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http://clevelandfed.org/research/trends December 1995 Best available copy The Economy in Perspective n e medium is the message .. . During this holiclay season, while standing in line to buy just the right gift-or to return just the wrong oneyou might stop to reflect on the evolution of shopping. There was a time when people would "go shopping" as a social pastime, but those days now appear to be the relic of a bygone era. In the second phase of the evolution, retailers learned how to reel in customers with double coupons, "midnight madness" sales, and everyday low pricing. Then came malls featuring petting zoos, beauty contests, and arnuselnent park rides. But the inescapable tntth of the shopping experience is that the transaction itself is too slow, son~etilnesfrustrating, and not very high-tech. Cash is a problem. No one wants to keep going to the bank, even if cash can be obtained quickly fronl ATMs. Check writing can be annoying when so Inany forms of iclentification are requirecl. Standing behincl a check writer is like standing behincl someone giving pennies to the bank teller. Credit cards overcorne many of these shortcomings, but they, too, require that a check be written when it's time to pay the bill. Besides, charge carcls have been around awhile ancl are showing their age. No pizzazz. Heading into the twenty-first century, w e need something that befits a cybershopper. Fortunately, the shopping scene is receiving a shot in the arm from payment entrepreneurs. Thanks to technological innovations, the very act of making a purchase can now adcl luster to othenvise numbing encounters with parking lots, sales associates, ancl merchandise racks. If clevelopers of new payment vehicles have their way, consunless will be as exhilarated by how they nlalce a purchase as by what they take home. Credit card issuers have found many ways to put the punch back into using these payment devices, illustrating how purely functional transactions can be tumecl into a Inore pleasant experience. Creclit carcls have traditionally carried an annual fee ancl lookecl stodgy. The only pleasure associated with their use was the knowledge that you really weren't paying for what you were taking out of the store: that came later at billing time (or even months later if you deciclecl to finance the purchase). Now you can obtain several carcls for free ancl choose from an array of colors, designs, and celebrity pictures. Using these cards can auto~llaticallyprovide accident and travel insurance, charitable donations, frequent-flier mileage, cash rebates, and merchandise credits. So, depending on your mood at transaction time, you can transcencl the Inere purchase of groceries to satisfy a deeper craving-like adding points toward that Caribbean cn~ise. Retail payment vehicles have broadened miell beyond cash, checks, and credit carcls. Storedvalue cards are designed to reduce the need to stop at the bank for cash, yet they take the place of cash for small-dollar purchases. For example, you can ride the public transit system and exit the turnstile by "swiping" a carcl that holds a dollar-denominated balance of "transit money" through a reading device. The device deducts the fare from your available balance. At the airport, you can place a long-distance call by using another carcl that stores long-distance minutes, for which you have already paid. Swipe. Your child uses a card to buy lunch at the school cafeteria. Swipe... . .swipe (back for seconds). And don't forget movie rental cards-swipe, swipe, swipe for that Jack Nicholson festival weekend. The possibilities are endless. One can imagine prepaid shoe-shine cards, coffee shop cards, and car wash cards. But paper currency and checks are likely to be with us for some time before being completely replaced by electronic payment vehicles. No one wants to carry around dozens of special-purpose electronic rnoney cards, each to be used as cash for only one n~erchant.Nor does it make sense to carry many cards denominated in telephone units, transit miles, and donuts, because it is not easy to exchange these units with people or merchants other than the issuer. What makes money valuable is its universal acceptance. Yet it is apparent that the technology to replace paper payment instru~nents is rapidly falling into place. The attraction for payment processors lies in the knowledge that replacing paper checks with electronic ones will cut handling costs dranlatically. The United States spends about $60 billion annually processing paper checks, so the business opportunities are quite attractive. Cash, too, is expensive for merchants to transport anct protect from theft. however, service providers To be successf~~l, will have to address some inlportant security issues ancl assemble a large merchant network. They will also have to persuade consumers to abandon those hopelessly old-fashioned greenbacks and paper checks by offering something of better value. But the handwriting is on the wall: Faster and cheaper payment services are cornin' to town. So the next time you stand in a check-out line tapping your toes and staring at your watch, think about how excited you'll feel when it's your turn to pay. Using your debit card with the Santa Claus logo may just earn you a trip to the North Pole. http://clevelandfed.org/research/trends December 1995 Best available copy Monetary PPoq Perceni, weeklv averaaes Perceni