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http://clevelandfed.org/research/trends
January 1997
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The Econorny in Perspective
Dead reckoning.. . The beginning of a new year
always brings increased attention to the econonlic outlooli, as though the prospect of another lap around the sun endows economists
with fresh insights about more earthly navigation. This is the tiille of year when we ciisnlal scientists are conscripteci for forecasting speeches,
panels, ancl polls. So-wh:ur' cloes she blow?
Surveys indicate that, on average, private
forecasters expect real output to increase at a
2% pace in 1997, extending an alreacly long expansion by another year. Inflation forecasts are
clustering arouncl a 3% rate, which, if attained,
would represent no acceleration fro111 the
1991-96 trencl. Unemployment is preclictecl to
I-emain at or below 5.5%, ancl the employment/population ratio sl~oulclhover around
recorcl-high levels. Although investment spending is likely to slow, as is spending on consumer
clurable goods, no serious inbalances except
high levels of credit carcl debt are thought to
threaten continued economic growth. The pros
is shipshape and
say that the U.S.S. ECO?ZOIII~V
l~lesseciwith favorable wincls.
With smooth sailing ahead, nlonetary policy
would seem to enjoy a11 enviable position.
Shoulcln't the Federal Reser~~e
just chart a neutral
d s unchanged
course, leaving the federal f ~ ~ n sate
and thereby promoting steacly economic conditions? The answer to this question depends on
the definition of "neutral course." During the
past six years, the Federal Open Marlcet Committee (FOMC) has raised ancl lowerecl the federal
funcis rate and left it ~~nchanged
over prolonged
periods (it has not been altered since January
1996). Likewise, the various money-stock measures have fluctuated consiclerably. The expansion got under way slo\vly, but strong wincts
eventually filled her sails; inflation, seeming to
defy Nephlne, has not surged along in her wake.
The orientation of post-1979 monetasy policy
bears closer scnltiny. lJncluestionahly, the events
of the 1970s-when a progrowth, proinflation
course was charted-powerfully
influenced
subsequent nlonetary policy. As \ve know, the
ship, lured by the Sirens of faster economic
growth, went aground on the rocks of rising
inflation. One interpretation of nlonetary policy
in the mici-1980s is that the FONIC set a course
for credibility with one objective-to preseive
the disinflation it had achieved hy 1983. By
showing its n:illingness to cu1t;lil licpidity at critical junctures, the FOMC not only earnecl credibility, but also enablecl householcls ancl husinesses to coordinate their plans ancl actions
more easily, \vhich prevented serious clisruptions of overall econonlic progress. Credibility
strengthened economic stability. 13y the end

of the 1980s, in the rniclst of a long expansion,
the FOMC co~llcltalk convincingly about its intention to change its bearings ancl set sail for
price stability.
What are the map coordinates of price stahility, ancl what instrument settings will hold the
the priinary emphaeconomy on course? Sho~~lcl
sis be on stating more clearly the longitude and
latitude by which price stability shall be known
ancl by announcing the journey's intended
length? Or shoulct the FObIC heed warnings that
it is now sailing into heavy swells that threaten
to swamp the ship? Perhaps a meandering cruise
would he more conlfortable. And, as a practical
matter, can the FONIC successh~llycontrol inflation by inanaging aggregate clemancl?
Accurate estimates of "potential output" or
"full employment" unclerlie the aggregate dernancl Inanagenlent framework. To avoid the
shoals, the helmsman must know what limits of
real econonlic activity are consistent with no
change in inflation. How reliable is the NAIRU
compass, an instrument that purports to infor111
us of the noraccelerating inflation rate of unemployment? And how reliable are the cables that
set the federal f~lnclsrate sails to catch the wincls
of aggregate demand?
Conventional NAIRU compasses operate
through labor nxlrlcet demographics. The old
captains thought they coulci tell what uneiuployment rates would mark ''f~lllemployment" for
different age ancl sex subgroups. The NAII<U is a
weighted average of the subgroup-specific "ft~ll
employment" une~xlploymentrates; the weights
change over time as the subgroups' shares of the
labor force change. For example, teenagers have
larger unemploy~nentrates than adults, and as
they become a smaller fraction of the labor
force, the NAIRU declines.
Unfortunately, the NAIRU compass needle
appears confused. When the U.S.S. Economn~~
left port in 1991, old salts estimated NAIRU at
6% to 6.5%. During the voyage, as the ship
plowecl the waves ivith greater speed than
seenled possihle ~vithoutgenerating more inflation, NAIRU estimates have been continuously
revised downward. Sonle hands judge it to b e
as low as 5%. Then again, the NAIIiU conlpass
may be broken. Relying on olcl relationships between unemployment rates and inflation coulci
be like using an olcl map in territo~ywhere the
land masses have shifted ancl water channels
have alterecl through the years.
One thing that has not changed is the clesire
of passengers ancl crew to know where they are
bound. Is it better to clefine monetary policy by
its instrument settings, or hy a course plotted,
declared, ancl steadfastly p~trsueci?

http://clevelandfed.org/research/trends
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Monetary Policy
Percent weekly averages
65

Perceni, weekly averages

IRESERVE MARKET RATES

-R5

ONG-TERM INTEREST RATES

Intended iederal funds ral

50
70

45
'f~ctlveiederal funas rate

40
60

35
30

55
i n

Perceni

a. Four-quarter growth rate.
NOTE: Shaded areas indicate recessions.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; and Board of Governors of the Federal Reserve System

