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http://clevelandfed.org/research/trends
December 1995
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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
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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
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Monetary Policy (cont.)
Percent

Percent

1995

Contract month

Percent, s.a.a.r."

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
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Monetary Policy (coat.)
Billions of dollars

Billions 01 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)

http://clevelandfed.org/research/trends
December 1995
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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.

http://clevelandfed.org/research/trends
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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

2.6

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

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

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
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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<.

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Economic Activity
Percent change s a a r a

Index 1987 = 1 00
1 25

1 20

115

110

1 05

IIIQ IQ

1990

11111
1992

IIIQ IQ

1991

1110 IQ

1993

IIIQ

1994

1110

1990

1991

1992

1993

1994

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

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Percent change

Percent 1987 dollars

1 BUSINESS FIXED INVESTMENTAS A SHARE OF GDP

Perceni
an

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.

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Percent change rrom corresponding month of previous year
6
PERSONAL INCOMEA N D SPENDING TRENDS

Billions of dollars, not seasonally adjusted

Real personal consumpt~onexpend~tures

Real disposable personal Income

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

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.

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Labor MarkeEs
Change, thousands 01 workersa

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.

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The Outlookfor College Graduates
Percent

' ' UNEMPLOYMENT RATE BY EDUCATIONAL AiTAlNMENT

1982-84 dollars
26.000

40
50
Percent change

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

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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.)

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Thousands 01 dollars Der recioienl
-"

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.

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Regional Banking Conditions

Per'cent

Percent

2.0

1.6

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%.

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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%.

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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.

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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

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.

Full text of Economic Trends (Federal Reserve Bank of Cleveland) : Economic Trends - December 1995

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