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http://clevelandfed.org/research/trends February 1996 Best available copy The Economy in Perspective On the road (again).. . America, it is said, is a nation that keeps reinventing itself. By cornmitting themselves to respect free speech, private property, and unimpeded commerce, our immigrant fo~~nclers cleclared that a den~ocratic process was more important than enshrining privileges for any particular group or region. They established certain protections for the rights of all citizens to minimize the likelihood that minority interest groups would be tyrannized by the majority. And over time, the spirit of that bolcl experiment led to expanding the voting franchise to groups of people who hacl once been excluclecl. Anerica's history can be told through the experiences of orclinary people who set about to inlprove their lives. Their journeys have talcen this country through several phases of econonlic development, shifting patterns of population mobility, and changing attitudes about the role of government in society. These changes have not always been embracecl enthusiastically, nor with unanimity. But Americans have always clisplayed a selllarkable ~villingness to change their jobs, their resiabout governdences, ancl even their attit~~cles ment-as long as they believed that they were building wealth and improving the lot of f~lture generations. We need to recognize, however, that movements from one accepted way of life to another required courage, sacrifice, ancl the passage of real time to allow for debate ancl assimilation. We find ourselves again in the rnidst of a national soul-searching about the role of government in our society in general, and in our economy in particular (although some mioulcl argue that in the United States, the two are virtually synonymous). For the last 50 years, government has been trying to fulfill expectations forged from the trials of the Great Depression and Worlci War 11. Interestingly, even the dismal economic performance of the 1970s, characterized by rarnpant inflation and nlultiple recessions, did not lead to a f~lnclarnentalquestioning of the government's econornic ancl social policies, although some seeds of doubt were sown. Voices in the debate have become louder ancl shriller in recent years because Arnericans have come to doubt the federal government's ability to clo what hacl been expected of it over Inore prolonged periocls: to provicle, at reasonable cost, income security for the agecl, meclical treat- ment for the poor, job security for the employable, poverty reductions for the misfortunate, and violent crime reductions for all. Disillusionment with government stems in past from performance expectations that have been raised l~eyondthe capacity of any government to deliver, and in past froin the public's ~~nwillingness to foot the bill for what might in fact be feasible. There was a time in our history, of course, when the federal budget was in balance, federal clebt was minimal, and governments were not expected to provicle much beyond a legal systen1 ancl national defense. People dealt with what life dished out by relying on their friends, relatives, ancl neighbors. Those looking for more than they hacl did not look to government-they took to the open road. Our country b e c a ~ n ewealthier through increased domestic ancl international trade, but this expansion of econornic borders brought with it more reliance on a strong fecleral government. As our nation came of age, its citizens found that "United" began to mean more to them than '(States." Nostalgia for the past appeal-s to be an important element in the current debate on the scale and scope of government. Politicians sense the appeal of imbuing campaigns with the image~y of whistle stops ancl road trips through the heartland. People understandably miant a government that is more intimate, nlore human, and i no re responsive to their needs. Surely big government has not been our salvation. But nostalgia alone cannot obliterate the real choices that nlust be made: How much responsibility should healthy, comfostable Arnericans bear for an~elioratingthe misfortunes of others, and through what means should the assistance be provicled? What is feasible, ancl what is reasonable? From the nature of our recent political discourse, one might imagine that Alnericans are experiencing a national midlife crisis. Here w e are, feeling obligated to shoulder so Inany responsibilities, when all we really want to d o is put down the top of a convertible ancl chase the sun against the sky; to trade in that station wagon and dump the excess baggage over the side. Which bags to pack, ancl which to leave behind, are the subject of political debates being held all across America. Pundits say that our nation is at a crossroacls. But in truth, w e are only preparing to t1.ave1down the road not taken when last we passed this way. http://clevelandfed.org/research/trends February 1996 Best available copy Monetary Policy Deviation irom trend, percent NOTE: Shaded bars indicate recessions.The trend and cyclical components are defined using a