At its I)eceml>er 17 ~neeting,the
Fecler-al Open bI/larket Committee
again left the intenclecl tcclcral f~unds
rate unchanged at 5.25(%.It is rrow
approaching orie year since the
Committee last alterecl its fecles:ll
f'uncls late ol>jective, a 25-11:tsispoint rccl~ictionthat occ~~rrccl
fbllo~vingits J a n ~ ~ a r3y1. 1996 meeting.
\V'hile the feclelxl f\~nclsrate has
remainecl constant, long-term intercst rates 1i;lve \.arieci somc\vh;lt over

the p i s t yeas. The 30-year Tseasusy
constant-maturity rate reachecl 21
1996 high of 7.28% during the \\;eel<
ofJune 6, before falling to its current
Ic\vl of arounct 6.5%.
Although short-tenn interest rates
h:ive risen relative to their levels in
early 1993, they remain low relative
to their averages over the l:lst two
decacles. In fact, one 11iust g o bacl<
t o the mid-1960s to find a period of
sustainecl low short-tern1 r;ttes

m;ltching tile avemge level posted
over the last four years. Not coincielentally, one must also go back to
the 1960s t o fincl a sustained periocl
of lo\\; inflation coniparable to the
avel.;lgc infl:ltion rate over the past
10 ycus.
11

is a wiclely accepteel view in

economics that over long periocls,

growth in the supply of money determincs the inflatio~~
rate a n d has
~co)7li~zi1c?c~
ot1 ?ze.~lpc~gc?j

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Dollars (log scale)
'rooO

I S&P 500 PRICE PER SHARE^

Percent change
25 [ S ~ P
500 REAL EARNINGSAND DIVIDENDS PER

SHARE^

a. Last plot is the December 31 closing price.
b. Real S&P 500 is the nominal S&P 500 divided by the Consumer Price Index.
c. Last plot is the December 31 closing price over 1996:lllQ preliminaryfour-quarter total earnings.
d. In 1983 dollars. Last plot is 1996:lllQ preliminary earnings and 1996:lllQ dividends. Real earnings growth is the compounded growth rate of four-quarter
total real earnings divided by four-quarter total real earnings three years earlier. Real dividend growth is the compounded growth rate of the current-quarter
real dividend divided by the real dividend three years earlier.
e. Last plot is 1996:lllQ dividends over 1996:lllQ preliminary earnings.
SOURCES: DRIIMcGraw-Hill; and Board of Governors of the Federal Reserve System.

Although vol:ltile, stock prices have
been trending- ~upn.:u-d
since 1982.
.
The Sta11cl:lrcl & I'oos's (Ski-') 500
index stood at 741 on Ilecemher 31,
21% above its year-e11c1 1995 level.
Messurecl in constant-dollar ter.111~.
the incles has risen 54% since 1994.
cornpareel with an ascent of 91%)in
the two-yclr period ellding SeptemE

---

ber 1955.
The recent surge in stock prices
has been associatecl with especi:tlly
strong earnings grotvth. Funclarnentally, a stock's price is deteslninecl
as the cliscountecl value o f its ex-

pectecl Suture dividends, which ultirnately derive from future earnings.
\Y;hen
prospects for earnings
gro\\rth iruprove, stock prices tend
to rise. The recent price/earnings
Icvel of the S&P 500 suggests that
investors espect the strength in
earnings to persist.
Since 1930, the variability of earnings growth h:~s increased substanti:rll~,, \vhile the variability of cliviclend gro~vth has remainecl essentially unchanged. Consequently,
thc cliviclencl payout ratio (measureel
as cliviclencls per share divided by

e:lrnings per share) has swung
\videly in recent years. It now st:~ncls
near its post-\Vorlcl \Var I1 low of
0.4 1. falling from a perioci high of
0.76 in 1992. Eve11 if earnings growth
modelates. cliviclencl growth coulcl
accelerate if the p:lyout ~.atioreturns
LO its postwar average. Moreover,
many firms have used earnings to
1 ~ 1 1~:rck
y
sh:~res in lieu of paying
cliviclcnds. This tvoulcl explain part of
the incrc:tsc i11e:lrnings per share. It
also lx>cleswell for future cliviclencls,
I ~ ~ Z I L f~lture
I S ~ earnings will be clistril>uteclanlong fewer shareholclers.

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Percent neehly averages
75

YIELD CURVESa

Percent, weekly averages
(15 9

a. All instruments are constant-maturity series.
b. Estimate of the yield on a recently offered, A-rated ut~litybond with a maturity of 30 years and call protection of five years.
c. Bond Buyer Index, general obligation, 20 years to maturiv, mixed quality.
d. Percent change from corresponding quarter of previous year.
e. Constant-maturity 10-year Treasury bond yield minus constant-maturity 3-month Treasury bill yield, lagged four quarters.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; and Board of Governors of the Federal Reserve System

The yieicl culve h:~ssteepened over
the last non nth ancl remains steeper
than at this time 1;lst year, being
higher at the long end ancl lower at
the short. Two closely watched
spre;~cls, the 3-year.. 3-month : ~ n d
the 10-year, 3-111~)11tll,
stand at 87
ancl 12.4 Ixsis points, at 01- slightly
above their 30-year averages of 80
;tncl 125 Ix~sispoints.
Long-term capital rates reflect the
increzlse in long-maturity Treasuries. Home mortgage r:ltes 1,eg:ln
their upt~wrla bit later, and Ilave

movccl slightly less, than 30-year

.Ireasuries,
.
utility boneis, and 11111nicipal 1,oncls.
I'eople commonly use term stntcLure to predict frlture GDI-' growth.
b i ~ they
t
clisagree over why it sl~oulcl
clo so-wllether it anticipates future
policy actions, reacts to shoclis more
cluickly than cloes the real economy,
.
the emerging
or l ~ o r t ~I-Iowever,
consensus is that the yield curve
cloes incleed predict Futtrre real activity. h/Iost dramatically, yielcl cul-ve
inversions (where the spreacl goes

negative as short rates exceed long
rates) often hel.:tlcl recessions,
whereas steep yielcl curves indicate
strong economic growth. This relation is particularly apparent in the
chart comparing real GDP growth
xvith the 10-year. 3-month spread
one year (four quarters) in the past.
".
Illis suggests that the current I*' tloveaveragc spre;lcl portencls robust
gro\vtl~over the next year, but vari:ll~ility in the chart :~lsomeans that
(here is n o gLiar;mtee.

