 4.5 percent of BHC assets nationwide, and BHCs with over $1 billion in
assets make up the majority of the assets held by
Fourth District BHCs.
19

The income stream of BHCs in the Fourth District
stabilized somewhat in ﬁrst quarter of 2008. The
return on assets (which is measured by income
before tax and extraordinary items because a bank’s
extraordinary items can distort the true earnings
picture) remained ﬂat after having declined to its
lowest level in the fourth quarter of 2007. The
net interest margin (interest income minus interest
expense divided by earning assets) increased slightly
to 3.0 percent.

Largest Fourth District Bank Holding
Companies by Asset Size
Dollars, billions
182
162
142
122
102
82
62
42
22
2
National
City

PNC

Fifth
Third

Keycorp

FirstMerit Park
National
Huntington

F.N.B. First
Commonwealth

Note: Rank is as of first quarter 2008.
Source: Authors’ calculation from Federal Financial Institutions Examination
Council, Quarterly Banking Reports of Condition and Income, first quarter
2008.

Income Stream
Percent
4.0

Percent of assets
2.00
Income earned
but not received 1.75

Net interest margin
3.5
3.0
2.5

1.50
ROA before tax and
extraordinary items

1.25

2.0

1.00

1.5

0.75

1.0

0.50

0.5

0.25

0.0

0.00
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Authors’ calculation from Federal Financial Institutions Examination
Council, Quarterly Banking Reports of Condition and Income, first quarter
2008.

Balance Sheet Composition
Percent of assets
42
Real estate loans

37
32
27
22

Commercial loans
17
12

Mortgage-backed
securities
Consumer loans

7
2
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Authors’ calculation from Federal Financial Institutions Examination
Council, Quarterly Banking Reports of Condition and Income, first quarter
2008.

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

Another indicator used to measure strength of earnings is income earned but not received, which has
been low for some time for BHCs in the District.
If a loan allows the borrower to pay an amount that
does not cover the interest accrued on the loan,
the uncollected interest is booked as income even
though there is no cash inﬂow. The assumption
is that the unpaid interest will eventually be paid
before the loan matures. However, if an economic
slowdown forces an unusually large number of borrowers to default on their loans, the bank’s capital
may be impaired unexpectedly. Despite a slight rise
over the past three years, income earned but not
received fell slightly from 2007 to the ﬁrst quarter
of 2008, reaching 0.52 percent, which is well below
the recent high of 0.82 percent set at the end of
2000.
Fourth District BHCs are heavily engaged in realestate-related lending. As of the ﬁrst quarter of
2008, about 40 percent of their assets are in loans
secured by real estate. Including mortgage-backed
securities, the share of real-estate-related assets on
the balance sheet is 49 percent.
Deposits continue to be the most important source
of funds for Fourth District BHCs. Savings and
small time deposits (time deposits in accounts
less than $100,000) made up 54 percent of their
liabilities in the ﬁrst quarter of 2008. Core deposits—the sum of transaction, savings, and small time
deposits—made up more than 60 percent of their
liabilities, the highest level since 1998. Finally,
total deposits made up about 70 percent of funds.
Despite the requirement that large banking organizations must have a rated debt issue outstanding
at all times, subordinated debt represents only 3.0
percent of funding.
20

Liabilities
Percent of liabilities
55
50

Savings and small time deposits

45
40
35
30
25
20
15
10

Transactions deposits
Large time deposits

Subordinated debt
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Authors’ calculation from Federal Financial Institutions Examination
Council, Quarterly Banking Reports of Condition and Income, first quarter
2008.

Problem Loans
Percent of loans
3.00
2.75
2.50
2.25
2.00
1.75
1.50
1.25
1.00
0.75

Commercial loans

Real estate loans

Consumer loans

0.50
0.25
0.00
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Authors’ calculation from Federal Financial Institutions Examination
Council, Quarterly Banking Reports of Condition and Income, first quarter
2008.

Net Charge-Offs
Percent of loans
3.0
2.5

Commercial loans

2.0
Consumer loans

1.5
1.0
0.5

Real estate loans

Problem loans are loans that are more than 90 days
past due but are still receiving interest payments,
as well as loans that are no longer accruing interest. Problem commercial loans rose sharply for
Fourth District BHCs starting in 1999, peaked in
2002, and settled below 0.75 percent of assets in
2004. As of the ﬁrst quarter of 2008, 1.01 percent
of all their commercial loans were problem loans.
Problem real estate loans, which peaked in 2007,
decreased to 0.24 percent. Problem consumer loans
(credit cards, installment loans, etc.) edged up
slightly to 0.62 percent.
Net charge-oﬀs are loans removed from the balance sheet because they are deemed unrecoverable,
minus the loans that were deemed unrecoverable
in the past but are recovered in the current year.
As of the ﬁrst quarter of 2008, net charge-oﬀs for
the BHCs’ consumer loans increased signiﬁcantly,
for real-estate loans they increased slightly, and for
commercial loans they remained ﬂat. Net chargeoﬀs were limited to 1.76 percent of outstanding
consumer loans during the quarter, 0.57 percent of
outstanding commercial loans, and 0.28 percent of
outstanding real estate loans.
Capital is a bank’s cushion against unexpected losses. The risk-based capital ratio (a ratio determined
by assigning a larger capital charge on riskier assets)
jumped to 11 percent for the Fourth District BHCs
in the ﬁrst quarter of 2008 from 10.5 percent at the
end of 2007. The higher the capital ratio, the more
protected is the bank. The leverage ratio (balance
sheet capital over total assets) fell slightly, to 9.1
percent.
An alternative measure of balance sheet strength is
the coverage ratio. The coverage ratio measures the
size of the bank’s capital and loan–loss reserves relative to its problem assets. This ratio has been falling
since 2006, and as of the ﬁrst quarter of 2008,
Fourth District BHCs have $6.80 in capital and
reserves for each $1 of problem assets.

0.0
–0.5
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Authors’ calculation from Federal Financial Institutions Examination
Council, Quarterly Banking Reports of Condition and Income, first quarter
2008.

Federal Reserve Bank of Cleveland, Economic Trends | August 2008

Coverage Ratio

Capitalization
Percent

Dollars
21

12.0
11.5

Risk-based capital ratio
18

11.0
10.5

10.0
9.5

Leverage ratio

9.0
8.5
8.0

9
6

7.5
7.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Authors’ calculation from Federal Financial Institutions Examination
Council, Quarterly Banking Reports of Condition and Income, first quarter
2008.

3
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Note: The coverage ratio is the ratio of capital and loan–loss reserves to
problem assets.
Source: Authors’ calculation from Federal Financial Institutions Examination
Council, Quarterly Banking Reports of Condition and Income, first quarter
2008.

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Federal Reserve Bank of Cleveland, Economic Trends | August 2008

Full text of Economic Trends (Federal Reserve Bank of Cleveland) : Economic Trends - August 2008

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