two-sided approximation to a band pass filter, with 12 leads and 1ags.Thetrend excludes all fluctuations less than 32 quarters; the cyclical component includes fluctuations between six and 32 quarters. For further details, see M. Baxter and R. King, "Measuring Business Cycles: Approximate Band Pass Filters for Economic Time Series:'National Bureau of Economic Research, Working Paper No. 5022,1995. SOURCE: U.S. Department of Labor, Bureau of Labor Statistics. Economists generally accept that monewry policy cleterrilines the rate of infl~ttion,but they continue to clebate whether it can affect real variables, such as the level of employment ancl the rate of economic growth. During the early 1960s, inany policy~naltersbelieved they coulcl rocttinely exploit a stable tracle-off between inflation ancl unen~ployment.This tracle-off, sumrnarizecl by the so-callecl Phillips curve, implied that monetaiy policy coulcl permanently lower uner-nployment by genesating higher inflation. Two economists, Milton Frieclman :lnd Ed~ilitnclPhelps, showed that this trade-off' ~ 1 ill~~sory. s In the long run, monetary policy co~lldnot rnove unemployment way from its natural sate. The Frieclman-Phelps argument left open the possibility that polic)~~nakersnight exploit a short-tenn tracle-off in order to smooth business cycle fluctuations. Intleecl, many people continue to 1,elieve strongly in a short-ter~n tncie-off-to the point where quarare terly changes in ~~nemployment tho~ightto contain information ahout future inflation. A careful examinaLion of the data suggests a much less precise view of any relationship, however. The inflxtion and unemployment series can be clecomposecl into a trencl (long-run) conlponent ancl a cyclical (shoit-lun) component. Over the last 30 years, the trencl c o n ~ p o nelits clisplay a wealcly positive, but crmtic, cor~.elation.This highlights thc failure of the original Phillipscurve hypothesis, just as preclictecl Ily t:riednlan and Phelps. The trends continue^/ on tzextpage) http://clevelandfed.org/research/trends February 1996 Best available copy Monetary Policy (cont.) Ratio oi M I lo nominal GDP Nominal one-year Treasury yield, percent Nalural logarithm, billions oi 1987 dollars 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 SOURCES: U.S. Department of Commerce, Bureau of Economic Ana1ysis;Board of Governors of the Federal Reserve Systemand the Federal Reserve Bank of Cleveland. clo move in opposite directions during the early 196Os, however, explaining why the I'hillips curve was accepted for a time. The cyclical components display a inore consistent pattern. Over the entire sample. the two series are negatively correlatecl. One 111iist be caref~ilin interpreting this result, however. The association obseivecl in the data tells is nothing about causation-whether a change in inflation is responsible for nlove~l~ents in unemployment. Indeed, many economists argue that both series are simply responcling to forces that clrive the business cycle. Iiecessions. for instance, are characterizecl by layoffs that raise unemployment. lit the same time: incomes decline, reclucing the clema~lclfor money. This may lower inflation because the money stock can gronr ollly as kist as the rate ;it which people are willing to 1 ~ 1 1 ~it.1 hIoney clernand is also affected by nominal interest rates. As interest rates rise, the opportunity cost of holcling lllolley goes LIP, making people less willing to hole1 noninterest-bearing cash. When plottecl against the one-year Treas~iryrate, the ratio of the MI lnoney stock to nominal GDP reveals :I clownn~;~rclsloping nloney clenlanci curve, just :is theory preclicts. Over time, the hel1:1vior of real M l balances is preclictecl reasonably well by an estimated version of this sinlple money clemancl fi~llnction. Apart from any effect on unemployment, inflation is harmful because it acts like a tax on real money ba1;inces. As prices rise, the real value of money in people's wallets hlls, just as if the individual were being taxed. Higher inflation ~isu;illy leacls to higher nonlinal interest (co)zti)7~~e~/ 012 1 7 e x t p ~ ~ ~ y e ~ http://clevelandfed.org/research/trends February 1996 Best available copy Monetary Policy (cont.) Average per capita output growth, percent Average per capita output growth, percent ICROSS-COUNTRY GROWH AND RESERVE RATIO Average required reserve ratio Average inflation rate, percent Average inflation rate, percent Average required reserve ratio a. High-reserve-requirement countries are those with average reserve requirement ratios above 26.1%; low-reserve-requirement countries are those with average ratios below 4.5%. High-inflation countries are those with average inflation rates above 18%; low-inflation countries are those with average rates below 5.9%. NOTE: All data represent 1965-1990 averages for 60 countries. SOURCE: J. Haslog, "Monetary Policy, Banking, and Growth:'Federal Reserve Bank of Dallas, Working Paper 95-15, October 1995 rates, making people less willing to S, elistorts hold money. T ~ L I inflation people's behavior ancl wastes resources as they t a l e steps to avoicl the tax. ?'ax policy