Perceni, weeklv averaoes Percent, weekly averages a. Estimate of the yield on a recently offered. A-rated utility bond with a maturity of 30 years and call protection of five years. b. Bond Buyer Index, general obligation, 20 years to maturity, mixed quality. c. 10-year Treasury yield minus f~ve-to 10-year mean inflation expectations as measured by the University of Michigan's Survey of Consumers. d. One-year Treasury yield minus one-year mean inflation expectations as measured by the University of Michigan's Survey of Consumers. e. Three-month, six-month, and one-year instruments are quoted from the secondary market on a yield basis: all other instruments are constant-maturity series SOURCES: Board of Governors of the Federal Reserve System; and the University of Michigan. Despite the :il~scnceof an)- explicit policy action 11)-the Fecleral Open Market Committee (FOMC). interest rates have killen across the specsince rnicl-Aug~~st. trum of mat~~rities 'l'hirty-!.car '1'reasur)- I~oi~clr:ites have dropped more t1i:in 00 lx~sis points. ~vhile three-month 7'-bill t basis rates are clo\\.n : i l x ) ~ ~ 10 points. l ' h ~ l s ,the )-ielcl ci~r\.chas flatteileci significantl)., I I L I ~ it still slopes up\~arcl. Since the cyclical peal< in longtcml rates in Noveml>cr I99.t. long- term honcl yields have fallen 2 percent:ige points, while short-term sates selllain slightly above their levels at that time. The down~varcl swing in the yield curve over this periocl has been rather clramatic, as has rlle rise in the stock mal-liet.The s:~g in the yielcl curve arouncl the one- to two-year maturities suggests th:it marliet participants expect further cuts in the federal fiinds sate over the nest year. Ileal interest rates are also clown subst:intially from their Janu:q 1995 pe:il<s. The short-term real interest late-as measured by the one-year Treasury rate less expected inflation -stands just above 1!h%,near levels rcgisterecl in June and September o f this year. The real long-term sate- as meastlrecl by the 10-year TI-easury rate less espectecl inflation-is just ~lncler2%. Many :inalysts have attril~utedpal-t of' the dovmwarcl trencl in capital marltet rates to tho public's increasing conviction that Congress ancl the (co17ti1zlrcclon ~ z e x ~ p c g e j http://clevelandfed.org/research/trends December 1995 Best available copy Monetary Policy (cont.) Percent Percent M J J A S 1995 O N D J Contract month Percent, s.a.a.r." F M A M 1996 Billions of dollars, seasonallv adiusled a. Seasonally adjusted annual rate. b. Last plot is estimated for November 1995. SOURCES: Chicago Board of Trade; Board of Governors of the Federal Reserve System; and Bank Rate Monitor, various issues. aclrninistration will psocluce a creclible deficit-reductio~~ packxge. Nevto identify the ertheless, it is cliffic~~lt f~lndamentalsbehincl changing interest rates, since other klctors may be involvecl. For es:~mple,the clemancl for l~anlcloans, rvhich was strong over 111ost of the past year, has tapered off in recent months. O n the other hancl, business investment remains robc~st,suggesti~lg[hat the real rate of return on new pl:lnt and eq~~ipment is still relatively high. Feel funcls futures marlcets reveal that the FOMC is again expected to lower its funds-rate objective sometime over the next few months. Such a move was projected to occur earlier this year, but the policy change failed to materialize. More recently, the projectecl funds-rate decline has been accompanied by evidence that inflation is somewhat lower than expected in the second half of 1995. Yields on so111e bank deposits fell early this year, but have remained relatively steady since then. As a consequence, the opportunity cost of M2-largely the difference between marliet rates on tradable short-term securities ancl rates paid on hanli cleposits-has stabilized. The effect of this stability is 111ost eviclent in the recent growth rates of snlall time anti savings deposits, which have fluctuated much less. During 1995, growth in retail money marltet mutual funds explodecl despite declining yields. Some analysts have attributecl this to (contincred on next pqqc.i http://clevelandfed.org/research/trends December 1995 Best available copy Monetary Policy (coat.) Billions of dollars Billions 01 dollars Billions of dollars Billions of dollars a. Last plot is estimated for November 1995. b. Growth rates are percentage rates calculated on a fourth-quarter over fourth-quarter basis. Annualized growth rate for 1995 is calculated on an estimated November over 1994:IVQ basis. c. Nondeposit liabilities are total liabilities minus deposits and borrowings from banks in the U.S. NOTE: All data are seasonally adjusted. Dotted lines are target ranges. SOURCE: Board of Governors of the Federal Reserve System. the flattening of' the l.ielcl curve, which I :IS inclucecl scc~lrityholclers to shorten the maturity of their portfolios. In I-ecent months. ho\vever, growth in money f ~ ~ n dIS s slowed some\vl~at. With &I2 opportunity cost Ilolcling steady, M2 growth h;ls climi,ccl to near 4%)this year. 