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http://clevelandfed.org/research/trends December 1996 Best available copy The Economy in Perspective was the day before Christmas, when all through the land Forecasts converged and the outlook was grand. For growth was expected to be at potential And continued expansion seemed most evidential. Our staff was debating with habitual fervor Which measure worked better-fixed-weight or deflator, While at my PC with equations quadratic I was searching for money demand inelastic. When off down the hall there arose such a clatter, I sprang from my chair to see what was the matter. Away to the TV I flew like a flash, Praying I wouldn't meet news of a crash. The glow of the monitor piercing our crowd Showed why they were leaping and shouting aloud. For what should my wondering eyes then see If not Alan Greenspan and the FOMC! More solemn than judges his colleagues they came, As he gaveled the meeting and called them by name: "Now McTeer and McDonough! Now Jordan and Lindsey! On, Meyer! On, Phillips! On, Hoenig and Boehne! "Now Melzer and Broaddus! Guynn, Yellen, and Kelley ! On, Moskow! On, Stem! Rivlin, Minehan, Pany! Take your seats at the table! To your seats! Do not stall! Opine away! Opine away! Opine away all!" They talked about houses, both permits and starts. They talked about blouse sales at Saks and Kmarts. Next came the dollar in round-the-world trading And what could be learned from a ship's bill of lading. Car sales (of course) received strictest attention, And t n ~ c korders also did not escape mention. LCD panels for laptops were rare if The importing country imposed a stiff tariff. Corn prices were up, making beef prices fall, But that was not all, oh no, that was not all. Herd liquidation would make cattle dear, Driving prices back up. Now, isn't that clear? Credit extended by U.S. bank lenders Was fueling the habits of freewheeling spenders. Though bankers were worried about banksuptcies They covered their risks with credit card fees. Labor markets were tight and shops paid a bonus To find someone willing to punch holes in donuts. Though inflation seemed low and few saw it surging There was talk of what forces might prompt an emerging. Predictions were premised on different decisions Made by the Committee, and on data revisions. Was policy easy, too firn, or just sight? Could the Committee agree without having a fight? And then, during a lull, I heard a voice rise From the head of the table in masterful guise. It cut through the chatter, exuding Clan, Who else could it be but Chairman Greenspan? He had a bright face and no sign of a belly And began with a joke about Governor Kelley. Then he warned to his purpose and couldn't be franker About what concerned him, this shrewd central banker. "How can we know that our measures are tme When accounting's at cash, but obligations accrue? When satellites send electronic bits floating But we dutifully track every railroad car loading? "Inputs make outputs in quite different ways Than they did, and they still do not cease to amaze. We must be producing more than we can count: A statistics-in~provingcampaign we must mount. "For if it's the case there's more stuff in our nation Then it follows we must chalk up less to inflation. Please allow me to add, I can't be more precise, But alternative measurements sure would be nice." A wink of his eye and a twist of his head Soon gave me to know we had nothing to dread, For this imprecision showed no loss of nerve; From his avowed course he never would swerve! He crafted his words with great erudition And set forth his tune like a Julliard musician. Put it to the vote, and canied the day. Then the meeting- adjourned and all went away. But I heard him exclaim, as he summed up the stakes, "Stable prices to all, and low interest rates!" e 0 e e http://clevelandfed.org/research/trends December 1996 Best available copy e Monetary Policy Percent, weekly averaqes Percent, weekly averages 1RESERVE MARKET RATES Percent i Percent 5.8 5.7 5.6 5.5 5.4 5.3 5.2 5.1 5.0 4.9 F M A M J J A S O N D J F M A M a. Predicted rates are federal funds futures. SOURCES: Board of Governors of the Federal Reserve System; and the Chicago Board of Trade It has I ~ e e nmore than 10 months since the Federal Open Marliet Coinmittee (I:OMC) last changed the intenclecl fecleral filnds rate. That action, a 25-h~isis-pointcut. follo~i~ecl a n eclual recluction at the g r o ~ ~ p ' s D e c e m l ~ e rmeeting. Over the halance of 1996, mzirket expectations iracill:itecl reg:ircling the clirection of the nest policy iilove. T h e one-year Tre:isury-bill yield inoved up sharply early in the year 21s prospects for f~lrtherrate cuts climinishecl ancl ulti~iiately reversed. Imnger-term sates rose even more dramatically, then swung substantially over the summer months as inarliet commentary revealecl a growing sentiment for a policy tightening. Home ~llortcgagerates rose almost 150 hasis points from early 1996 to early summec Since then. all Utes have receclecl somewhat. PIost f~iturescontracts are clmwn on cornmoclities or financial instrurilents \v\iose ["ice or yield is determined in competitive marliets. The fet1er:il funds sate, on the other h;ind, is essentially cleterminecl by a clelil~erativedecision of the FOWIC. ?he feel funcls futures market is thus zi place ivhere one can place a bet as re policy will to \vhat f ~ l t ~ l islonetary be. 