is often viewed as an avenue by which the government can influence economic growth. In general, higher taxes reclnce incentives t o w-ork ancl invest, and nlay co~ltributeto lo~\lergrowth. It is conceivable, therefore, that monet:lry policy might affect growth through the irlflatioli tax. A broacler notion of nioncta~ypolicy also inclucles finan- cial regulations, which govern the amount of non-interest-bearing reselves that banks 111ust holcl against deposits. Higher reserve requirements imply that a larger fraction of the I~anlc'sassets are exposed to the inflation tax. A simple cross-country comp;~risoti o f average growth rates ancl inflation suggests, at best, a weak negative association. Countries ~vith higher reserve ratios also seem to experience lower growth rates:ulcl higher inflation rates. This suggests that higher reserve ratios may :~mplifythe tax aspects of inflation ancl the potential growth effects of nlonetary policy. The historical perspective for the U.S. is less supportive of an inflation-gron-th connection. Data over the last 100 years reveal that the trencl of per capita growth has bee11 surprisingly stable despite trernencious changes, such as the inception of the fecleral income tax. the founding of the Federal Reselve System, and the occurrence of large swings in inflation during the 1970s ancl 1980s. I 0 0 Q e http://clevelandfed.org/research/trends February 1996 Best available copy O Interest Rates Percent, weekly averages Percent, weekly averaaes Percentaae polnts a. 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 b. Estimate of the yield on a recently offered. A-rated utility bond with a maturity of 30 years and call protection of five years. c. Bond Buyer Index, general obligation, 20 years to maturity, mixed quality. d. Percent change from corresponding quarter of previous year. e.Yield on Moody's seasoned Baa-rated corporate bonds minus yield on three-year Treasury, constant maturity. SOURCES: Board of Governors of the Federal Reserve System;and U.S. Department of Commerce, Bureau of Economic Analysis. Interest rates across the 1,oarcl have come clown sharply in the past year, but this clrop has not I ~ e e ncompletely even, 21s the flattening of the yielcl curve sho\vs. Medium-term rates have clroppetl Illore than longa n d short-term rates. The estrenle steepness of the yielcl culves of late '1994 and early 1995 clla~natizesthe flatness of the current yielcl curve: The spread between 10-year ancl 31nont11 yielcls is now 55 basis points, less than half the 35-year average of 120 basis points, ancl k t r Ixlow the 264 points of November 1994. The slight inversion at shorter rates has some people worried about a recession and others happy about successfitl inflation control. Iiates have fallen across asset classes as well as maturities. Rates on home mortgages, utility boncls, ancl municipal bonds have all dropped in step with the long Treasury honcl. Again, although the drop looks dramatic, a similar one occurreci in 1992-93. Along with the term stntcture, an- other useful inclicator is the risk structure of interest rates-the difference in yielcl between bonds of differing risliiness. The bottom chart plots the spread between Baa-rated corporate bonds ancl 3-year Tseasury notes, as well as real GDP growth. The so-callecl "risk spreacl" serves Inore as an indicator of recessions and negative growth than as a predictor. In the 1990s, even this relation has become suspect, perhaps because of deepening in the financial marltets. http://clevelandfed.org/research/trends February 1996 Best available copy Inflation and Prices Dollars per iroy ounce Index 90 Perceni of lorecasts 80 70 60 50 40 30 1988 1989 1990 1991 1992 1993 1994 1995 1996 20-24 2.5-2.9 3.0-3.4 Annual perceni change 23.5 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-Riddet Business Information Service. c. Handy and Harman base price, NewYork. d. Consensus forecast of the Blue Chip panel of economists, January 16, 1996. SOURCES: U.S. Department of Labor. Bureau of Labor Statistics; the Federal Reserve Bank of Cleveland; the Commodity Research Bureau; the National Association of Purchasing Management; Metals Week; and Blue Chip Economic Indicators, January 16, 1996. Retail prices increaseel at an annualizecl rate of 2.4% in 1)ecemI~er.just a shade under their average increase for the whole of 1995. However, inflation signals from the core measures were mixed. The C1'1 less foocl ancl energy ~nocleratedto :t 1.5O/1:t11nualized sate for the month, while the rneclian CI'I c o n t i n ~ ~ etod show price pressure of arouncl 3%. Still. for t h e ye:tr overall, both core inflation measures stoocl at allout 396, a small rise fro1111993 and 1994 levels. Iwo presumecl leacling inclic:itors of inf-lation have shown genclally ? . contladictory patterns in recent months. After inching down in the first three quarters of 1995, gold ["ices began to rise by year's encl and, in January, topped the $400 per ounce threshold for the first time in over five years. However, purchasing Iilanagers are increasingly reporting niore moderate price increases. In December, about 10% noted that