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Inf2ation and Prices
*

12-month percent change

November Price Statistics
Annualized percent
change, last:

Imo.

6 mo. 12 mo. 5 yr.

TRENDS IN THE CPI

36 r

1995
avg.

Consumer Prices

All items

3.1

2.6

3.2

2.8

2.6

Less food
and energy

2.2

2.6

3.0

Mediana

2.8

2.9

3.0

3.2

Finished goods 4.6

2.8

3.1

1.6

2.1

Less food
and energy

0.8

0.6

1.4

2.6

2.4

5.4

Producer Prices

1.7

Commodity futures
pricesb
-12.1 -12.0 -0.3

Percent of forecasts

Annuallzed percent change from preced~ngquarter

QUARTERLY BLUE CHlP CONSENSUS CPI FORECAST

DISTRIBUTION OF BLUE CHlP 1997 CPI FORECASTS

Actual
December 10,1996

Annualized percent change
a. Calcirlated 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.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; the Federal Reserve Bank of Cleveland; the Commodity Research Bureau; and Blue Chip
Economic Indicators, January 16 and December 10, 1996.

The Cons~lrnerI'rice Incles (CI'I)
rose 3. L'Xr in Noveml~er,just a bit
under its mvrage incre:~seof the last
1 2 months. The nleclian CPI, ~1
measure of core inflation, aclvancecl
at a slightly slo\vcr 1 x 1 ~ ~ .
Neither economists nor policyn~altersforesee the CI'I's gro\vtli rate
changing m ~ i c hh e ~ ~ v e e1996
n ancl
1997. At its July meeting, the Fetieral
O p e n blarliet Conllliittee projectetl
that the indes \vouid rise 1,etwcen
2?/10/,anci 5% this year, not m ~ i c hciiff'eretlt from tlie 2.8(!4i t o 3.2%) range
anticipated I,? more t h n 65% o f the

economists responding to December's 131ue Chip survey.
l<ecently,21 fais amount of contro\.essy has surfaced over the CI'I's
rll,ility to ;~cwratelymeasure changes
in the average cost of living. The
m;ijor ~ n e a s ~ ~ r e mproblems
ent
uncleslying the inclex have been reason:il,ly well ui~tlerstooclsince the first
"fisecl marltet basltet" intiexes \\-ere
constructeci. However, because tile
C1)I is the tx~sisfor acljusting roughly
one-third of all fecleral expentiitures.
Cl'l "l)ias" has recently pro~~lptecl
a
more Focused discussion of "correcting" the index in orcler to ease the

fecleral govel.nn~ent'sfisa~lproblems.
A recent report to the Senate Finance Committee (procluced by the
i\tivisory Co~nmissionto St~lclythe
Consumer l'rice Incles) IILICS tlie
total annnal CI'I bias at 1.1%. The
components of this bias are belieyeel to 1,e chnnges in the marliet
basket clue to relative price changes
(sul~stitutionhias, 0.4%). changes in
the quality o f gootls or the intl.ocluction of new ones (0.6%). :ullcl
changes in ~ v l ~ e rgoocis
e
are purchased (outlet l~ias,0.1%).
(cojltirz~iec/or1 riextpcigol

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Inflation and Prices (cont.)
Index,1982-84 = 1 0

Estimates of Annual CPI Bias
(Percentage points)

EFFECT OF CORRECTING A 1.l-PERCENTAGE-POINT CPI
OVERSTATEMENT ON PROJECTED CPI GROWTH

Senate Advisory Commission

Substitution bias

0.4

New producVquality change

0.6

Outlet bias

0.1

Total bias

1.I

0.8 to
1.6

Range of plausible estimates
Consensus view
of economists*

0.8

* Blue Chip panel of economists, July 10, 1995

Def~crireduclron billions oi dollars

Deb1 reauction billions of dollars

250

C] Social Secuiity and retirement progiams

a. Consensus forecast of the Blue Chip panel of economists, October 10, 1996.
b. Includes reduction in deficits due to revenues, change in debt service, and other outlays.
c. Dates in parentheses represent estimation period.
SOURCES: Toward a More Accurate Measureof the Cost of Living, final report to the Senate Finance Committee from the Advisory Commissionto Study the
Consumer Price Index, Michaei J. Boskin, Chairman; and Blue Chip Economic Indicators, July 10, 1995 and October 10, 1996.