'l'his pace is more commensurate lvith historical csperience and suggests that special fattors clamping the z1ggrcg:lte's gron.th in recent years may IN\-e lesseneel. bhrliet analysts helieve that M2's ilnusual I,eh:~\;ior \vas a consc- cluence of' fundamental changes in the way householcls managecl their 1x)rtfolios. These changes were lasgely inclucecl by a n environment in ~vhichhanks had limited opport~lnities for nlalting good loans. Absent banks coulcl not such oppo~T~lnities, :~ggressivelycompete for funcls by of'fering attractive yields on cleposits. I-Iigher-yielcling bond rn~~til:tlfilntls :~ttractecl the attention of cleposit holclcrs, \v11o for the first time aclclecl honcl fi~nclsto their portfolios. These conetitions lecl to a massive suhstitution of hanli cleposits for hone1 funds, which are not incluclecl in M2. The recent cessation of net inflows into hone1 funds suggests that M2 [nay resume Inore norrnal growth. The engine of deposit growth in the recent past has been strong loan clemancl from hot11 consumers ancl lx~sinesses.In 1995, banks increasingly turned to large time cleposits to S~uncinew loans. As a consequence, M3, which includes large ti~llecleposits, has espancled a healthy 6% this year. Recently, some ilnusual f.dctors (co~?tinttccl on wextpage) e B e 8 8 68 http://clevelandfed.org/research/trends December 1995 Best available copy @ Monetary Policy (cont.) Billions of dollars, seasonallv adiusled Billions oi dollars, not seasonally adiusted May June July Aug. Sept Oci 1995 Billions of dollars, seasonally adjusted Billions oi dollars, seasonally adjusted a. Last plot is estimated for November 1995. b. Growth rates are percentage rates calculated on a fourth-quarter over fourth-quarter basis. Annualized growth rate for 1995 is calculated on an estimated November over 1994:IVQ basis. c. Adjusted for sweep accounts. NOTE: Dotted lines represent growth ranges and are for reference only. SOURCE: Board of Governors of the Federal Reserve System. have rest~;iinedtile grolvth of the narrow money measures. 'I'lle plannecl introcl~~ctionof rhe reclesignecl $100 note may have hacl ;i significant effect on current‘>. gro\\;th over the seconcl half of 1995. Foreign holclers of lJ.S. currencyrllany of \\.horn 11:1\re esi,ericncecl ~infavol-al,leexcl~ingcsof their onin currency-are concernecl :lboc~tthe future acceptal~ilityof their dollar holclings, leacling some to recluce this portion of their portfolio. Because it is cstir-natecl that ;ilmost 70% of all V.S. currency is helcl :il,ro:~cl, cLirrency growth is believed to be highly sensitive to such concerns. Another factor ciepressins the narrow aggregates is the widespread emergence of sweep ;lccounts. I3anlis are initiating these programs to eco~lomize o n their reserves, \vhich earn no return for the bank. These arrangements sweep excess householcl checkable cleposits, which are reservable, into money marliet deposit accounts, n.hich are not reservable, thereby reducing a banli's required reserves. Over the past fen. months, clepository institu- tions' intensifiecl efforts to initiate sweep progmn~shave led to sharp cleclines in checlial,le cleposits ancl total reserves. Because &I1 comprises currency and checliahle cleposits, its growth has been significantly darnped by these special factors. It is estilllatecl that sweep accounts alo11e have cle~)ressecdMI gro\vth Inore t11:~n 3% this year. I3ecause the M2 aggregcrte inclucles money marl<et deposit accounts, it is impe~vioust o the clevelopment of sweep accounts. Q O B e ' a @ http://clevelandfed.org/research/trends December 1995 Best available copy * Inflation and Prices 12-monih perceni change 3 75 October Price Statistics Annualized percent change, last: I rno. 10 rno. 5 yr. Consumer Prices All items 4.0 Less food and energy Mediana 3.8 3.3 Producer Prices Finished goods Less food and energy FOMC central tendency as of July 199SC ----------- 1994 average 2.9 2.9 2.6 3.3 3.5 3.4 3.2 2.7 2.8 -0.9 1.4 1.0 1.8 0.0 2.4 1.9 1.6 -3.0 4.8 0.6 3.5 ' TRENDS IN THE CPI Commodity futures pricesb Perceni of iorecasis 50 I Percent 01 ioial DISTRIBUTION OF ECONOMISTS' 1996 CPI FORECASTS~ < 2.5 2.5-2.9 3.0-3 4 3 5-3 9 4.0-4 5 1 95 I PURCHASING MANAGERS REPORTING HIGHER PRICES >45 Annual perceni change a. Calculated by the Federal Reserve Bank of Cleveland. b. As measured by the KR-CRB composite futures index, all commodities. Data reprinted with perm~ssionof the Commodity Research Bureau, a Knight-Ridder Business Information Serv~ce. 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. As of July, the stated range (fourth-quarter to fourth-quarter percent change) is 3.125 to 3.375 for 1995 and 2.875 to 3.25 for 1996. d. Blue Chip panel of economists. SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; Board of Governors of the Federal Reserve System; the Federal Reserve Bank of Cleveland; the Commodity Research Bureau; National Association of Purchasing Management; and Blue Chip Economic Indicators, January 10 and November 10, 1995. The latest inflation inclictttors are showing s~lrprising\.olatilit).. Af'ter a four-month gain of only I.So/ilthe , Cons~tmerI'rice Inclcs (CI'I) acceleratecl to a -1.0% annualized Ute in Octolxt-. kl~lchof' the upturn \\.as centel-eel in tlie index's ho~tsinganel energy components. The rise in C1'1 inflation stancls in starii contmst to the decline in the I-'roclucer I'rice Incles, which s\vitchecl fl.o111;t 3.8%1 aclvance in Septeml~erto a 0.9% contraction in October. The mecli;ln CI'I - :t rne;tsclre of core inflation - slowed to 3.3(!4). ho\-cring I,et\vee~~its year-to-date ;uncl five-year rates. '1':llcing :I lotlger perspective, the 12-tnoniil ch;tnge in the CI'I ancl the meclian CI'I rose to 2.7% and 3.3%. res~>ecti\.ely.Both are higher than 1994 sates, but are still ~vithinor I,elo\v the central tendency range ~xojected1)). the Fecleral Open &l;trliet Committee last July. l'he I3lue Chip forecast paints a f'itr 111or-efr-~vorablepicture of especwcl inflation. The Novcmber 10 ~xojection shows sigt1ific;tnt improirement over brecasts m:tcle at the beginning of the year. In Janu:~ry,over 57'X of' economists were predicting that inflation \vo~~lcl reach 3.i(H, or niore. In November, that s1~i1.efell to less tl1a11 5%. 