prices were moving higher. the Ionest proportion since mid-1991. According to the Blue Chip panel of economists, the U.S. is likely to see slightly higher inflation this year aricl next. Most of the panel believes th:tt inflation will fall into the 21/29/0to 3% n n g e this year, with a substanti:tl minority (30%) anticipating a 3% to 3'/r?h rate. For 1997, the proportion pegging inflation at or above 3% is somewhat larger tha11 the share especting a nlilder rise (54% and 46%, respectively). From the perspective of n ~ o n e ~ a ~ y policymakers, the CPI's 199j performance came as somewhat of :t surprise. At 2.6%. last year's rise was '/L percentage point belorn7 the lower (conti77tred OTI 17ex-tp~ige) 0 0 0 0 O B http://clevelandfed.org/research/trends February 1996 Best available copy . Inflation and Prices (cont.) 12-month percent change 3.8 lndex 1982-84 = 1 16 CPI GROWTH TRENDS 15 - 14 - 35% .' 13 12 11 I I I I I I I I I 10 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Percen! change, four!h quarter over fourth quarter Index 1982-84 = 1 a. Calculated by the Federal Reserve Bank of Cleveland. b. 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. c. Brackets represent upper and lower bounds of the central tendency growth ranges issued each February.Bars represent actual inflation. SOURCES: U.S.Department of Labor, Bureau of Labor Statistics:the Federal Reserve Bank of C1eveland;and Board of Governors of the Federal Reserve System. encl of the Fecler-al Open Market Committee's central tenclency projection issueci at mielyear (3.10/0), hut nearly on target for the core inflation me:lsures. In hlct. the economy appears to 11;lve heen on a 3% inflation trencl o\.er much of the past five years, \\.ell helow the 5% average gro\vtll I-ate posted dilring the 1986-90 period. 'I'here seems to 11e little consensus among economists th:~tthe CPI is following a path that \vill 1e:lcl to successively lower inflz~tion. I-Iowever, legislation pending in Congress woulcl malce price st:~bility the pri- 1112uy long-term goal of the Fecleral lieserve. Presun~ably,such a legal manclate would include a timetable for achieving that objective. To some, such a proposal m-ould bind policymalters such that they v\ioulcl not have sufficient liberty to respond to financial or other econ o ~ n i ccalamities shoulcl they arise. In 1990, the Clevelancl Fecleral Reserve Bank proposed a program for achieving price stability that would have gr:lclually reclilcecl inflation (at that time arouncl 5%) by M percentage point per year until a stable price environment nlas reached in the year 2000. That inflation target inclucled :I relatively 7%-icle3-percentage-point band on both sicles of the target price level to ensure that policy \VOLI~CI not be inhil~itetlfrom responcling to near-term problems. Indeed, hacl such a policy been ;rdoptecI. the nlonetary authorities might have found themselves with a considerable margin to work with today: The do\\;nsliift in the inflation treml over the past five years has put the price level at the very I~ottomof the target ranges that the proposed policy envisionecl. c 0 O I F http://clevelandfed.org/research/trends February 1996 Best available copy , Economic Activity Percent change A5. Real GDP and Components, 1995:lllQa (Advance estimate, ~.a.a.r.~) change, billions of 1992 $ Real GDP Consumer spending Durables Nondurables Servlces Business fixed investment Equipment Structures Residential investment Government spending National defense Net exports Exports Imports Change in business inventories Percent change, last: Four Quarter quarters 53.8 32.3 13.2 1.8 17.3 3.2 2.9 9.5 0.5 2.7 1.9 2.6 4.8 2.0 2.4 9.2 6.7 2.4 5.2 -1.4 -6.3 12.7 15.4 2.7 5.3 5.1 5.4 8.4 -0.4 -7.5 8.3 1.2 9.0 9.4 7.9 -3.1 -0.5 -7.6 -3.5 - - Percent change from corresponding month of previous year - 7.6 6.7 Billions of 1987 dollars a. Chain-weighted data in 1992 dollars. b. Seasonally adjusted annual rate. c. 1995 and 1996 estimates are from Blue Chip Economic Indicators, January 16, 1996. d. October. November, and December data are estimated by deflat~ngnominal retail sales by the Consumer Price Index for commodities SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; and Blue Chip Economic Indicators. I i e c e ~ l tclat;l-tho~~gh sltetchp and drop of a very strong investment tentatiw-and anecc1ot:ll accounts sector, the 131ue Chip panel of economists currently foresees 2.2% indicate that economic activity growth in 1996. None of the memweakenecl in the last months of bers anticipates a recession. 1995. The final nurnl>ers are exPIuch of the uncertainty about pected to put gro\vth for all of last t 1.8%. Ne1.e~- econo~liicactivity has centered o n year ~ t approximately theless, contril2uting k~ctors, inthe consumer sector. Real consumer cluding severe weather ancl the spending grew a illoderate 2.2% in federal government s l ~ ~ ~ t d o x v n ,Novemher following a 1.5% advance in October, despite relatively generally seer11 isolatetl 01-transistrong :tnd steady gains in real distory. Viewing the recent eviclence of downside rislts against the t ~ ~ c l i - posable income. Moderate consumption patterns, together with high levels of credit card debt, raised concerns about holiday spending. Many retailers reportecl clisappointing December sales, with heavy discounting and some inventory accumulation. Acivance estimates of real retail sales for December-acljustecl for price changes -registereci virtually no increase. Gnit sales of motor vehicles rose sliarply in December, hut sales at general merchanclise stores (cotztilzued OIZ izext page) http://clevelandfed.org/research/trends February 1996 Best available copy EconomicActivity (cont.) Percent rising Index. 