While the over:~II t i a s seems
small, its imp:lct 011 the CIjI could
over several
be huge if ;tcci~~nulatecl
years. I f we acljust the Cl'I's psojectecl gro\vtln rxte clo\vn\\;:lsci 12)~
the Colnnlission's bias estim;lte, the
i~lclesrises al>out one-third less than
what is currently projectecl by economisrs. i\ccoscling to the Congressional Huclget Office. a potential
overst:ltenlcnt o f this m;~gnitucle
\ v o ~ ~ l tcause
l
the federal government to esceecl its budget by about
$200 1,illion in the year 2008, cumu1:itivelp aclcling more than S 1 trillion
to feclel.:tl government debt over the

11-year pcriocI.
The Commission's report has receivecl :t certain amount of criticism
ancl. : ~ t the vely least, shoulcl h e
consiclerecl speculative. The potentially largest bias in the indes comes
fro111 mismeasurernent of cluality
clnanges ancl the introduction of
ne\\. goods, areas that economists
11a1.e identified as h:lving the potential to cause inaccuracies, b ~ for
~ t
\\;l~ichvery little broad-b;tsecl eviclence has heen collected. In its repost. the Commission inclicateci
i\.iclc \:ariation in the amount of
clu:~lity Iias by component. Nun;-

ever, these estilnates can change
sharply horn periocl to period and
may, in certain cases; be negative.
For tlle m o ~ n e n t ,the Bureau of
L:il,or St~~fistics
(the government
agency that oversees the construction of the CPI) is unliliely to nlake
;illy s~111st:~ntial
changes in the
incles. Hcsicles its use as a federal
17~1cIg~t
ese:11;1~or.the CI'I is usecl in
labor :mcl other private contracts
co\~eringmillions o f tvorlters, Making pernnanent alterations without
thoroi~ghlyi~ntlerst;unclingtheir imp1ic;ttions co~rldcreate more problems th:ln it solves.

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Economic Activity
Percent change iron preceding quarterb

Real GDP and Components, 1 9 9 6 : l l l ~ ~

GDP AND BLUE CHIP FORECAST

(Final estimateb)
change,
billions
of 1992 $

Real GDP
Consumer spend~ng
Durables
Nondurables
Servlces

35.8
5.9
-4.0
1.3
8.3

Buslness fixed
investment
30.9
Equipment
27.5
Structures
3.7
Resldentlal investment -3.7
Government spend~ng -2.1
N a t l o n a l defense
-4.5
Net exports
-22.7
Exports
-1.8
Imports
20.9
Change in business
lnventorles
27.4

Percent change horn corresponding

montii

Percent change, last:
Four
Quarter
quarters

2.1
0.5
-2.6
0.4
1.3

2.2
2.1
3.8
1.2
2.2

17.5
20.8
8.2
-5.2
-0.7
-5.5

8.7
10.7
3.2
5.9
1.O
-1.3

-0.9
9.3

4.2
7.8

of previous year"

PERSONAL INCOME AND SPENDING TRENDS^

Ratio
65( MORTGAGE AND CONSUMER DEBT^^^

Ratio

Real personal
consumption expenditures
Real disposable
uersonal income

a. Chain-weighted data in 1992 dollars.
b. Seasonally adjusted annual rate.
c. All data include households and nonprofit organ~zationsand are measured at year end.
d. Disposable personal income data are through November 1996: home mortgage debt and consumer credit are through 1996:lllQ.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis: Board of Governors of the Federal Reserve System: and Blue Chip Economic
Indicators, December 10, 1996.

Reviseel Conitncrce 1)ep:~rtment estirilates inclicate tl'iat real GDl' grew
2.1Yo in lC)9O:IIIQ,doxvn from an
atypically 11igl1 -t.70/(,the previous
cltl:~ter. Ad\-ances in producers'
clurable ecltiipment (mainly computers) ancl in\.entory ~lcc~im~i1:ltion
Inore th:m :iccoilnteci Sor the thirdquarter incre:~se.Economists p:lrticipating in I)ccen~l)cr's1 3 1 ~ Chip
1 ~ stirvey espect continlieel economic
grow-th of apixoximately 2.0%
througlio~it 1997. Althoiigh lo\ver

tila11 the liistorical norm, this figure
is consistent \vith currelit esti~nates
o f li.S. potential economic gro\vth.
Consumer outl:tys, \vliich slo\vccl
during the thircl cluarTer, have si11ce
17icl;ecl lip. Real personal consumption e s p e n c l i t i ~ r e ~ n c r e a s e:I dsolicl
2.00/i, (year o\.er year) in Noveml,er.
Sollo\t.ing a 3.0% advance the
month hetore. Both of these incre:lses esceeclecl gains in real clisix)s;tl,le ~ x r x ) l i : ~incollie,
l
n-hich
Ilas r n o d c ~ ~ t esort~ewhat
cl
in recent
months l x r t remains healthy. i\nec-

clotill evitlence suggests that holiclay
spencling W:\S fair.
Concern that high levels of household c l c l ~ m;~)i crimp consumer
spending and \I-e:~lccn tlie over:tll
cconorny persists. hiit 11i:ly be
o\-cr1)lon.n. I-louscliolcl debt as :I
share o f disposal>leperson'I 1 lncoiiie
11:~
generally
~
risen over the 1;lst 30
yc:~rs,\\.ith most of tlie rlinlip reflecting liiglier levels of mortgage clel~t.
.I.he L I ~ T V : Utrencl
~
in conslimel- cle1,t
Icotiti~ztrec/oil i~c.~r/~crgc)
'

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Percent change from corresponding month of previous year

INDUSTRIAL PRODUCTION AND CAPACIW UTILIZATION^

26 6

100

26 2

25 8

25 4

25 0

92
tai liab~iitiesldisposable

24 6
1990

90
1991

1992

1993

1994

Net percent rising
65 PURCHASING MANAGERS' INDEX

1995

1996

Ratio
2.5

Percent change from corresponding month oi previous year
20

2.0

1 .0

0.5

0.0
1992

1993

1994

1995

1996

a. All data include households and nonprofit organizations and are measured at year end.
b. Disposable personal income data are through November 1996: total liabilities and total financial assets are through 1996:lllQ.
c. Seasonally adjusted.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; Board of Governors of the Federal Resetve System: and the National Association of
Purchasing Management.

