Full text of Economic Trends (Federal Reserve Bank of Cleveland) : Economic Trends - July 1996

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

http://clevelandfed.org/research/trends
July 1996
Best available copy

The Economy in Perspective
Good tze~usbears . . . Financial markets were
rockecl on July 5 when the Bureau of Labor Statistics (BLS) releasecl its report on labor nlarlcet
conclitions for June! along with revisecl data for
April ancl May The Bureau reported a 239,000
net increase in June enlployrnent as measured
by the survey of employers' payrolls, plus a
combinecl upward revision of 45,000 for April
ancl May. Average earnings expancted by 9 cents
per hour in June, the largest monthly gain ever
reported. Moreover, the BLS householcl survey
registered a decline in the national unemployment rate to 5.3%.
Despite weak trading over the holiday period,
the stock n~arltettook a sharp hit that Friday
(11 5 points on the Dow Jones Industrial Average), and U.S. Treasury bond prices plunxneted.
The yield on a 10-year Treasu~ybond jurnpecl
fron16.77% to 7.06% during the day.
Long-term bond yields have been on a rollercoaster ricle for the past few years. The pace of
econo~nic activity quickened during 1994,
putting pressure on capital market interest rates.
At the same time, concerns about accelerating
inflation prompted the Federal Reserve to slow
the rate at which it was supplying reserves to
the banking system. The fecleral funds rate rose
from 3.0% to 5.5% during the year.
Capital market rates declined during 1995, as
~narketparticipants expected growth to gear
down a bit to keep pace with additions to productive capacity. By year's end, in fact! capital
nlarket rates had fallen ahout 200 basis points
fro111 the beginning of the year, and some analysts spoke of a recession in the latter half of
1996. Last January, the Federal Reserve recluced
the fecleral funds ancl cliscount rates to keep
them in line with open n~arlcetrates, and in anticipation of a decline in inflationary pressures.
However, the BLS reported a strong employment gain for February, and subsequent economic data have convinced most economists to
expect rnoclerate econornic gro\.?th to continue
for the next year or so. I3efore BLS's July report,
capital nlarkets had retraced about 100 basis
points fi-om their 1995 low point, ancl the July 5
news accounted for another 25 to 30 points.
Interest rates have been volatile b e ~ t u s emarliet participants are responding to underlying
forces which themselves are volatile. I'eople revise their plans for saving, investment, ancl consumption as they acljust their views of future
econonlic activity. These revisions, in turn, affect the real interest rate prevailing in capital
rnarkets. People also rnay change their view of

the inflation rate they expect to prevail over the
next several years. Although the inflation rate as
~neasureclby the Consurner Price Inclex has
been following a 3% trencl cluring the past several years, many observers believe the trend will
be strongly influenced by the pace of econonlic
activity. Since by most accounts the economy
has been operating at very high rates of capacity
utilization for the past year or two, financial
market participants are especially leery of an acceleration in the price level.
The association of economic growth with inflation, sometimes referred to as the Phillips
curve, stems from positive correlations between
changes in the unemployment rate and unanticipated inflation observed during business cycles-particularly before 1981. This has encouraged some analysts to thinlt that policymakers
can alter inflation's trend by affecting the unemployment rate, that is, by designing policy so as
to speed up or slow clown the pace of economic
activity. The non-accelerating inflation rate of
unernployment (NAIRU) is thought to keep the
prevailing inflation rate steady. If NAIRU is 6%,
for example, unernployment rates below 6% will
likely generate accelerating inflation.
Econo~netricestinlates of Phillips curves and
NAIRU reveal that the relationships between inflation and economic growth are not very stable. Moreover, since the early 1980s, inflation
has declined during a prolonged period of economic expansion, at apparent odds with predictions from standard Phillips curve models. At
the outset of this decade, mainstrean1 estimates
of NAIRU centerect on 6%, but this figure is now
wiclely regarcled as 5.75%, or even 5.5% If the
inflation trend continues to holcl this year, we
may see esti~natedNAIIiU fall to 5.25%.
Those who forecast inflation fro111a Phillips
c u ~ v eview have occupied the high ground in
the media during the last few years, even
though this approach has been overpreclicting
the amount of econornic slack recluired to
reduce inflation. The Phillips culve/NAIRU
framework puts policy~naltersin the position of
being responsible for fluctuations in econo~nic
growth on a year-to-year basis, when their Inore
liltely objective is to nlaxi~nizeemploynlent ancl
promote price stability over business cycles. Excessive t7zo1zeygrowth, not economic growth,
creates inflation. Though rapid economic
growth may sornetirnes accompany excessive
Inoney growth, the goocl news need not bear
bad tidings.