1987 = 1.00 Days' SIJPPIY~ Billions of 1987 dollars Billions oi 1987 dollars ".dV J F M A M J J A S O N D J F M A M J J A S O N D 1994 1995 a. Fourth-quarter data are prel~minaryestimates; seasonally adjusted annual rate. b. 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 Economic Analysis; Board of Governors of the Federal Reserve System; National Association of Purchasing Management; and Ward's Automotive Reports. ancl apparel stores fell slightly. Nevertheless, the continued tightness of labor marl<ets I~ocleswell for tile consumer sector, anel clespite high levels of creclit carcl clebt, evidence of liquidity prol)lems is lacking. The nexr-term outlook for the industrial sector, which acco~intsfor approximately 20% of total GDP, remains 11 seconct area of concern. 111d ~ ~ s t r i a procli~ction l was flat in 1995:IVQ. Production of nond~~rable consumer goocls fell. as clicl output of defense-related goods. Businessecli~ipmentproduction slowed in the fourth quarter, but remains strong relative to a year ago. Factory operating rates, while still generally high, have declined somewhat over the year. In October (latest wailable clata), factory orclers fell as backlogs increased. Anecdotal evidence about factory orders, while niixecl and inconclusive, suggests some pocltets of weakness and inventory co~-rection.In December, the purchasing managers' inclex of over- all manufacturing activity stood at 46, its fifth consecutive reading below 52point generally consistent with a flat industrial performance. Dealers' supplies of cars and light trucks rose sharply in the late summer and early fall. hut strol~gincentive progranls and recli~ceclorclers to proclucers have helped lower inventories some~vhat.Automotive procluction, which was flat in 199j:IVQ, is liltely to remain weali in the early months of 1996. e . e e e http://clevelandfed.org/research/trends February 1996 Best available copy e Fo;oreign Trade Percent Percent change 1 lgO STATES WITH HIGHEST EXPORT G R O W . 1987-1994 Percent, not seasonallv adiusted I Billions of dollars 1994 a. Chain-weighted data in 1992 dollars. SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the Census. 1nternation;ll tracle is becorning increasingly important to the U.S. economy. Since 1987, exports have grown from less than 7% of GDII to more than 11%. while in~portsas a share of o~ltputhave espa~lcled3 percentage points. The U.S. trade deficit narrowccl thro~lgh1791. l x t has generally wiclenecl ever since. While significant for the nation, international tr.:~deis becoming propor-tinllally even more me;!ningful to Ohio anel I'ennsylvania. Between 1987 and 1994, exports from each of these states grew 151% (comp:irecl to 127% for the nation), with Ollie accounting for approximately 31/,%,. ancl I'ennsylvania for about 2l/i1%. of IJ.S. shipments abroad. In October (the latest month for which clztta are available), the U.S. tracle deficit declinecl slightly as imports fell somewhat Illore than exports. Since its June high, the trade deficit for goocls and s e l ~ i c e shas narroweel by 51.3 billion. The U.S. saw 2 substantial improvement in its trade balances with Japan, Europe, ancl Mexico over this periocl, but our trade deficit with China and other Pacific Iiinl countries cleterioratecl. Despite the markccl improvement clat:~will probasince June. f~~ll-year 11ly show that our overall trade position has worseneel since 1794. The U.S. tracle deficit-on both a ~contitz~i~~lool7 ~7extpc~ge) http://clevelandfed.org/research/trends February 1996 Best available copy Foreign Trade (cont.) Billions of dollars -2.5 -2.0 -1.5 -1.0 -0.5 00 0.5 1.0 Billions of dollars Index 1973 =lo0 Billions of 1987 dollars 100 B~ll~ons of 1987 dollars Iildex March 1973 = 100 150 140 60 130 20 120 -20 110 -60 100 -100 90 -140 80 -180 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1978 1980 1982 1984 1986 1988 1990 1992 1994 70 1996 a. Includes former Soviet Bloc countries. b. Foreign GDP growth is the average for Germany, Japan, France, the U.K., Canada, Italy, the Netherlands, Belgium, Sweden, and Switzerland, weighted by trade shares.Annual data for Belgium are interpolated to a quarterly series. c. Weighted average of dollar exchange rates against the above-listed countries, adjusted for inflation differentials. SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the Census; International Monetary Fund; and the Federal Reserve Bank of Cleveland. nominal ancl a real basis-has ~videneclsince 1991, as economic growth at horne has outpacecl growth abroad. Foreign economic activity, \vhich