'l'he inliplied yields of these fu- tures prices serve as a reasonai~ly unl~iaseclpreclictor over horizons of three moriths or less. By early March, the impliecl f ~ i tures yielcls revealecl that expecta~ t vantions of another rate c ~ hacl ishecl. At nliclyear. the ecoiiorny appeareel to Ile stronger than exlxctecl. :uncl these yields indicated that a feel f.~lndssate increase was imminent. Expectations of a change in policy cliiiiasecl right before the Septemlxr meeting. Iiecently, the impliecl yielcls have indicated that p;tsticipz~ntsill this 11larketd o not expect a lmlicy action hefore spring. (contit?1 r c 4 on 17extpcige) e 0 0 . http://clevelandfed.org/research/trends December 1996 Best available copy . Monetary Policy (coat.) Billions of dollars. seasonallv adiusted Uillioiis oi dollars, seasonally adiusted Billions of dollars, seasonally adjusled a. Growth rates are percentage rates calculated on a fourth-quarter over fourth-quarter basis. Annualized growth rate for 1996 is calculated on a November over 1995:IVQ basis. NOTE: Dotted lines represent growth ranges and are for reference only. SOURCES: Board of Governors of the Federal Reserve System; and Bank Rate Monitor, various issues. Given the environment of continued eco~iomicexpansion with low or 1noc1er:ite inflation, commercial banlcs have faced relatively strong clemancl for comniercial ancl industrial (C&l) loans. In September ancl October. C&I loans shot up at an annual rate of more than 19%. compareel \vitli 8% over the previous year. I'reliminary data for November reveal that C&I loan grorvth is moclerating. C o n s ~ ~ n i eloans r at commercial banlis have been relatively flat in recent months. Apparently, consumers a r e becoming Inore cautious about tlie arnount of additional credit they are willing to take on. While much iten en ti on has been given to increasecl clelinquency rates, the state of consunler credit at commercial banlcs is not alarming. Nevertheless, continued moderation in consunler loan grocvth will help assuage fears about credit quality. Since mid-1994, banks have tended to finance 1nuc11of their loan growth by issuing large certificates of deposit (CDs), which have increasecl at clouble-cligit rates throughout the periocl. The rates paid on these deposits are cletermined in the CD marliet. I'ersistently strong gains in large CDs have 1,een the major source of strength in M3, which for two years has consistently run at or above the upper end of its gronrth sanges. Linlike the case with large CDs, banks post the rates they are willing to pay for small time cleposits ancl nioney ~narliet cleposit accounts (bIMDAs). If posted rates are competitive. these instruments attract fi~ntls.lluring 1996,the rates offered by banlcs on small time deposits have generally bee11 attractive enougli only to maintain tlie level of these cleposits. (corzti~z~recl O ~ Zrzext j7cigc5IC) http://clevelandfed.org/research/trends December 1996 Best available copy Monetary Policy (cont,) Biil~onsof dollars 1 1'300 THE M1 AGGREGATE Billions 01 dollars 1 Billions of dollars Raiio a. Growth rates are calculated on a fourth-quarter over fourth-quarter basis. Annualized growth rate for 1996 is calculated on a November over 1995:IVQ basis. b . MZM is an alternative measure of money that IS equal to M2 plus institutional money market funds less small time deposits. NOTE: All data are seasonally adjusted. Dotted lines represent growth ranges and are for reference only. SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; and Board of Governors of the Federal R e s e ~ e System. MiMDAs have gro\vn even though rates paid on these cleposits cleclinecl in the face of rising short-term marltet rates. This gro\vth 1:lrgely reflects of the impact of the i~i~plementatiol~ s w e e p accounts, ~ v l ~ i c1,anlis h have initiated over the p:lst few pears to economize on rese~ve 1,alances. 'These arrangements "sweep" excess householcl checkable cleposits, which are resel-vahle, into MMLIAs. whicll are not. Thus. the irnplementation of these arrangements accounts for the unesplaineci strength in ICIMIIASanel the wealiness in M1, which inclucles checlcing :lccounts Ixlt not I\lfMll)As. The impact of sweeps washes out in broader aggregates such as M2 and M%h,I, \vhich include both instruments. The MZM nieasilre of money comprises instruments that have zero m:iturity ancl hence :Ire redeemahle at par o n clemancl. As short-term market rates began to rise relative to sates paid 011 MZM cleposits, PIZM g r o w ~ hmocleratecl frotn its rapicl pace earlier in the year. In light of the recent stability of shortterm rates, i\/lZM is expected to continue expantling near its recent mocle~ktepxce. h12 gro\vtli also slowecl in response to the turnaround in interest rates. This aggregate :ippears to be responding more consistently with its historic:il pattern, after hehaving 2ttypically in the early 1990s. It ap1 ~ : ~iis s though M2 velocity (the ratio of nominal GDl-' to M2) has st:~l~ilizecl at a new higher level. As Fecleral Reserve Chairman Alan Greenspan notecl cluring his midyear congressional