1)~lrch:tsingmanagers at manufacturing firms provide aclclitional encoumging ne\xTs.The Nation;tl Association o f I'ilrchasing i\f;tnagement's price inclcx has droppecl clramatic:tlly since the encl of last year. (cot?iilzrtedolz 11extpage) http://clevelandfed.org/research/trends December 1995 Best available copy Percent change irom corresponding quarter oi previous year 1986 1988 1990 1992 1994 Percent change from corresponding quarter oi previous year Percent increase in product~v~ty 14 IMPACT ON PRODUCTIVITY OF A 10% INCREASE IN EDUCATION, LABOR HOURS, OR CAPITAL STOCK Education Labor hours Capital stock a. Nonfarm business. SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; and EQW National Employer Survey, National Center on the Educational Quality of the Workforce, University of Pennsylvania (administered by the U.S. Census Bureau). I-Ioi1r.1).compens:iiion in the LT.S. grew a h o i ~ t3%(%over the I73St l o i ~ r cparters. esceecling the rise in CI'Imeasi~recl inllation. This slioulcl come ;is 110 si~sj~rise. since, in theor). at least. \vosliers ;ire compensateel for espectecl inllation plus any in1provcment in proclucti\.ity. Holvever, the growth in I;il~osprocluctivity has rise11 m:~rlicclly in the p;ist several years. l'his implies that tlie economy's uncierl).ing i11flation:iry thrust (me:isilrecl 17y unit l:ibor costs. or compens;ition g r o \ ~ t hless 171.0tlucti\.ity h;~sheen essentially zero over the 1:ist year-a seemingly impl:ii~sihleconclusion. Ilusiness analysts are puzzlecl hy this recent lack of conformity bet\veen procluctivitp growth ancl real (inf1:ition-;~clj~~sted)wage gro\\~th. Some Imve cotlcluclecl that o ~ l curr rent inclicators of output, which sc~ffcr from a host of measurement prol>lems, overstate the economy's ;ictilal growth sate and thereby overestimate the growth in labor producti\.ity. Others believe that the inflation measures usecl to clcterl~li~le real w g e s are calculated incorrectly anel thus cause us to unc1erestim;ite the gro\vtli of real nxges. A third consiclesation is a selmrtecl rise in n-orker t ~ l i n i n g , ~vhichmay be a significant impetus to productivity gron.th, I I L I ~ is not necess:irily computed in a wo1.1ier's Ilour-1)-cost. Certziinly, t ~ i i n i n gancl ecliication I7enefits h:we the potential to affect ~vorker~~rocl~ictivity cl~um:itically.Recent research s h o ~ v s that incre;isecl n-orlier ecli~cationh:~s 21 greater in1p;'ct o11 prociiicti\.ity gro\vth th;in clo proportionate incre:ises in either n.orli effor[ or tllc c:ipii;il stocI<. http://clevelandfed.org/research/trends December 1995 Best available copy Economic Activity Percent change s a a r a Index 1987 = 1 00 1 25 1 20 115 110 1 05 IQ IIIQ IQ 1990 11111 1992 IIIQ IQ 1991 IQ 1110 IQ 1993 IIIQ 1994 la 1110 O0 1990 1991 1992 1993 1994 1995 1995 a. Seasonally adjusted annual rate. b. Fourth-quarter estimate is from Blue Chip Economic Indicators, November 10, 1995. c. 1995:IVQ consists of October and November data only. d. 1995:IVQ consists of October data only. SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the Census; Blue Chip Economic Indicators; and Board of Governors of the Federal Reserve System. Econo~nists participating in the LSlue Chip sclr-\-eyanticipate :i 2.4%) rate of real economic gron-th in 199j:IVQ - lvell belo\\. last cluarter's 4.34) acl\,ance. The recent flatness in inclustri:il i~rocluciiona n d hours \\.orliecl seems consistent with this slo\vclo\vn. For all ol' 1995, tlle I31uc. Cllip panel foresees a gro\\.th of approsi~n;itely HI. Ic~onomistsestimate the n;k- ro~igi~ly 2.50f)per ye"'. 11 i>ooil~ in business fisecl i~lvestment h:is :kccompanied the current I ~ ~ ~ s i nespansion, ess but c u r i o ~ ~ s l y , [lie c~nclerlyingfilctors have not ignitccl resiclcntial construction. Ilespite some i~nprovement in the thircl q~~;irtcr, new \;home construetion 1121s heen a relatively weak conlponent o f GilI-' this year. Ileal resiclential invest~nentfell 1.4%) in starts remaining gener;~lly \\.e:~li, sesiciential construction will most likely stay soft. iiousing starts declinecl 1.796 in Octol~er.the seconcl consec~~ti\.e monthly clrop Tie\-erthelcss, :k substanti;~lcleierioration in the hoi~singsector seems ~~nlilicly. Iiousing sales, which rose clram;iiically het~veenFel~ruaryzinc1 Jc~ly,rem:~in strong, ;~nclthe I ~ L I I I I 1)er of ~ n o n t h sthat unsolci homes http://clevelandfed.org/research/trends December 1995 Best available copy Percent change Percent 1987 dollars 15 1 BUSINESS FIXED INVESTMENTAS A SHARE OF GDP Perceni an I Billions of curreni dollars, ~ . a . a . r . ~ 600 550 500 450 400 350 300 250 200 150 100 1980 1983 1986 1989 1992 1995 a. Tlirough 1995:lllQ. b. Output per hour, nonfarm business. c. Seasonally adjusted annual rate. SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis: U.S. Department of Labor, Bureau of Labor Stat~st~cs; and Board of Governors of the Federal Reserve System. stay on tile illarliet 11:~s cleclinecl 13.6%1ol'ror~lits .April peak. A contin~lingI,oo~n in in\.estment spencling ancl acl\.anc.es in procluctivity gro\\-tll brigl1ten the n:~tion's long-term economic prospects. Real I>usiness fisecl in\-estment. which has risen I3.j0,il 01-er the past four cluarters. has cqilaletl 14%ool' the nat i o n ' ~o ~ l i p ~this i t !.e:u-1.4 percetlta g e points higller than last yew's recoscl le\.el. '1'11~sapicl pace of investment is \\.elcome in an economy thought to I>e operating at high lev- els of capacity, since business fixecl proclucti\.it)- gron.th accurately. in\-eslinent fosters p~.ocl~~cti\~ity Chief ;kinong these is the difficulty gro\\.th. 