aclvancecl rapidly in 1994, p:~ux"d in 1995. In fact, Canada, France, Germany, and the IJ.K. arc 2111 liliely to see their grom-tlth rate 11;1l\~eclrelative to 1994. Japan. on the other hancl, recorclecl a slight improvement. Most economists foresee foreign economic growth accelerating rlgai11 in 1996. If their projections :Ire correct. this will contribute to further U.S. export growth. However, with U.S. economic activity also expecteel to remain fairly brisk in 1996, not much clth;u~thgeis anticipated in our overall tracle deficit. The relationship between the real trade balance and the real tradeweightecl dollar is not as tight as Ilthany analysts suggest. When Inore complete clata hecome available, the real tracle-.iveighted clollar will prohably prove to have exerted little influence on the 1995 trade balance. The no~ninal clollar clepreciatecl some\vhat over the yeac but U.S. inflation was slightly higher than that o f our key trading partners. With international inflation rates seeming to converge at lo\\? levels, large swings in the clollar appear less liliely. http://clevelandfed.org/research/trends February 1996 Best available copy Labor Markets Change, thousands of workersa 350 IAVERAGE MONTHLY NONFARM EMPLOYMENTGROWTH 1995 Thousands I 11 13 8 7 93 68 109 65 18 23 42 -20 -41 Average for period 5.6 5.6 5.6 13 -83 5.6 5.8 34.5 34.4 34.4 34.3 33.7 1996 Percent Percent rising, one-month span 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 Statistics and Employment and Training Administration. 'The U.S. employment situation was off t o a n unusual start in 1996 as nonfarm p:lyrolls tumblecl hy 201,000 in J;ln~lary.The "l>lizz21rdof the century" has I ~ e e nl~lamedfor much of this unexpected clecline, malting it cliffic~~lt to cletermine the underlying trends in tlie labor market. Incleecl, the ~videspreacli~npact o f the storrn is evident in the shnrp clrop in the clifi~sionindexes of employment. ?'he January figure for total nonk~rmintl~~stries inclicates that more than Ii:~lf of tlie nation's cletailecl inclustsies reportecl zero or negative jolx gsowttl over the month. i\le:~n~vliile, the civilian unemployment rate rnade its first significant jump in several months, risin:,. to 5.8% in January. Construction employment remainecl positive despite the weather, sincc jol, aclclitions in warmer parts of the country offset losses on tlie East Coast. On thc other hancl, manuk~ctiiringposted a loss of 72,000 \voskcrs in J:tnuary. The blizzard most liliely worsenecl this clecline, in addition to causing the factory worlcweek to fall below 40 liours for the first time in 12 years. Se~vice-psoclucing errlployment was in the reel last month (clown 141,000)-a clirect result of ~lnusual losses in typically r.obust component irlclustries. I-Iarclest hit was business services, where h:~rsh weather. couplecl with a strilce I,y I~uildingselvices cvorkess in New Y ~ r l City, i contributecl to net job cleletions totaling 75,000. ( c o I ~ / ~ ? ~011L [flextpageI L'L~ http://clevelandfed.org/research/trends February 1996 Best available copy Labor Markets (cont.) Millions of iobs Millions of jobs Percent Percent a. Includes health, social insurance administration, air transportation, judicial and legal services, other government administration, and unallocable employment. b. Includes corrections, utilities, health, other government administration, financial administration, fire protection, judicial and legal services, parks and recreation, natural resources, and unallocable employment. SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; and U.S. Department of Commerce, Bureau of the Census. Despite recent concerns about the ever-es~xnclingsize of government, civilian governinent e~nplopruentas a fraction of total employment has been falling at the federal, state, and local levels. Fedel-al employment has been declining as a share of total employment since the 1970s, with temporary spikes associated with the hising of additional census workers every 10 yezirs. Unlike state- and local-level government, federal ernployrllent has actually fallen on an absolute basis from its non-census peak in 1989 ( 3 inillion n~orkers). Since the beginning of 1990, the farlarger local government sector alone has added more than 1 million employees. However, in the current expansion, even state and local government employment have fallen relative to the faster-growing private sector. While data on the functions of government employees have not been updated recently, the general composition of government employinent has generally been stable. Federa1 employment is dominatecl by defense ancl the postal service, which together account for inore than 50% of all federal jobs. Cutbacks in these t\vo areas were responsible for the bull< of the decline in federal employr~lent between 1990 ancl 1992. State and local governnlent e~nployinent is concentrated primarily in education, with a substantial number of jobs in hospitals ancl police forces. These categories-ancl many other local government f~~nctions-tend to grow as the populations they serve expand. Regional Conditions http://clevelandfed.org/research/trends