testimony, the relationship linking M 2 to its opportunity cost has "reasser-tee1itself." Nevertheless: given the lirnitcd experience ancl the cont:iined nature of inflation, it seems i~nlilielytllat PI2 will fully regain its lost status :my ti~llesoon. http://clevelandfed.org/research/trends December 1996 Best available copy Interest Rates Percent 10 Percent, weekly averages 7.5 9 7.0 8 6.5 7 6 6.0 5 5.5 4 5.0 3 4.5 3-mo. 6-mo I-yr. 2-yr. 3-yr 5-yr. 7-yr. 10-yr. Percent 2 1990 30-yr. 1991 1992 1993 1994 1995 1996 Basis points a. All instruments are constant-maturity series. b. The TED spread IS the 3-month eurodollar rate minus the 3-month Treasury bill rate SOURCE: Board of Governors of the Federal Reserve System. T h e yielcl curve on U.S. Treasuries h a s flattened noticeably since last month, with long rates falling but short sates remaining steady. Among the closely \vatchecl spreads, t h e 3-yc:lr, 3-month spread has droppecl to j9 hasis points, below its 30-year average of 80 basis points, ant1 the 10-year. 3-month spreacl has fallen to 96 basis points, belon. its :lverage of 120. The flattening of the 10-year, 3-month spread also portends a slowdown (thoug11 not a recession) in real econonlic growth. Loolting more closely at the extremes of the yield curve-30-year boncls ancl overnight federal funds -we see the pattern of cleclining long rates and flat short rates repeated. This occurred despite n o change in "policy," if the federal funds rate in Fact indicates policy. Of course, expectations about future rates may change even if toclay's rate doesn't. The recent flattening could also reflect reduced inflation fears, greater confidence that the Federal Reserve will keep rates low, or de- creasecl ~~ncertainty over the future course of the economy. Another closely watchecl indicator is the TED spread, the difference between interest rates on Treasu~ysecurities and eurodollar instrunlents of the same maturity. Euroclollar rates are generally higher, since they emhecl the deklult risk of the issuing banlt. The TED spreacl thus acts as a n indicator of investors' relative confidence, which in turn links it to gold prices ancl exchange rates, t ~ v o measures that also reflect concerns about confidence. e 0 0 0 http://clevelandfed.org/research/trends December 1996 Best available copy 0 The Stock Market Dollars, in loaarilhms Per 20 15 10 5 0 -5 1953 1958 1963 1968 1973 1978 1983 1988 1993 a. Last plot is the December 2 closing price. b. Last plot is the December 2 closing price over preliminary 1996:lllQ earnings c. Last plot is preliminary 1996:lllQ earnings. d. Last plot is preliminary 1996:lllQ dividends. NOTE: Growth rates are five-year moving averages of the four-quarter sum. SOURCE: DRIIMcGraw-Hill. In recent months, milch attention has been given to the stupendous ascent of the stock nlarket. The rise in t h e Stanclarcl & II'oor's (S&P) j00 index of more tlian 60% since 13ecember 199% llowever, is not unprececlented in the post-WWII period. Between September 1953 and September 1955, for example, the S&P index increased more than 90%. Fundamentally. ;I stocli's price is cleterminecl hy the cliscoiu~lteclvalue of its expectecl fi~tureclividencls. Future clividencls ultimately cierive fro111 futilre earnings. When prospects for earrllllga grokvth are good, stocl< prlces tend to rlse The price/ earnings ratio (P/E)-simply the stocli price divided by earnings per share-gives investors an idea of how rnuch they are paying for a company's earning power. The higher the P/E, the more illvestors are paying, and hence the more earnings gro\vth they are expecting. Although the P/E of S&P 500 stocks has been rising over the past two years, it is not unusually high. The one clearly extraorclinary fact has been the phenon~enalearnings growth over the past five years, \vhich is viewed largely as a product of corporations' widespread efforts to cut costs and become more effi- cient. Current stock prices suggest that although earnings gron;th may slow, prospects remain good. This reflects an unclerlyillg expectation that econo~nicexpansio~lis sustainable with low inflation. Strong growth in private donlestic investment in recent years has created 21 foundation on which to base such beliefs. Moreover, yields on fixeclincome securities, such as Treasury bonds, suggest that inflation espectations are well contained. Historically, low inflation has been associatect with balanced econon~icgrom.th and a strong stock market. e e e e e e http://clevelandfed.org/research/trends December 1996 Best available copy s Inflation and Prices 12-month percent change 38 October Price Statistics Annualized percent change, last: I mo. 10 mo. 12 mo. 5 yr. 1995 avg. 36 34 Consumer Prices All items Less food and energy 3.9 3.3 3.0 2.9 2.6 2.9 2.8 2.6 3.0 3.0 Mediana 4.3 2.9 2.9 3.0 3.2 Finished goods 4.7 2.5 3.0 1.6 2.1 Less food and energy -3.3 0.4 0.9 1.4 2.6 Commodity futures pricesb -8.0 0.1 1.5 2.4 5.4 Producer Prices 32 30 28 26 24 11 12-monih percent change 3.8 Percent oi iorecasis 70 60 3.6 50 3.4 40 3.2 30 3.0 20 2.8 10 0 1.8-22 23-2.7 2.8-3.2 33-3.7 Annualized perceni change 3.8-4.2 2.6 a. Calculated by the Federal Reserve Bank of Cleveland. b. As measured by the KR-CRB composite futures index, all commodities. Data reprinted with permission of the Commodity Research Bureau, a Knight-Ridder Business Information Service. c. Upper and lower bounds for CPI inflation path as implied by the central tendency growth ranges issued by the FOMC and nonvoting Reserve Bank presidents. d. Consensus forecast of the Blue Chip panel of economists. e. Median expected 12-month change in consumer prices as measured by the University of Michigan's Survey of Consumers. SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; the Federal R e s e ~ e Bank of Cleveland; the Commodity Research Bureau; Un~versityof Mlch~gan;and Blue Ch~pEconomic Indicators, November 10, 1996. 