'l'he current expansion hns of meas~iringser\.ices, \vllicll repre\\iitnessecl hove-average increases sent a large anel gro\ving compou t hour workecl, fc)llo\vin o ~ ~ t p per nent of national o~ltput. s ~ r l ~ s t a n ing a lengthy period (1974-91) of ti211 amount of ;lnecclotal e\.iclencc helo.i\,-a\.er;lge postings. indic:ltes that procluctivity gron.th is 71'lle neu. chain-weighteel GIII-' :~cl\,:lncing a1,or.e [I-encl. Corpor:lte rnetiloclology will recluce the magprofits. for esample. ha\.e risen nitucle o f recent producti\-ity gains 10.40/(1ann~lally since 1991. \\.ell I>). elimin;tting an ~ ~ p w a price r d hias above the Kite of inflation. Such inin the real oiltput data. Keverthecre:tses ~ o i ~ seem ld unliltely ;mcl less, n ~ ~ m e r o clow~l\v\iarcl ~ls biases i~nsustain:~t)le \\.ithout the sirpport :11so hincler ocrr capacity to measure of strong pi-ocli~ti\.itygro\vth. http://clevelandfed.org/research/trends December 1995 Best available copy Percent change rrom corresponding month of previous year 6 PERSONAL INCOMEA N D SPENDING TRENDS Billions of dollars, not seasonally adjusted 1 C] Real personal consumpt~onexpend~tures - Real disposable personal Income 1 I 200 N O N - A U T O RETAIL S A L E S 190 - 180 - 170 - 160 - 150 140 130 120 110 Percent not seasonally adjusted 6 J F I I I I I I I I I I M A M J J A S O N D Percent, .. seasonally adjusted 5 4 3 2 1 0 -1 -2 -3 1989 1990 1991 1992 1993 1994 1995 SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the Census; and Board of Governors of the Federal Reserve System. Despite some nnocleK~tionover the past six months or so, the trend growth in inf;ktion-;icljc~stecI~ or real, dispoxiit'le income continues to outpace red spcncling, lnostly as a result of a persistent strengthening in pesson:~l income. Incleed, the recent trencl in seal spencling growth has shown little cleviation from the solicl 2l/L(H1 to 31/L(Yh /i)i~igeit has followecl t i ~ rthe past three years. Althoe~ghtrencls in hoe~seholclincome ancl spcncling are generally fa- vol.al>le, retailers are reporting the c~sualanxiety over holiday spending prospects. Excluding autos, retail spending cluring November and Decemhes typically accounts for 20% or niorc of a retailer's receipts for the yea]; maliing these months pivotal. Anlong the factors affecting the cclment holiday sales outlook is a relatively high level of consumer debt, since a substantial share of holiday s ~ x ~ i d i nisg financecl by revolvi~ig clel~t.or creclit carcls. During Novem- ber ancl December, creciit card halances terlcl to Ix~lloonby about 4% of clisposable income; conseqc~ently,. a liq~~iclity-constl.ainet1 consumer could liniit holiday sales prospects. There are n o current indications that householcls' liquiclity is impairecl, however. While the clelinquency rate o n installment debt is rising (as it often does cluring periods of econornic growtli)~the current rate-less than 2%-is estremely low 11y historical standarcls. http://clevelandfed.org/research/trends December 1995 Best available copy Labor MarkeEs Change, thousands 01 workersa 1 350 [AVERAGE MONTHLY NONFARM EMPLOYMENT GROWH 300 250 200 150 100 50 0 -50 -1 00 1989 1990 1991 1992 1993 1994 1995 to date Thousands IlIQ S e ~ t . Oct. Nov. 1995 Percent Percent chanae, vear over veara a. Seasonally adjusted. b. Production and nonsupervisory workers. c. Four-week lagged average of seasonally adjusted data. d. Vertical line indicates break in data series due to survey redesign. SOURCE: U.S. Department of Labor, Bureau of Labor Statisticsand Employment and Training Admin~stration. Nonklrm payroll cmploynlent increasecl by 166,000 in November. although about half the gain can he attrihutecl to special circumstances, including a longer-than-usual survey periocl 2ulcI the introduction of n e w season;ul ;ucljustment klctors. Substantial jol~cleclines in manufacturing, coupled with frigid weather t11:ut Ilartenecl constn~ction employment. resulteel in a negative figure in the goocls-lxoducing sector.. D i ~ ~ i b l eand nonclu~lble goocls esperiencecl identical cleclines o f 16.000 jobs in No\.eml~er. fIo\vever, year-to-clate losses have been much nlore severe in notlclul-able goods industries, particularly apparel. Service-producing ernployrnent sho\ved strength in November, fortifier1 by sizable gains in a range of inclustries. Firrns in the nasson- selvices category posted a net job increase of 87,000. Both health set-vices and management/ engineering services h;lve performed nicely over the past few months. contributing a combined net total of 378,000 jobs to the economy in 1995. Retail tracle est a b l i s h ~ ~ ~ eaclded n t s 74,000 work<ers over the month, while government employment continuecl to slide (down 8.000). Tot:i1 compensation of ci\.'l' '1 an workers rose by the smallest amount since 1981 in Septemheru p only 2.7% from a year ago. I-Io-cvever. the \\i\iages and salaries component continues to outpace inflation. having risen 2.8(%in the year enclecl September 30, a periocl ~ v l l e nthe Consumer Price Indes showeci only a 2.5% uptick. fB e e http://clevelandfed.org/research/trends December 1995 Best available copy @ The Outlookfor College Graduates Percent I ' ' UNEMPLOYMENT RATE BY EDUCATIONAL AiTAlNMENT I 1982-84 dollars 26.000 0 10 20 30 40 50 Percent change 60 70 80 90 SOURCES: U.S. Department of Education, National Center for Education Statistics; U.S. Department of Labor, Bureau of Labor Statistics; and John H. Bishop, "Is the Market for College Graduates Headed for a Bust? - Demand and Supply Responses to Rising College Wage Premiums," Cornell University,working paper, November 1995. In recent years, college graduates have esperiencecl relatively low une111ployment rates and rising relative wages. The continuing low share of new four-year gracls in the total workforce suggests th;tt these trencls will be sustained. Nevertheless. last year the I-lureau of 1.ahor Statistics (BLS) preclictecl that [he supply of college gracluates \\;oulcl outstrip clenlanct by an axrer.ageof 330.000 jobs per year between no\\. ancl 2005, ancl that nearly 2 i ? h of new entrants to the college-eclucat~.clla1,or pool woulcl have to settle fix lvork that cloes not require a college clegree. If true, this represents a significant Ixeali with past conditions. 7'0 cletermine whetlzer these dire predictions are lilcely to materialize,John Bishop of Cornell University rece~ltlyexamilleel the RLS' methoclology for assessing job prospects of the classes of 1996 and beyond. He founcl that, historically, the BLS has been pessinlistic about the clenla~lclfor college grad~~ates. Growth in relatively low-slcill occupational sectors was systematically overpredictecl between 1978 ancl 1990, while growth in professional and manageri;ll jobs \-V:IS unde~precticted. Bishop also noted that the BLS lxojections of jobs requiring a college clegree ancl of ~~nc~eremployecl college gracluates are problematic. Aside from data issues, actual ability varies greatly anlong those holcling college diplomas. Determining cvhether a person is overqqualified for a job shoulcl depencl not only on credentials, but also on substance. If a prosy such as "clegree of literacy" is usecl instead of "ctegree in hand," it is likely that Inany of those the BLS iclentifiect as overclualifiecl in tBct have low skill levels that make the111 ilnahle to fill oiher types of jobs. Regional Aspects of WeIfare Spending http://clevelandfed.org/research/trends December 1995 Best available copy Billions of 1982-84 dollars @ @ @ AFDC replaced with block grant Assistance to Needy Families. Federal funding conditioned on at least 75% of 1994 expenditu Maximum five-year assistance for a States can deny payments to un under the age of 18 and can re in cases of unknown paternity rape or incest is involved). @ Adult recipients are require years of receiving benefits. lowed for parents with child a. "Other" includes deposit insurance and offsetting receipts. NOTE: All budget data pertain to fiscal years. SOURCES: Congressional Budget Office; and Jeffrey L. Katz, "Provisions of Welfare Bill," Congressional Quarter&, vol. 53, no. 45 (November 18, 1995), pp. 3542-544. Any attempt to i>alance the federal buclget r n ~ ~confront st the pro1,lem of burgeoning wellare payments. Meaw-testecl entitlements, which include h/feclicaicl m c l otller \iielfaretype programs, have gl-own at a 12% average annual clip since 1962, increasing from 496 to 12% of total outhys. Non-me:uns-tested entitlements, which cover Soci:~lSecurity. PIeclicare, ancl uncruplo\.ment compensation, have grolvn at a 10%)annual rate over the s:ume periocl. rising fro111 26% to 42'81 of governll~ent outlays. 1)iscretionar-y spencling. on the other hand, is up only 6.4%, shrinking from 70% to 37% of total fecleml outlays. The current congressional proposal for limiting welfare payments would give states more control over welfare progranIs, recluire recipients to work, ancl liinit the cluration of benefits. LYielfare attempts to furnish a minimum standard of living for those unable to provide for themselves. typically young single mothers with children. The concern of many policymakers, however, is that an otherwise worthy cause creates disincen- tives for \vol.lc ancl promotes longterin welfare dependency. The problem rimy arise not fr.0111 any single program. hut from a coml~ination of in-lcincl ancl cash programs. K~elfarehenefits xuty fro111state to state and among recipients. One st~lclyestimates that the total value of 21 stantlarcl package of benefits for a typical recipient in the Aid to I;:unilies n.ith 1)epenclent Chilclren (APIIC) prog1~1111ranges from S27,736 in Ma\vaii to $13,033 in Mississippi. Cl'he st:undarcl package in (co~lti~zlre oud ize.