February 1996 Best available copy SOURCE: National Conference of State Legislatures While politicians in Washington lnalte painfully slow progress towarcl resolving their battle over the size of governnient, state legislatures have apparently committed themselves to ~iiakingd o with less. .1.his past year-for the first time in a clecacle-the total value of state tax cuts exceeded the value of state tax increases. The National Conference of State Legislatures reports that 25 states cut taxes by a combined total of S2.1 billion, while 14 states boosted taxes by a combined total of $910 million. Most of the increase was concentrated in taxes o n hospitals, nursing homes, and other health care providers, as states use these revenues to pay their share of Medicaid, one of the fastest-growing state I~uclgetitems. The largest cuts occurred in North Carolina, I'ennsylvania, Oregon, and New Jersey, each of which reduced taxes by rnore than $250 million. In contrast, New York (which anticipates a substantial loss of Medicaid funcls if fecleral 11lock grants are enacted) and Illinois each saised taxes by more than $250 million. Whether sollie states will illtimately regret such bold ~ n o v e swill not be revealed until the federal government decides whether to give them long-promisecl block grants mcl increasecl autonomy over spending on various programs. (coii'tin~ledon next page) http://clevelandfed.org/research/trends February 1996 Best available copy Regional Conditions (cont.) Real personal income growth, percent 15 20 25 30 35 40 45 Sales tax revenue as a percentage of total state tax collectionsa 50 55 60 65 a. Sales tax revenue includes general sales and gross receipts. b. Excludes states with no sales tax. SOURCE: U.S. Department of Commerce, Bureau of the Census and Bureau of Economic Analysis. Another area in wl~ichstate policy may presage federal policy is the structure of the tax system. For instance. there has heen ~ n u c hclebate about nrhether the federal tax cocle discourages saving a11cl xvork effort. i\iIany economists lxlve suggested that a u~liform national sales tax would be a more efficient way to raise needecl tax revenues and encourage saving. They I~elievethat the addition31 saving would result in greater investment, enhancing the procluctivity of workers and raising their earnings. States' tax codes exhibit varying clegrees of reliance on sales taxes :~ndthus may suggest how increasing taxes on consumption coulcl affect economic growth. In 1993, 33% of'total state revenues were generatccl by sales taxes, a figure vil-tually ~~nchangecl from 1988. The proportion of state revenues raised by a sales tax in 1993 mngecl from zero (in Al:lska, Delarvare, Montana, Oregon, ancl New Hampshire) to a high of 60% in \'ashington state, nit11 the media11state gamering 31% of its revenues from a sales tax. There is n o obvious connection l~ebveenreliance on sales taxes anel growth, however. Froxn 1988 to 1993, residents of states that relic:cl Illore heavily on sales taxes clicl not experience greater overall growth in re:d personal incorne than clid resiclents of other states. http://clevelandfed.org/research/trends February 1996 Best available copy Banking Conditions Percent of lolal loans Billions of dollars COMPOSITION OF COMMERCIAL BANK LOANSa Loans to commercial borrowersb Retail Percent a. Figures are for December of years shown, except for 1995, which is for September. Data are for FDIC-insured commercial banks. b. Includes commercial and industr~alloans, multiple mortgages, commercial real estate, construction, and agricultural loans. c. Includes consumer and credit card loans, one- to four-family residential mortgages, and home equity loans. d. Figures are for September of years shown and are for FDIC-insured commercial banks. e. 1995 figure is through August. SOURCES: Federal Deposit Insurance Corporation: and U.S. Department of Commerce, Bureau of Economic Analys~s. Since 1986, commercial Ixknlis h;~ve been substituting retail loans tor 1o:111s to commercial t~orro\\rers.Although the trend appears to have stopped in 1995, this does not imply 21 recluction in the creclit availahlc to consumers, who experienceel ;in expansion of their creclit lines. As reported o n bank l~alance sheets, consumer credit rose $57.6 billion in the 12-month pesiocl enclecl September 30, 1995-an increase iclentical to that postecl ovcr the prior 12 months. On-balancesheet figures, however, mask much of the growth in consumer creclit. More than two-thirds of the consumer credit available at the end of Septeml>er appeared as off-Ix~lancesheet items, primarily unused loan commitments (unused lines of credit estenclecl to credit carcl customers) :uncl oiitstancling credit card loans th;lt have Ixen securitizecl ancl sold t o others. The value of iinused loan commit- ments to creclit card holders was up ~ the 12 months $252.1 b i l l i o ~ in encled Septe~iiber30, 1995, a significant increase fronl the previous 12month period, when a $168.3 billion gain was reported. Over the latest 12 months, the increase in creclit card loans securitized and solcl also escalated, up $38.8 billion, compared x\~itIionly $8.6 billion in the prior 12month period. (co?ztitzzrec/077 tzextpagej 0 0 . 