'The monthly price statistics tool< an t~nexpectecl j~lnip in October. spurred mostly 13). higher food ancl energy prices I'roducer prices inrate of creased at a n :~nn~ialized nearly i ( N i elusing the moilth; however, escl~icling:I ternposziry (ancl probal,ly re\.ersihle) spike in foocl a n d energy prices. they actually fell 3.3% in Octol,er. At the ret:lil level. October prices increasecl at abo~lta 4% pace. 11~1t:I percent:ige point less :~ftcrSootl iuncl energy goocls are factored o u ~ . For the year to date, consLlmer prices increased at an a~lnualizecl rate of about 3%, which is virt~~ally identical to their average over the past five years. Still, this year's retail price performance is coming in at the lower end of the range projected by Fecleml Reserve policytllaliers last July (3% to % ?I% ,) but at the high encl of their expectation for consLlIner price i~lcreasesin 1997 (2X% to 3%). Indeecl, looking forwarcl, few economists expect inflation to devi- ate 111uch from its recent 3% trend. Nearly 70% of those pollee1 in November predicted a Consumer Price Index (CI'I) increase of 2.8% to 3.2% between this year ancl next. Similarly, surveys of householcls indicate that the ~lieclian consunler expects prices to rise 3% over the next 12 months. ,* I he CI'I represents changes in the cost of a representative baslict of goocls in 85 urban areas. For any particular year. retail price changes (contintled 0 7 7 ~ze.?:tpcig~) http://clevelandfed.org/research/trends December 1996 Best available copy Inflation and Prices (cont.) I CONSUMER PRICE GROWTH IN MAJOR U.S. CITIESa I 12-montti percent change a. 12-month percent change covers the period beginning October 1995 and ending October 1996, unless otherwise noted b. Covers the per~odSeptember 7995 to September 1996. SOURCE: U.S. Department of Labor, Bureau of Labor Statistics. can var). s~rl~stantiall>. from region to region. 1:or csa~uple.o\.er the past 12 months. consurrxr price increases among 15 ~najorcities \\.ere highest ancl lo\vest in I-IOLISin Miami (3.8(%1) ton (0111). I . l(H1). (Other m:~jorcities that posteci larger-[han-a\.e~~ge retail t \\,ere price gains cluring t l r ~ ~periotl Boston (3.lC?+)ancl (:lo\-c1;lncl (3.0%). while 1.0s Angeles ( 2..j0,'~~ i ;lncl B:lltim o r e ( 2..~r%i) silo\\-ecl srrl;~lle~.-thana'iierage incre;~seh.'1'0 solrlc extent, disp:~rities :lrnong rcgio~?s'year-toy e a r ret:~iI price inc,~.cahespi.ohably reflect the measurement errors that creep illto the regiorlal dat-1' I3ecaclse of their relatively small sample. Still, some of the difference may represent varyi~lgdegrees of prosperity. For example, in recent years Los Angeles a i d I-Iouston have almost certainly experienced greater cconomic distress than Miami, Boston, or Cleveland, and this may partly account for tlleir more ~nodelxtecostof-living growth. However, differences in the costof-living increase across rnajor urban areas have tendecl to ciiminish over time, presumably I3ecause sampling errors are e a s e d and econorllic growth differences lessen. In fact. cost-of-living increases for 15 rllajor U.S. cities varied about 40% less over the past five ye:lrs thz111 over the past 12 months. That variability is further reduced as the time spar1 is increased; thus, over the past 20 years, variation in the cost-of-living illcrease anlorlg rllajor U.S. cities has been quite small relative to any 1x1sticular year. . b e 0 . . http://clevelandfed.org/research/trends December 1996 Best available copy b EconomicActivity Percent change from preceding quarterb 5.5 5.0 Preliminaryestimate 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.o 0.5 0.0 1996 Percent change from corresponding month of previous year INCOME AND SPENDING TRENDS^ IPERSONAL 1997 I a. Chain-weighted data in 1992 dollars. b. Seasonally adjusted annual rate. c. Index, 1985 = 100; seasonally adjusted. d. Index, February 1966 = 100. e. Percent of University of Michigan survey respondents reporting that now is a good time to buy. SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; The Conference Board; the University of Michigan; and Blue Chip Economic Indicators, November 10. 