l'lne tot:~l index incre:~secl more
has 1,een clclite moclest. At 2 1.290,
th:~n (1.9"io in November. Analysts
cons~~rllers'
recent debt-to-income
expected a post-strike rel>ound in
ratio is 011ly sliglitly al~oveits previt
the automotive inclustrp.. 1 > ~ 1nono u s peal\: of 20.4'%1iin 1986. h,lose~tc1to111oti1.c
incl~~stries
acco~lnteclfor
over. the I.:~tioof consullies clel~tto
much of the overall p i n . Measureel
financial assets suggests that houseo n :I year-over-year Ixsis. industrial
holcls' I3;tlance sheets are liealthier
psocluction has grown at a he:~lth).
no\\. than in 199O. I'erl~aps setiecting
!>;ice this ye:tr, with U.S. mines. utilf>~\;ol.al>le
I>;~l:~nce
sheets, me:lsclres
ities, ancl manufacturitlg plants conof consc~mers'ovcr:tll conficlence in
tincling ro operate at high le\.eis of
the economy senlain strong.
12ecent cl;ita stion. :I s~lrpsisingly cap:tcit); ~ltilization.The Xation~tl
1;~rges~rrgein industrial procl~~ctio~n.Association of I+urchasing Manage-

m e n t ' ~incles inclicates that a slight
majority of managers are reporting
gro\vth in their firms. The industrial
sector accounts For onl). ahout 20%
of national octt~>clt.
11cit it is it pivot:ll
component of the 1,usiness cycle.
Kew ortlers for dural>le goocts increasecl :I scihst;lntial 5.796(year over
year) in Novemt~es,and new ostlers
for all manuf:tcturecl goods ad\.;uncecI 6.6'80 in October (latest clata).
The mtio of ctnfilletl orcless to sliipments has 1.e1iiainedsteady.

-5

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Labor Markets
Chanae, lhousands of workeisa

600 "

Employment Growth by Industry, 1996

MONTHLY NONFARM EMPLOYMENT GROWTH, 1996

(Thousands of employeesa)

IIQ

Total nonfarm
601 800
Goods-producing 36
78
Manufacturing -85
16
Nondurables -41 -57
Durables
-44
73
Construction
117
61
Service-producing 565 722
Wholesale and
retail trade
59 252
FIRE^
45
35
Transportation,
public utilities 40
40
Services
374 343
Computer
18
40
Health
87
66
Government
47
52

Peiceni a

Perc'ent change, year over yeard

6.0

IllQ IVQ

Total

513 342 2,256
-17 42
139
-57 18 -108
-36
1 -133
-21 17
25
48 26 252
530 300 2,117
178 128
42 32

617
154

8 12 100
229 158 1,104
31 27 116
56 46 255
73 -30
142

1 EMPLOYMENT COST INDEX. 1996

5.9
5.8
5.7
5.6
5.5
5.4
5.3
5.2
5.1
5.0

Jan

Feb.

Mar

Apr.

May June

July

Aug

Sepi.

Oci

Nov.
east

Cenirai

easi

Cenirai

a. Seasonally adjusted.
b. December data are not available.
c. Finance, insurance, and real estate.
d. Through 1996:lllO.
SOURCE: U.S. Department of Labor, Bureau of Labor Statistics.

Labor markets remainecl solicl in
1996, with 2.3 million jobs being
adclecl to the n:ltion's paprolls.
Through Novemk,er (December
data are not yet available), the num1 x 1 of net jobs createcl was slightly
higher than the 2.2 million created
in 1995.
The ~ ~ ~ C I S - I ~ S O ~ L I Csector
~I~~
aclclecl 139,000 \v\;orliersover the first
11 months of the yeas, with strength
in the constrilction industry more

than offsetting :l contraction in manilfact~~ring.
Most service-proclucing
categories saw about the same increase in 1996 as in 1995. One clramatic exception was the finance, insurance, and real estate inclustsy,
\\;hicli more than triplecl its 1995
growth. This tral~slateclinto 154,000
nenr jobs.
Despite fluctuations in the
monthly data, unemployment folk
lowecl a clo\vnwarcl trend in 1996.
Nove~nl~er's
jobless rate, at 5.4(Y0~

stoocl 0.4 percentage point below
the Jan~1al-yfigure. Aclclitionally, average ~lnelnployrnentfor the ye:1r
(5.~i%,,)was l~elowthe 1995 avernge
(5.6%).
\Xlges anel total compensation
(rh-hich incli~tles benefits) grew a
~noclerate3.4% :~ncl 3.0%, respectively. close to the rate of inflation.
Tighter lal~or~i~arlcets
in the \vestern
states were eviclent in the region's
mose rapicl xwiage anel salary gro\~th.

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The US. Work?force
Percent
80 EDUCATIONAL ATTAINMENT BY RACE^

1 EDUCATIONAL ATTAINMENT BY SEXa

I
50

C] Less than 4 years of high school

Less than 4 years of high schoo

4 years of high school

More than 4 years of col

35
More than 4 years of college

20
15

5
0

1963

Female

1993

Percent
70 1SHARE OF RECENT HIGH SCHOOL GRADUATES

1963

Male

Female

1993

Male

a. Refers to full-t~meworkforce.
b. Data not available before 1976.
c. As a percentage of average earnings for white males.
States: 1996,
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; the Federal Reserve Bank of Cleveland; and Statistical Absfract of the Un~ted
table 279.