8 8 0 http://clevelandfed.org/research/trends February 1996 Best available copy 0 Banking Conditions (coat.) B~llionsof dollars Percent oast due a. Figures are for December of years shown, except for 1995, which is for September. NOTE: All data are for FDIC-insured commercial banks. SOURCE: Federal Deposit Insurance Corporation. The rapicl growth in loan commitments made available to consumers has been moti\;ated fly the high yielcls associated with credit carcl loans. In the first three cluarters of 1995, creclit card loans accounted for only 7.8% of total bank lentling. but were respo~lsiblefor 12.2% of the loall i~lconle that banlts received. Creclit carcl lending remained a highly concentratecl I~usiness: The 50 largest creclit carcl lenders owned almost 80% of all credit carcl loans. The sustainability of credit card loan profits has been questioned because of the increase in delinquency rates obse~vedin the first three quarters of 1995. Furthermore, the rapici growth in loan commitments nlay also be a sign of increased competition, mrhich could have a negative i~llpacton the attractive yielcls that 11a1lks are currently receiving on credit card loans. Sonle bank inclustry observers have expressed concern about the rise in credit carcl cielinquencies and the growing level of consumer debt. With the ratio of outstanding consumer installment credit to personal inconle only slightly below its 1989 peak, there is some question about the irnplications for bank credit quality. As yet, however, overall flank asset quality and capital remain strong. http://clevelandfed.org/research/trends February 1996 Best available copy International Developments German marks per US, dollar 1 R5 Percent change irom corresponding month oi previous year Japanese yen per U.S. dollar . 130 Percent Percent change irom corresponding month of previous yea1 a. Monthly averages of daily rates for the U.S.and Japan;monthly average of weekly rates for Germany. SOURCES: Board of Governors of the Federal Reserve System; Bank of Japan; and DRIIMcGraw-Hill. The clollar has strengthenccl against both the German marlc ancl the Japanese yen over the last month. Eviclence of weak economic growth in G e r ~ n a n yancl elsewhere in Europe has led market ohservers to er interest anticipate f ~ ~ r t hEuropean rate cuts, which \voulcl he expectecl to pull f ~ ~ n cinto l s U.S. clollar assets. Tkiough Japanese economic growth has piclteci up, unespectecl weak- ness in the Japanese trade surplus may be partly responsible for the increase in the yen-dollar rate. just as a worsening U.S. trade bal~ince might nlove the dollar lower. Short-term interest rates have recently eclgecl down in the ~najorinclustrial countries. The decline in German short-term rates has followecl weakness in M3, the Bundcsbank's targeted monetaty aggregate. Econonlists generally focus o n short-term interest rate differentials as cletermi~lantsof short-term swings in exchange ntes. Inflation rates remain noder rate in Germany ancl the U.S. Prices continue to fall in Japan, but econo~llic activity there has recently shown signs of reviving. The last half of 1995 saw Gc-~nanecononlic gro.cvt11 fall to 1.9% and the nation's budget deficit wiclen. http://clevelandfed.org/research/trends February 1996 Best available copy World Trade PaEerns Percent 01 world exports Percent of world imports 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995a Percent 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995a Index. 1991=100 a. OECD forecast. SOURCES: Organisation for Economic Co-operation and Development (OECD); and DRliMcGraw-Hill. 8 5 -8 3 -F Accorcling to the Orgzunisittion for Economic Co-operation ancl Development (OECD), the U.S. share of the world's export tracle has inched u p over the last clecacle. I1.S. shipments amountecl to :lpproximately 11% of total export trade between 1985 and 1987, ancl to Inore than 12% between 1993 :lntl 19%. Over this sanle periocl. the expo11 share of other OECD countries (relatively developed nations) fell from 62% to under 60%, and the export share of non-OECD countries (developing nations) expanded from 27% to 28%. Despite the growing U.S.tracle deficit, our share of world irnports a c t ~ ~ a l lcleclinec1 y over the past 10 years, falling from 18% to 16% betcveen 1985 and 1995. Similarly, the share of other OECD countries droppeci from 57% to 54%. Thus, developing countries' share rose from 2 5% to nearly 30% over this period. As the U.S. has capturecl a larger share of the world markets, exports have become more impo~-tmtto our econon~icperformance. In 1995, exports accountecl for 13.2% of U.S. GDP, LIP fro111 7.2% in 1985. This puts us roughly 011 a par with J a p n , where exports account for 12.5%,of total output, but I~elowGer~nany, where exposts make LIP25% of GDI? In part, our export gains may reflect trencls in U.S. labor costs-a major factor in international competitiveness. Over the last 10 years, U.S. labor costs have fallen 15.9%.
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