1996. The Commerce I)ep:~rtment recently parecl its esti~nateof thirdq u a ~ t e econon~ic r growth from 2.2% to 2.0%. lIo\\;nn;~rclacljustments to the ovelall pace of invento~yaccumulation and to net exports clominatecl the ~ c \ ~ i s i o nI7ut s . \\;ere parti:illy offset b y upw:1rcl corrections to business fixed in\.est~nentand state and local go\'rernmentspencling. Although the 2.0% growth rate is belo\\. the exceptional seconcl- quarter rate of 4.7%, it is consistent with estinlates of U.S. potential econonlic growth, which generally range from 2.0% to 2.3%. Consumer expenditures, accounting for approxirnately two-thircls of GDl', slowed in the third cluarter. Throughout the summer months, consumers augmented their savings, but October's data suggest a return to the brisker spending pace seen earlier this year. Real personal con- sumption expenditures increasecl 2.9% (year over year) in Octol>es,exceecling the 2.6% gain in real clisposable income. Measures of consumers' overall conficlence in the economy are at the highest levels yet reached in the current expansion. Building pernlits and housing starts, both fairly volatile o n a month-to-month basis, have cleclinecl marlteclly since last May and (contitzued on izext pcge) http://clevelandfed.org/research/trends December 1996 Best available copy Economic Activity (cont.) Index 1987 = 1.0 Days' supplyC Index, 1987 = 1 .OO 1.20 95 1.15 90 1.10 85 1.05 80 1.oo 75 0.95 70 0.90 65 0.85 60 0.80 55 0.75 Index, 1987 = 1.OO Millions of units 50 1994 1995 1996 a. Seasonally adjusted annual rate. b. Seasonally adjusted. c. U.S. dealers' current stock as a share of daily average sales (includes domestic and imported vehicles). SOURCES: U.S. Department of Commerce, Bureau of the Census and Bureau of Economic Analysis; Board of Governors of the Federal Reserve System; and Ward's Automotive Reporls. Aug~ist,respectively. Nevertheless, the automobile industry. (The Canasales of new single-unit h o r ~ ~ e s clian Auto Wor-kers returned to work on October 24, after a 21-clay n;ork rem:tin brisl<.Although consumer atstoppage, and the Ullitecl Auto titudes al2out home lx~yingh;ive cle\Vorliers ended brief, localizecl terioratecl over the year, approxistrikes on October 29.) Nonautomomately 76% of responclents to the tive incl~~strial productioll also deIlniversity of Michigan's survey heclined slightly in October, clue prilieve that conelitions for purchasing marily to reduceci output of a home are good. consumer durable goocls. Inclustrial production. which inWith labor issues resolveel. :~uto creased an average 0.3% per month production will probably rcl)ounci i i ~ this year, fell 0.j(% in Octol,er. the corning months, but m:lnuf~~cturlasgely beca~iseof l:~horclisputes in ers are not likely to nuke up all their lost output. Consumer purclnases of new cars have declined sharply this year, reaching 3.47 illillion units in October. the lowest level in more than 10 years. Business purchases of new cars, which now exceed consumer acquisitions, also cieclinecl in September and October. Despite the strike-inciuceci clisruption of supply, clealers' currellt stoclis of cars ancl light trucks seen1 adequate. e e . . Labor Markets 0 b) http://clevelandfed.org/research/trends December 1996 Best available copy e Change, thousands 01 workersa "-- 1990 1991 1992 1993 1994 1995 1996 to date lllQ Sept. Oct. Nov. 1996 Percent Percent Millions 01 personsa Jan. Feb. Mar Apr. May June July Aug. Sept. Oct. Nov. a. Seasonally adjusted. b. Production and nonsupervisory workers. c. Vertical line indicates break in data series due to survey redesign. SOURCE: U.S. Department of Labor, Bureau of Labor Statistics.' Civilian unemploy~nentrose to 5.4% in No\~ember.an upticli fro111 its August low of 5.1%1.hilt still consistent \.\;it11a robust labor m:~rlcet.The employ111e11t-to-1>~1p111~1tion ratio, at 63.3% last month, is little changecl from its recorcl high of 63.4(%in October. Elnploy~nent gro\vth as relatively flat last month. Accorcling to t h e establishment snr\.cy. the econo m y aclclect 118.000 neu' jobs in November. This is somewhat off the average pace for the year. hilt ploy~nentlast month. These surveys ~nonthly data exhibit s u l ~ t a n t i a l frequently diverge on a 11101lth-tovariation and are subject to revision. month basis, but tend to move toAs has been the case throughout gether over longer periods. 1996, most of the gains came in the lastSince August. ~~nenlployrnent ing less than 27 weeks has picked service-proctucing sector. u p slightly. By contrast, long-term Manufacturing payrolls, which joblessness has been falling since have followed a down\varcl trend since March 1995, rose for the secJune, ancl the 1neclia11tluration of ontl consecutive month in Nove111unernployme~lt clroppecl to 7.7 her. In contrast to the establishrnent weeks in November. cto\v11 fro1118.3 estimates, the household suIvey weelcs the month before. showect a slight decline in total em- http://clevelandfed.org/research/trends December 1996 Best available copy Work Stoppages Percent Number 550 500 450 400 350 300 250 200 150 100 50 n Percent Millions a. Data for 1947-83 are not strictly comparable with those for 1984-94 because of different sources. b. Refers to stoppages that began in each year. c. Includes agricultural and government employees; excludes private household, forestry, and fishery workers. SOURCES: U.S. Depariment of Labor, Bureau of Labor Statistics; and Barry T. Hirsch and John T. Addison, The Economic Analysis of Unions: New Approaches and Evidence, Boston: Allen and Unwin, 1986, p. 47, table 3.1. Union mem1,ership in the U.S. grew consiclerably during the first half' of this centur);, from about 4(K)in 1001 to a peak of al~out33% in