Nothing is more certain than change,
partic~llarlyeconomic chsinge. The
last 30 years have witnessed a dramatic tr;i~~stosmatio~~
in the ec1uc:itional attainment of' the U.S. \vorliforce, along \\;it11 a n~trro~ving
of
race- ancl scs-related pay clisparities.
As recently 21s 1963, 42% of all
.c\rorking Americ~insclroppecl out of
t 1993 th:it numhigh school, I x ~ I>y
ber llacl Etllen to 11%. Over the same
periocl, the share o f high school
gracluates attencling college rose
from -ijcH, to 02%1:tile proportion of
unclerg~icluatecollege stuclents who

eamecl a degree increaseel fiorn 7%
high school actually fell helo\v that
to 1H%, and the share of college
of men.
gracluates with bvo or more years of
Over this same 30-year periocl,
post-gs:iduate education triplet1 from
tlle share of women in the work3% to 9%).
force balloonecl f r o ~ nroughly 28%
In :iclclition, the clat:i reveal 3 110to 42%. :inel the male-female pay
table coalescence in educational atclisparity tlarso\\~ecl.In 1963, a WOm:In earnecl al~oilth:ilf as much as a
tainment anlong race sund sex
groups. Retween 1963 ancl 1993, the
man. By 1993, that figure hacl risen
sh:ire of I>laclr \vorl<ers \\;ho hacl
the percentage of
to 70%. Altho~~gh
conlpletecl less than four years of
blacks in the Iahor force has
high scllool plummetecl to a proporchangecl little over the last three
clecades, the earnings clisparity betion nearly eclual to that of white
\\~orlcers.u~hilethe fraction of ~\iorl<- tween hlaclcs :~nclwhites n:~nowetl
ing women who Ilad clroppecl out of
from 65% in 1963 to 85% ill 1993.

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Regional Conditions

Canton - Massillon
Cleveland- Lorain- Elyria 4.8
Dayton-Springfield
Hamilton- Middletown

3.6

Steubenville-Weirton

5.5

a. Not seasonally adjusted.
b. Seasonally adjusted.
c. F~nance,insurance, and real estate.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; and Ohio Bureau of Employment Services, Labor Market Information Division

g
$
-,

Althougll more tll:tn half of the
Fourth Fedel.:~l lieserve Ilistrict's
counties postccl ~~nerilployment
nltes
at o r helow tile national average in
October, tiiany others continued to
exceecl it. one fly :ts ~nncllas 8.8
percentage points (I<nox County,
Kentucky). 2Iorgm County recorclecl
Ohio's highest jol~lessrate (11.6%).
while Fsanklin ancl 1)el;t~varecounties, in the Colurnl~~ls
metropolitan
area, sh;lrecl the si:ite's lorvest posting (2.7(!41).
Octo1,er ~ ~ r i e m p l o ) - m rates
e ~ ~ t it1

the District's metropolit.'In areas \yere
comparable to those of October
1995. Cincinnati, Clevelancl. Colurnl~us,:lncl I'ittsburgh all saw their
sates go down. The largest improvement canie in the Youngstown\Warren area, which cut its jobless
rate from 7% in October 1995 to
5.3(?6:t year later.
I11 recent years. Pennsylvania has
seen less robust jobs growth than
Ohio ancl Iie~lt~icky.
In fact, Pennsylvania employment is only sliglltlp
higher nor\- than in 1990, \\jl~ereas
Ohio ancl Tie~ltucky have posted

g:tins of al~out6% ancl 12%. respectively.
Ohio's cluarterly employment figures sho\v :in increase in total
e m p l o y m e ~ ~l>et\veen
t
the first
ancl second quarters of 1996. Gains
occurrecl in e l - e ~ ysector except
government, which lost almost 4.000
\vorliers. The 1,iggest cluarterly improvernent came in services. xvhich
aclded more than 53,000 jol~s,hut
large increases were also seen in
construction ancl in mlholesale ;lncl
retail tl.acle (LIPnearlj. 40.000 ancl
37.000, ~'especti\;ely).

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Regional NAIRU
Percent oi labor iorce

1 UNEMPLOYMENT RATE^

Selected Statistics for Midwest and
U.S. ~ c o n o m i e s ~
Midwest

U.S.

61,394

260,341

Manufacturing
output
($ billions)

940.4

3,003.5

GDP ($ billions)

1,374.5

6,244.4

11.4

12.3

Population
(thousands)

Percent of population
holding a bachelor's
degree

Annualized percent change

1988

1989

1990

1991

1992

1993

1994

1995

1996

a. Seasonally adjusted.
b. Population data are for 1994; manufacturing output (measured in value of shipments) and GDP data are for 1992; and educational attainment data
are for 1990.
c. All data are semiannual.
d. All data are third quarter over third quarter.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; and U.S. Department of Commerce, Bureau of the Census and Bureau of
Econom~cAnalysis.

S o ~ l l epo1icym:tkers view the concept of NAIRU, the non-accelerating
inflation rate of unemployment, as
consistent with an ecluilibriunl Linemployment r:kte. Although it is
often associatccl with full employment, the NAIIiIl is not zero because even in ec~uiliI,rium, an adjusting economy experiences some
unemployment due to n:~tural
turnover clncl jell-sceliing.
Certain economists feel that any
~lnenlplopmentlate above (belo\\r\.)
t1.le NAIRL; portencls :in inflation decrease (increase). ljnfortunately, the

NAIRU is not ~lneasurecldirectly, but
nl~istbe inferred froin past price and
uile~llploy~llent
data, so there is considesable uncertainty about the rate's
value at any given time. Some economists have hegun to suggest that
the U.S.sate has fallen from HI to
5.5%. with significant in~plic:~tions
for current policy.
One \v.v;lyto gain a clearer picture
of the KAIIIIJ is by exaniini~lgregional eviclence. For example, the
Midxxrest's economy accounts for
illore than a cluarter of all 1J.S. output. More important, its labor force

cloes not differ much from that of
the nation as a \\/hole. In recent
years, miclwestern ~lnemployment
mtes have consistently been well
1,elon. the U.S. average. I-Iotvever,
the region's prices have risen at
about the sarne average rate as the
nation 21s a \vhole, as have its labor
costs, which for111 tile largest share
of its business expenses. Thus, the
Nfid~vest eviclence suggests that
even if the KAIRU is a useful concept, the rate nlay be far lower than
m:lny observers believe.