~tpngel Regional Aspects of Welfare Spending (cont.) http://clevelandfed.org/research/trends December 1995 Best available copy Thousands 01 dollars Der recioienl -" I PRE-TAX INCOME REQUIREMENT FOR EARNING THE EQUIVALENTVALUE OF THE WELFARE PACKAGE. ,995' F~rsl Second Third Quinl~le Fourth Fiflh a. Totals are calculated on the basis of state benefit levels weighted by the corresponding number of recipients in 1992. b. Aid to Families with Dependent Children plus supplemental food program for Women, Infants, and Children. c. Calculated using number of recipients in 1993. SOURCES: Statistical Abstract of the United States: 1994; and Michael Tanner, Stephen Moore, and Dav~dHartman, "The Work vs. Welfare Trade-off: An Analysis of the Total Level of Welfare Benefits by State," Cato Institute, Policy Analysis, No. 240, September 19, 1995. the stucly incl~ldesAI:I>(: i~enefits, foocl st:inips and otllcr supple~nental nutrition assistance, hleclicaicl. ancl housing and utilit>-;issist;~nc.e.All of Fedthe states mal<ing LIPthe I:oi~~-tIi eral Reserve Districr-Ohio, 1)ennsylvani:l, \Vest Virgini:~. zinc1 Iientucliy-fell belon. the n:ition:il average. The top lefr cliart inclic:itcs the avesage percent:ige c.ontrihi~tion of various components o f this stanclarcl package. T h e typical \vciflarc rec'ipicnt receives benefits for onl). ;I short time, :incl many recei1.e onl!. :I f~.:icrionof the entire set of cash ancl noncash pa)lments that are potentially a\.ailable. 13ut as many as 65% remain on p i ~ i ~ l assistance ic for eight years or longel-.Statistics such as this have lecl many economists ancl polic~~maliers to cl~lestionwhether the system is constructed to facilitate the tr-ansition o f persons receiving welfare I~enefits into fill1 labor-force participation. Most welfare recipients espress a clesire to work, and employment c:in ~ ~ s u a l enhance ly their long-term economic benefits relative to remaining o n welfare. In 11ia1iy in- stances. however, fillfillillg this clesire nieans taking 211-1 ent1-j~-leveljob tllat pays less than staying o n xvelfare. Concern about the potelltially pen:erse incentives created by public assistance progralns ~llotivatesat least some of the provisions in the welfare proposals clesigned by Congress. For instance. caps on the number of years that participants are eligible for benefits ancl \vork recluirements for aclult recipients are ;is much reforrrl rileasiires as they arc buclget-cutting Ineasures. I http://clevelandfed.org/research/trends December 1995 Best available copy Regional Banking Conditions Per'cent Percent 24 2.0 1.6 12 0.8 0.4 Midwest Southwest Percent 0.0 West Percent a. Troubled assets include noncurrent loans and leases plus other real estate owned. NOTE: All data are for FDIC-insured commercial banks. 1995 data are for the first half of the year and are annualized where appropriate SOURCE: Federal Deposit Insurance Corporation. Data for the first half of 1995 illustrate the continuecl health of the con~mercialbanking intlustry across all regions of the country. 7'he average return o n assets declined slightly to 1.13% lat ti on ally. but increasecl in the South\vest. \West, and Central regions. This measure of profitability sangecl from 0.99% in the Northeast to an impressive 1.41%in the bliclwest. Equity capital as a percentage of total assets firmecl to 8.03%) from 7.78%, as the increase in equity capital outpaced the gain in total assets. This improvement enconipasseci all regio~lsof the country, ranging from 7.5%)in the Northeast to 8.83% in the iz/Iidwest. The percentage of assets classified as troubled declined cluring the first half of 1995, as total assets increased 7.2% ancl troubled assets fell 20.3%. Although the percentage of troubled assets is still highest in the Northeast ancl West, these two regions have seen this indicator fall by nearly two-thirds since 1992. During the first half of 1995, net charge-offs (the net amount of loans zu11d leases re~novedfrom bala~lce sheets because they were not collectible) clecli~ledmore than 12(% fro111 1994 levels. The ratio of net charge-offs to loans and leases w:ts little changed from last year's in every region except the Northeast. where a substantial 30% clrop in net charge-offs lowered the ratio frorr~ 0.75% to O.j4%. http://clevelandfed.org/research/trends December 1995 Best available copy lvlillions oi contracts Notional principal, trillions of dollars" Millions of contractsC Not~onaiprincipal, trillions oi dollarsa a. Notional princ~pal1s the value on which payments are based, but it does not represent a liability of either party. b. Excludes currency options. c. Values represent combined global trading volume of exchange-traded futures and options. NOTE: Notional values of OTC derivatives have been halved to prevent double counting. SOURCES: Bank for International Settlements: lnternatlonal Swap Dealers Association; Futures Industry Association; Options Clearing Corporation; Philadelphia Stock Exchange: and the Federal Reserve Bank of New York. The volume of financial cleri\.atives continues to gron. at a rapicl pace. although the gron.tli has shiftecl somewhat horn the 01-er-thecounter (OTC) lnarket to tile 01-ganized eschanges. ?'he 37%)increase in notional val~leon tlic 01'CInarket between 1993 ancl 1 9 9 ~\\-bile ~. still quite brisli, represents :L slon.d o w n from the S.io/ii aclvancc between 1992 :mcl 1993. Esch:ingetraclecl cleri\.ati\.es increasecl their growth. with volu~ne u p 45% in 1994 in contrast to a mcr-e 24(!,6 in 1993. Some o1)servers attrilxltc this shift to a heightened concern ~vitli I-isk that has scared investors away SI-omthe more complicatecl and exotic instrur~lentsof the OTC ~narket. I<eep in mincl, however, that these ni~mbersd o not inclucie mortgage1)acked clerivatives, ancl that notional principal does not measure esposure to risk. Interest-rate contracts continue to clominate the OTC market, both in 10131 volume and in gro~vth,acc o ~ ~ n t i nfor g E14.2 trillion of the S 1 5.3 trillion OTC contracts. Interestrate s ~ \ ~ : ~also p s remain the clominant lorm of interest-rate contract. The option-based instruments (caps, collars, floors, and swaptions) grew only 12.5% in 1994 after jumping 120% in 1993. Folward-rate agreeiuents grew fatest-up -%2 5 within the interest-rate category. Interest-rate contmcts dominatecl excli;~nge-tracleclcierivati\.es as well, although other contracts also showed robust growth. Currency contracts, with volume up 45%, and ecluity-inclex contracts, with volume 111' 43%, barely laggecl interest-rate contracts, \v\ihich saw value increase I>y'-46%. e e e e e http://clevelandfed.org/research/trends December 1995 Best available copy e Jqanese Banks Percent chan~efrom corresoondino auarter of orevious vear JapaneseBankLoans (Trillions of yen) Total loans LoanUnrealized Problem loss gains on loansa reserves securities 274.6 13.1 4.2 8.1 Long-term credit banks 54.5 4.0 1.0 2.5 Trust banks 61.5 6.3 1.0 2.2 184.5 7.7 1.9 5.9 Credit unions/ 129.1 cooperatives 6.3 1.5 1.6 37.4 9.6 20.3 City banks Regional banks Total 704.2 Thousands of yen Index. 1990 = 100 a. Problem loans include nonperforming and restructured loans, but do not include loans to mortgage firms. b. Average of 225 stock prices. c. Nominal effective exchange rate is a weighted average of yen exchange rates against the currencies of the major industrialized countries d. Real effective exchange rate adjusts the nominal effective exchange rate for unit-labor-cost differentials in manufacturing. SOURCES: Japanese Ministry of Finance; International Monetary Fund; and DRIIMcGraw-Hill. Because Japanese hanlis play a greater role in the allocation of clo~nesticcredit tlmn do their A~nerican counterparts-or 1,anlis in most other industrializecl countriestheir financial \\.ell-heing has strongly infl~~encecl the contours of Japan'seconomic recovery. According to the Japanese Ministry of Finance. approximately 5.3% o f Japanese bank loans outstanding at the encl of September \vere either nonperforming ( Y 1 4 trillion) or had I~eenrestructured (Y13.0trillion) to forgive previously contracted intercst pay~uents.The Minist~ybelieves that Japanese banks will write off approximately Y18 trillion of nonperforming loans, including creclit to mortgage firms. Consideri~lgloanloss reserves and u~lrealizeclgains o n securities. officials believe that the hanliing sector can sustain s~lch :I write-off. The cleterioration in asset values associated with the economic bust in 1990 and with the prolonged Japanese recession adversely affected householtl and I~usiness lxilance sheets and severely lowered the quality of I1a11lc loals-particularly those relatecl to real estate. Because i~nrealizeclgains on equity forrllecl a lasge share of Japanese bank capital, the stoclc-market collapse red~~cecl the capital position of banlis. 7'11is year. banlc lentli~ighas hegun to recover, but it remains weak. http://clevelandfed.org/research/trends December 1995 Best available copy http://clevelandfed.org/research/trends December 1995 Best available copy International WageTrends (cont.) Percent 2.0 Percent 2'0 ANNUAL CHANGE IN TOTAL MANUFACTURING HOURS WORKED, 1960-1 990 EMPLOYMENT, 1960-1 990 Japan France Percent 9.0 ANNUAL CHANGE IN MANUFACTURING OUTPUT. 1960-1990 1 U so Japan France U.S. Germany" Germany * Japan France Germanya Percent O I ANNUAL CHANGE IN MANUFACTURING OUTPUT PER Us .~ Japan France Germany a a. Data are for West Germany. b. Manufacturing output, total hours, and output per hour for the U.S. are taken from the June 1992 Monthly Labor Review. These data were subsequently revised, and the new series are not available before 1977. NOTE: Hours data exclude paid holidays, vacations, and sick leave. SOURCE: U.S. Department of Labor, Bureau of Labor Statistics. gains of 0.4% ancl 0.9'M,. respecti\rely. xvorkecl, implying that output per T h e clownturns in Gei.r-nany and hour grew I I I O S ~ rapidly in these France reflect the ktct that employc o ~ ~ n t r i ethan s in the U.S. In Japan, tot:li o i ~ t p u twas u p 8.0% per year, ment ciicl not increase to offset the I ~ hour gron~ing7.2% d r o p in average annr~alhours. E1nwith O L I ~ I I Lper ployment growth in Japan. I>y conversus 5.0% for France, 4.1% for trast, was strong enoiigh to compenGermany, ancl 2.6% for the U.S. In summary, the country with the sate for the recluction in average hours ancl lee1 to ail increase in total longest average hours \\.~rliecl in each ye:ir of the s a ~ n p l eperioclhours n.orkccl. k1anufact:lring O L I ~ ~ I L i~~c~-e;ised I~ at Japan-esperiencecl the Iligflest a n average ann~i:il mte of a l ~ o u t groxvth in employment, output, and oi1t11ut per hour, while the n:1tio11 3.0% in the U.S. anel Gcrinany ancl with the largest decline in average 4.0%)in Fmnce. Fr:lncc ancl Germany saw v\;~rocluctio~~ picli L I dc~ hours-Germany-saw n o employspite the clecline in total h o ~ ~ r s ment growth ancl only a moclerate upturn in o ~ i t p u tancl o ~ i t p u tper hour. 711e [J.S., which sho\ved no recluctio~~ in :iver:lge hours. c1ispl:lyecl relatively strong gro\\ith in employment ancl relatively wc:ili growth in o~ltputancl output per hour. While exploring these trencls cloes not tell us how the U.S. economy \voc~lclresponcl to ;I policy aimecl at reclucing average work IIOLISS, it cloes show that although se\.eral ELIro~>eancountries "lead" the worlcl in this regarcl, cutting hoal-s does not necess~lrilytranslate into greater ernployment ancl econo~nicgrowth.