the e:lrly 1950s. Since then, meml~ershiphas trended clown, prorupting irnions to fociis on increasing their ranks. in sollle cases by consolidating with other unions into larger ancl per11:lps more powerf~ulorganizations. .1ocl:ty. . only about l/t% of the L.S. cvorkforce is ~inionizecl. Although ilnions have been alAe to bargain on behalf of workers to ol~tainhigher wages, better \vorliing conclitions, age restrictions, 21ncl so on, the benefits have not come without cost. Often, bargaining I~etween workers (not necessarily unionizecl) and firms breaks down, resulting in strikes or lockouts. Such worli stol7pxges recluce output. The Octol,er I996 strike at GM, for exarnple, re- sultecl in a loss of approxi~llately 183,000 cars ancl tn~cks. The number of work stoppages averagecl about 300 per year between 1947 ancl 1980. Between 1981 ancl 1994, that average fell to about 60 per year, anti in the 1990s, it clropped to about 40 per year. Declines have also occurrecl in the number of participating worliers, the nirmber of iclle clays, and the percentage of work time lost. . , . Banking Industry Employment 13 0 . 0 http://clevelandfed.org/research/trends December 1996 Best available copy . Millions of persons Millions of persons Billions of dollars . Billions . Percent of total 711 a. Based on Federal Reserve System estimates. b. Includes total loans and securities; seasonally adjusted data. SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; Board of Governors of the Federal Reserve System; Federal Deposit Insurance Corporation; and U.S. Equal Employment Opportunity Commission. Until recently, the U.S. \,anking inclustry providecl employnlent that was relativel\i free f r o n ~the uncertainties that affected other industries, such as steel. However, banliing employ~llent is now killing; incleecl, solme analysts preclict that the inclustry will lose 400,000 jobs in the next clecade. despite increasecl supply a n d dernand for Inally hanliing products. Why xvould employment fhll? 'The answer probably lies in two re- cent changes in the banking sector. First, new technology allows machines to be used for tasks that were formerly performed by unskilled labor. The most dramatic esample is the rapidly increasing use of ATMs, which has resulted in a sparsely staffed modern bank brancl~that loolts very different from the bank of 20 years ago. Other new technologies, such as electronic scanners and improved bookkeeping programs, are replacing workers who once performecl these duties by hand. The effects of the second change are not limited to unskillecl labor. Iiece~ltindustrywicle consoliclation has meant shutting clown clepartnlents anel branches. When a merger transforr~lstwo separate departments into one, cluplicate tasks are often eli~ninatecl.Some mel-gers also entail a purge of middle-management positions. The net effect of these two changes has been to raise the sliill level of the banking intlustry's labor force. in e e e e * m e Resource Annuitization and Consumption Share 1 O 22 FRACTION OF RESOURCES CONSUMED http://clevelandfed.org/research/trends December 1996 Best available copy 1993 U.S. dollars 1 Male Female 1960-61 Share 1972-73 1984-86 1987-90 Share NOTE: Resources are defined as net worth plus the present value of labor earnings, pension benefits, and transfer receipts, minus the present value of taxes. SOURCE: Jagadeesh Gokhale, LaurenceJ. Kotlikoff, and John Sabelhaus, "Understanding the Postwar Decline in U.S. Saving: A Cohort Analysis," Brookings Papers on Economic Activity, no.1 (1996), pp. 315-407. From the early 1960s to the late 1980s, the fraction of resoilrces consumecl annually has rem:linecl more o r less stcacly for all U.S. age groups except retirees, for whom this fraction increaseel dsamatically. What might he the unclerlying reason for such impressive growth in olcler generations' "propensity to consume"? f3y the late 1980s, the resources of t h e elclerly (those agecl 65-89) were almost ciouble \\that they hacl been in the early 1960s. Moreover. the composition of these resources hacl changecl significantly. At the heginning of this periocl, almost four-fifths of older Americans' rethe clclerly during the late 1980s. sources were nlacle up of heclueathFirst, Meclicare :lncl Medicaid beneable assets-bank cleposits, CDs, f'its are paicl in kind ancl therefore stocks, bonds, ancl s o forth; by its must be consumecl. Seconcl, annuend, this share had fallen to ~ ~ 1 s t itizecl benefits provide insurance over hztlf. The declining share of against uncertainty about one's Ixqc~eathable resources was mirlongevity. Resources in I~ecliieathrorecl by a rising share of resources able form encourage caution in the speed of' co~~s~irllptio~l because peoin annuitized fornl-monthly Ilenefit payrllents from Social Security, ple fear running out of nloney in ole1 age. On the other hancl, the annuitiprivate pensions, and (for those in poor health) regular benefits from zation of resources suarantees ecoMcclicare and Medicaid. nomic security no matter how long Two aspects of this change in reone lives, thereby providing a n insource composition rnay explain the centive to consume at a faster rate. higher consumption propensities of http://clevelandfed.org/research/trends December 