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Banking Conditions
Percent

Percent

5.5

0.5

MARKET INTEREST RATES

ICD
INTEREST RATE DIFFERENTIALS, 1996

Percent

1995

1996

SOURCE: Bank Rate Monitor, various issues.

Short-term l~anlccleposit rates have
declined sliglltly since October. Although 1,usiness's dem:lnd for bank
loans was strong in September ancl
October, their increased utilization
of alternative funding sources may
portencl a wealiening in this area.
Wealcer lo:tn clemancl ~voulcl increase the pressure on banlts to
lower their cleposit rates.
Since June, yielcl curve clifferentials have cleclinecl, consistent with
expectations of lower interest rates.
The n~icleninghetween one-year and
six-month C1> mtes since October

suggests that marltet participants
might expect a temporary firlning.
However, such interpretations are
prohlernatic, in part because each
yielcl ctul-ve segnlent may temporarily reflect supply and clenlancl factors specific to particular portions of
the marltet.
Mortgage rates have shown a
slight firming, possibly because the
volume of mortgages clenlancled
nlay have responded to the loxver
rates \xritnessed since midyear. Iionrever, sonle reports inclicate that demancl is concentrated in refinancing
rather than in new home loans.

Consumer loan rates (credit cards.
auto loans, ancl personal loans) have
been cleclining since last fall. Although clelinquency rates on credit
cards and closed-encl consumer
loans fell for the first time in two
years, concerns are still being voicecl
about the quality of outstanding
consunler loans and the debt burclen facing American householcls.
Banltr~lptcyfilings for the 12 months
enclecl September 30 reached a
recorcl high. On the other hancl.
high levels of credit carcl portfolio
sales have ena1,lecl banlis to sllecl
(co~zti~zlted
on ~zc~x/pcigel

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Banking Conditions (cont.)
Net oercent
20

iRESPONDENTS TlGHTENlNG STANDARDS FOR C81 LOANS

Net percent
40

RESPONDENTS

Net oercent

REPORTING STRONGER DEMAND

FOR C8l LOANS

Net percent

1991

1992

1993

1994

1995

1996

SOURCE: Board of Governors of the Federal Reserve System, Senior Loan Officer Opinion Survey on Bank Lending Practices.

some of their riskier consiimer clebt
and thus lower their rates.
The No\rember Senior Loan Officer Opinion Survey on Uanli Lending I'ractices revealect that several
banks recliicecl stanclarcls for I~usiness loans ancl easecl terms. However, m:uny also laisecl standards for
creciit carcl lending and other types
of consumer loans.
Conlparecl to the previous survey
in August, there has I x e n a slight
easing of stanclarcls for business
loans. 'Ishe number of banks that reportecl ei~singterms for large anel

small firms rose to 40% and 30%. respectively. An often-cited explanation I ~ L I Sc~lnpetitionfroill either
other banlis or nonbanlts. lieported
increased sensitivity of loan elemand
to changes in bank terms was greatest for meclium-size firms.
Although the volii~neof commercial ailel inclustrial (C&I) loans at
coinrnercial banks grew rapidly in
Nol-em1,er. little change in the delnailcl for such loans was notecl over
the Septelnlxr- Nove~nherperiocl.
Only a slightly greater percentage of
res17onclents reporteel increased cle-

ml~ilclfor commercial real estate loans.
The survey also found continued
eviclence of tighter consumer lending
~~ractices.
consistent tvith the cleceleration in consumer credit in the
thircl cluarter. Similar to the results
of the August survey, roughly 50% of
respondents tightened credit carcl
stanclarcls, ancl 25% tightened standarcls on other consun1er loans. Stanclards on home equity loans were
easecl hy 20%, although a few banlts
tightenecl stanclarcls on home Inortgage applications.
(cotzti~?~/e~I
on 17extpage)

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Banking Conditions (cont.)
Percent
25
.. [ASSET GROWTH RATE

Peicent

Percent

Peicent

Percent

AII inst~tut~ons
$1 bill~onto $10 bllllon in assets

Less than $100 m~llionin assets

%k!

$100 mill~onto $1 bill~onin assets

More than $10 billion In assets

NOTE: Data for 1996 are for the first three quarters. All percent changes are year over year.
SOURCE: Federal Deposit Insurance Corporation.

a
i-

-,
7,

-j
.,

--*

1'relimin:lry data for the first three
c1~iarter~0f
1996 show th:lt commercial l,anlts itls~ireclby the Fecleral De~ x ~ sIint s u ~ ~ l l cCorporation
e
(FDIC)
recorclecl an :n,erage return on assets
of 1.19%. 'I'hircl-c1u:lrter net i n c o ~ n e
of $13.2 billion was the thircl-highest
posting in histo~y.Compareel to 1995,
however, asset gro\vth clippecl, although increases occurrecl in credit
carcl ancl commercial loans. Asset
quality inclicators are positive, \\-it11
the propol-tion of bank loans that are
at least 90 clays past clue falling to
the lowest level in 15 ye:\rs.