1996 Best available copy Trade Deficits and National Saving Percent of GDP Percent oi GDP I ~U.S.GROSS SAVING AND INVESTMENT 1960-69 1982 SOURCE: 1980-89 1990-95 Billions of dollars Trill~onsof dollars 1980 1970-79 1984 1986 1988 1990 1992 1994 1980 1982 1984 1986 1988 1990 1992 1994 U.S. Department of Commerce, Bureau of Economic Analysis. T h e I1.S. trade balance has heen in deficit, o n average, for the last 25 years. This is reflectecl in the lxhavior of U.S. gross saving ancl investment. Iluring the 1960s. gross saving surpassed gross private investment, and the excess saving was investecl al~road. National saving began to decline in t h e 1970s. The gross saving rate dropped 3.7 percentage points between the 1970s ancl the first half gross private cloof the 1990s. 1x1~ rnestic investment fell less. 'I'he shortfall in saving was coverecl by ancl ultimately living stanclarcls, an foreign capital inflows-a necessaly expancling foreign clebt also incounterpart of OUT current account ing creases the burelen of s e ~ ~ ~ i c it. cleficits. The long-term decline in U.S. Foreign income 011 U.S. assets has national saving has thus been assorecently begun to exceed I1.S. inciatecl with a secular swing. fro111 come on assets o.v\inecl abroacl. positive to negative, in the nation's kloreo\~er, shoulcl foreigners benet investment position. Since 1987, co111e less willing to invest here, the foreign ownership of assets in the debt woulcl have to be repaid I y U.S. has exceecleed ownership by U.S. sunning current account surpluses residents of assets located abroacl. -that is, by exporting more than Although foreigners' willingness we import. In that case, maintaining to invest in the U.S. helps sustain clomestic investnlent will necessitate clomestic investment, productivity, an increase in national saving. http://clevelandfed.org/research/trends December 1996 Best available copy Housing Finance P~rr~nt Percent Index Percent a. The housing affordability index considers median income, median home prices, and interest rates. When the index is at 100, a family earning the median income can afford a medium-priced home with a conventional financial arrangement. A higher index indicates a more affordable housing market. SOURCES: Bank Rate Monitor, various issues; National Association of Realtors,Real Estate OuNook, Market Trends, and Insights; and Mortgage Bankers Association of America, National Delinquency Survey. One of the nlost interesting trends in housing finance throughout the 1990s has been the declining importance of government ins~lrancein the nio~stgagem2uliet. Early in the decacie, the Federal Mousing Authority (FHA) ancl the \ietel;lns Adn~inistration(VA). hy htr the largest two fecieral programs, guaranteeel loans in nearly half of all U.S. mortgage originations. By the seconcl clual-ter of this year, liowe\~er,feclerally insureci mortg:1ges constit~lted only 31.9% of new originations. This general trend has been even more i x o n o ~ ~ n c eind Ohio. 'I'he change is attributable to se\.er;d klctors. First, private mortgage insur'lnce has become mucli more flexil~leover the last several ye:lrs. For ex;lniplle, loan-to-value ratios of 9i%, once unthinltable without fecleral guarantees, are now regularly ~tppro\.eciI > J ~ private insurers. Second, the cornbination of low mortgage mtcs :lnd increasingly afforclahle housing in the L.S. has enableci more I~orrowersto forgo fecleral progra~nsfor less costly private insurance. Finally, the recent explosion of hanlis offering special loan programs for I o n - ancl moderate-income t ~ o r r o ~ v e(often rs with special sates ancl terms) has probably lielpecl retluce the volume of feclemllp guaranteecl loans, 1,ecause these hank programs ofler such borrowers a private. niore altr:kctive, alternative. e o 0 0 http://clevelandfed.org/research/trends December 1996 Best available copy e Consumer Debt Percent lo O JCONSUMERLOAN RATES Billions of dollars Percent 19 0 Percent l9 Percent 140 ICONSUMER DEBT Trillions of dollars 4.0 Billions of dollars 100 3.5 80 3.0 60 2.5 40 2.0 a. Includes two-year unsecured loans of up to $3,000. b. Includes mobile-home loans and all other loans not included in automobile or revolving credit, such as loans for education, boats, or vacations. These loans may be secured or unsecured. SOURCES: Bank Rate Monitor, various issues; American Bankers Association, Consumer Credit Delinquency Bulletin; U.S. Department of Commerce, Bureau of Economic Analys~s;and Board of Governors of the Federal Reserve System. Attention has heen lavished on the recent rise in consumer debt levels, a n d in fact, householcl cleht of all types has increased rapidly througho u t the 1990s. For example, mortgage debt has gron7\;nmore than 50% since the beginning of the decade (to $3.75 trillion by the first quarter of 1996), \vI;hile revolving credit has incre~isecl 3 \vhopping 127% (to $456 billion by September). 