Altho~ighthe leverage ~.atiorose
slightly, ecpity as a percentage of nssets cli~nhedto its highest level in
half a century. As a ratio of the hook
valcie of clebt to the booli value of
assets, tlie leverage ratio does 11ot
clirectly reflect either the market's
evalc~ationof the cluality of bald< assets or the lilielil~oocithat banli clebt
will be repaid.
13anlt profitability rem:lins sound
clespite a cleclirle of 4.8% relative to
o11e year ago. Virtually all of the
clo\vntur~~
was related to the reclciirernent that the industry con-

triI>ute $1 I~illionto\\-arcl recapitalizing the Savil~gsAssociation Insurance
Fu~lcl(SAIF). Commercial I ~ l n lhold
i~
more than 10% of the deposits ins~lreclby tile SAIE
As a signal of the so~inclnessof the
banl\ring incl~~stry,
the FDIC announced thztt the 94% of banlis in
the lou.est risk czltegory \\:ill n o
longer be recluirecl to pay prerniu~ns
for maintaining the 13ank InsurLlnce
F~lncl(13II:). Furthermore, hanlis \vith
SAIF-insurecl cleposits will no longer
have to pay higher premi~lmsrlo\\r
th:lt the SAIF is fully capitalizeel.

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Oflicial Fo'oreign Capital Flows
Billions of U S dollars

Billions of U.S.dollars
120

.S. BALANCE OF PAYMENTS

B~llionsof U S dollars

Billions of U.S. dollars

B~llionsof U S dollars

INTERNATIONAL RESERVES~

Canada Germany

Italy

Fhexico S~ngaporelndo:ies~a Cll~na

a. Private capital flows have signs reversed and include the statistical discrepancy as unrecorded capilal flows. Positive values represent a capital outflow.
b. Positive values represent a capital inflow.
c. Latest data are for October 1996, except for the U.K. and Singapore (September) and Indonesia (August). Columns show change from December 1995.
Numbers above each column are total reserves in billions of U.S.dollars.
d. Latest observation is October 1996.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; Board of Governors of the Federal Reserve System; and International Monetary
Fund, InternationalFinancial Statistics.

Over the first three c1u:irter.s of 1996.
the V.S. current account deficit grew
at a 5123 billion annual sate, somewhat slo\ver than in tile previous
two ye:lrs. Official ancl private capital inflows of $96 billion ancl 527
billion, respectively. have financed
this cleficit. Since 1991, net official
capital inflows have accounteel for. a
growing share of our tap 011 the
worlcl's savings. as foreign go\.esnrnents ancl official :~gencies1i:ive accluised clollar-tlenomi~i:itecIassels.

Sep:lr;ite data on countries' holdings of international reserves s h o x
that Japan ancl China have greatly
increased their portfolios. Although
these data inclucle assets denominatecl in other currencies, much of
the increase probably represents
tlollars, since both countries maintain rmcle surpluses with the U.S.
Countries' current ancl capital acC O C I ~~:rl;ince~
~ ~ ~
must exactly offset
each other. Changes in economic
varial~les,primarily exchange mtcs.
interest Kites, and prices, autornati-

cally correct any divergence ketweell
the two accounts. I~lternationalreserves. however, call provicle countries ~ ~ i at hhit of ;I I~ufferagainst
sharp acljustments. XVhen a surplus
country (lilse Japan) accluires clollars,
its money stocli grows. other things
heing equal. An ~~nespectecl
monet:uy cspansiorl can check a currency
aplxeciation, hut becai~seit also prornotcs inflation, monetary e:tse cannor i~~clefinitely
secure a current account sc~rplcls.

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The Mexican Economy
Percent change irom corresponding quarter oi previous year
8

Percent change irom corresponding month of prevlous year

CONSUMER PRICE INDEX

50 45 40 35 30

20 25

1
10 5 l
1993

Pesos per U.S.dollar

1994

1995

B~llionsof U S dollars
30 FOREIGN EXCHANGE RESERVES

1996

a. The real exchange rate is calculated using consumer prices for both the U.S. and Mexico. The base period is November 1994
SOURCES: Banco de Mexico; and lnternat~onalMonetary Fund, International Financial Statistics.

Two years after the clisruptive peso
clepreci:~tion,the outlool-L f or Mesico is brightening. Our NAFI'A partner has regaineel access to intern:(tional capital markets ancl can now
repay its creclitors. Of contintling
concern, !lo\\-ever, are uncertainties
associated \vitIi rcxl currency appreciation ancl I\-ith the fragility of the
lxtnking sector.
After cleclini~lgsh;~rplyin 1995,
real economic activity has rebounclccl. Much of the gro\\~tlihas

I ~ e e nin the esport and investment
scctors; consumer spending remains
lvcalc. Inflation moderatecl fro111ari
annual rate of 52% in late 1995 to
approximately 28% last Novem1)er.
Allexico's relatively high inflation
late vis-5-vis the U.S. has erocled
much, but not all, of the pi-ice atlv:lntage that the peso clepreciatio~~
conferrecl on Plesican goods. That
the nominal exchange rate rem:li~is
Ltirly stable clespite continuing price

clifferentials attests to grom:i;itlg conf'iclence in b1exican monetary policy,
which has rem~inedcontractionary.
I'oreign c:lpital inflows are returning, :mcl i\lesico's inter~iationaltoreign currency reselTFes, when valuecl
;kt cilrrent eschange rates, exceed its
i1ioneta1-yI~ase.'The cl~~ality
of h~unlc
:Issets, however, remains poor clespite efforts at fi~iancialreorganiz:ltion ancl :kttempts to i~oostlicl~~iclity
:inel improve c~ipital.

Full text of Economic Trends (Federal Reserve Bank of Cleveland) : Economic Trends - January 1997

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