1'erh;lps Illore troubling, ho~vevcr, is that the satio of consumer cleht to personal income has risen clramatically over the last several years, fro111 a low of 14.10% in December 1992 t o a high of 18.11% last July. High latios of debt to personal income c:1n foreshadow f ~ ~ t ~defaults. ire 112cleecl, the 13te of credit carcl elelincluencies, although highly volatile. typically follonrs the clebt-to-income ratio with a lag. Considering that we have yet to see a clecrease in this ratio, we may re:lsonably expect the consilrner clelinquency rate to continue rising in the near future. Despite these inclicators, it may be p r e m a t ~ ~ rtoe mise the alarm for ovcrl,~lrclenecl householcls. Because interest rates, particularly for mortgages and home equity loans, are at historically low levels, ho~~seholcts can mlinage higher cleht levels at any given income. http://clevelandfed.org/research/trends December 1996 Best available copy International Developments Rate 120 I EXCHANGE RATES Percent change from corresponding quarter oi previous year Rate 60 Percent change from corresponding quarter of previous yea1 Percentage po~nts a. 10-year minus 3-month interest rate. NOTE: Prior to January 1991, German data represent West German figures. SOURCES: DRIIMcGraw-Hill; and Board of Governors of the Federal Reserve System. Over.lil1, the inter~~ational value of the clollar has changecl little over the last month, clespite the fact that both short-term anci long-term interest rates have fallen more in the U.S. than in ~llosti~lcic~strializeclcountries. Market obse17;ers attribute the strengthening of the clollar against ~~t the yen to disappointment a l ~ o the prospects for Japanese Iilonetary tightening. This in turn is related to the perception that the new Japanesc government is less lilely to soften the existing proposals fbr fisc11cont~.;lction. In se\,eral industrialized countries, high levels of ilnernploylllent coexist with sul~clueclconsurner price inflation. Despite the previous clepreciation of the yen, which would be expected to I~oostdomestic prices, the 12-111onthJapanese inflation rate is near zero. Unexpected upward price pressure u~oulcl increase the perceivecl liltelihoocl of monetary tightening in any nation ancl thus would 11oost the v;~lueof its currency. Recent i~lclicatorspoint to continuecl economic growth in Gernlany anel J a ~ x n .I-Iowever, the Huncles1,:lnlc h:ls inclicatecl that m o n e t a ~ y e:lsing is not im~ninent,despite an i~r~ernployn~ent rate of 10.4% in unifiecl Germany. This, in co~nbination with s~~bclueclinflation numbers, might explain the clrop in G e r ~ n a n long-term interest rates. Although long-term mtes fell even more in J:tpa~~, growth there 11lay be boostecl :IS the yen clepreciatio~lenhances net exports. The French economy surged temporarily in the third quarter, but consumer confidence is low? partly becaclse of the nation's 12.6% jobless post-WWII high. French rate-a short-term rates have been allowecl (contirz~red017 ~ ~ e x t p u g e ) http://clevelandfed.org/research/trends December 1996 Best available copy International Developments (cont.) Percent Billions of U.S dollars 250 75 , 200 150 100 50 n Exports, trillions of U S dollars Index 1990 = 100 1,600 C O N S U M E R PRICE I N D D 1,400 - 1,200 - 800 600 - 1,000 Trade balance, billions ol U.S. dollars Industrialized countr~es'exports --- Africa -- Asia Europe M~ddleEast --- Deveiop~ngcountries' exports Industrialized countries' lndustr~alizedcountr~es - 400 0 I I I I a. Aggregate net resource flows equal loan disbursements minus principal repayments plus foreign direct investment, portfolio equity flows, and official grants b. The trade balance is calculated as merchandise exports minus imports. SOURCES: International Monetary Fund, International Financial Statistics; and The World Bank, World Debt Tables: 1996, vol. 1. to fall more than those of Germany or Japan. Worlcl I3ank data indicate that aggregate net resource flows to cleveloping countries continued to advance rl~piclly in 1995, increasing 11. j C X ) . Excluding the financial aid given to Mexico. ho\veve~;growtll in official developmeilt assistance slowecl. Smaller increases in private flows are mainly clue to declining portfolio equity investruent. Mo\vever, Soreign tlirect investnlent con\lartl tinued a steady i ~ p ~ ~ ~ trencl. The clecline in ec1uit). f1oa.s has been attril~uteclto three n~ajorfac- tors: the increase in U.S. interest sates, the so-called "tequila effect," \vilereby the Mexican economic crisis led to a deterioration in investors' confidence in other developing countries, and the runup in the U.S. stock market. However, ecliiity flows to cleveloping countries are expected to rebound, though not necessarily to rates reached in 1990-93, when they increased tenfold. The strength in foreign direct illvestment, which includes investment in productive capacity, may well continue, as it is p:~rt of the gloI~aliz;~tion of production. A con- tinuation of privatization effo~tssupportstthis trencl. The clecline in official assistance, on the other hand, is a serious concern-especially for countries perceivecl as poor credit rislts. since they cannot shift from official to private sources of finance. In some nations, soaring inflation sates inay inclicate that policy reforms :Ire requireel before private flows can be increasecl. Ho\vever, a variety of official actions, inclucling cle1,t rescheduling or debt forgiveness, might k~cilitatethe impleinentation of effecti\;e policy refornls in cle1,tor countries.
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