http://clevelandfed.org/research/trends
July 1996
Best available copy

Monetary Policy
Billions of dollars
420
CURRENCY OUTSIDE BANKS

Billions of dollars

480 1 M O N E T A R Y B A S E

B ~ l l ~ o nofsdollars
72
T O T A L RESERVES

Billions of dollars
1,300

1.250

1,200

1,150

1,100
-10%'

' l l l ' ~ l ' ' l ' ' ' ' l ' l ' ' " ' ' ' ' r ~ ' ' ' ' ' ' ' ' '1,050
'
1994

1995

1996

a. Growth rates are calculated on a fourth-quarter over fourth-quarter basis. Annualized growth rate for 1996 is calculated on an estimated June over
1995:IVQ basis.
b. Adjusted for sweep accounts.
NOTE: All data are seasonally adjusted. Last plot IS estimated for June 1996. Dotted lines represent growth ranges and are for reference only.
SOURCE: Board of Governors of the Federal Reserve System.

So far this year, the narron. monetaly aggregates continue to l ~ rather
e
weak. Currency, \\-liich 1x1s expandecl at an :tver.age : ~ n n ~ rate
~ a l of
nearly SMO/i,over the past 22 years, is
growing only asouncl 3(%.'The slo~vclown is believecl to 11e ca~lsedby a
clrop in foreign clemancl. Vi~ith :IS
much as 70(!4~
of' all U.S. currency
held abroacl. any change in foreign
clernancl will have a proi~ouncecleffect 01-1 t l i ~aggregate's gro\vth.
T h e slower gro\vth o f currency is
p:irtly responsil,le for the sluggish

perforin:ince of the ruonetary base,
.r\;hich has exparldecl at an annual
sate of only 1.8% since January. The
1mse comprises currency held outsicle banks, surplus vault cash, ancl
total reserves, Ixit is clomin:itecl 11y
its currency component.
Base gro\vth is also being affected
by the clecliile in total reserves clue
to \viciespre:tcl implementation of
s\veep :~cco~lnts.
These accounts ell:tl~leclepository itlstitutio~lsto shift
funcis froin other checkable deposits, ~ i h i c h are reservitl>le. to

Illoney market deposit accounts,
~vliichare not. Without this reserve
avoichnce technicj~ie.it is estilnatecl
that total reserves \ V O L I ~have
~
beeil
increasing since January.
The implementation of sweep accounts and the slowclo\vn in currency growth have rilso influencecl
k1l. \\~hichfell at rl 1.5% annual late
through June. I-towever. adjusting
for the impact of sweep accounts, it
have esis estimatecl that M I \\~o~lld
pa~lcledat ;i ~lioderaterate.
(co~tirrr
led 017 17e.vtpagirc)

http://clevelandfed.org/research/trends
July 1996
Best available copy

Monetary Policy (cont.)
Inflationrate, percent

Percent

UNEMPLOYMENT AND INFLATION, 1960-1996

CHANGE IN UNEMPLOYMENT AND INFLATION GROWTH,

1960-1 9 9 6
16

"
8

cam

&
I

Era@!
Hm

m
B

m""m
4

+""

0
B3

1960

1965

1970

1975

1980

1985

1990

-4
-1 .O

1995

-0.5

0.0

1.O

0.5

1.5

2.0

Change in unemployment rate, percentage points
Inflation rate percent

Actual minus expected inriation percentage po~nts

CHANGE IN UNEMPLOYMENT AND
UNANTICIPATED INFLATION, 1 9 6 0 - 1 9 9 6 ~

I
Idf

-1

'
l
S

0
-2

-3

m
f

-2

La
IBi
PI

-4

-1 0

-05

Change in unemployment rate percentage points

"
-4

Unemployment rate percent

a. Unanticipated inflation is the difference between actual inflation and its expected value, where expected inflation is based on past inflation rates.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; U.S. Department of Labor, Bureau of Labor Statistics; and the Federal Reserve Bank
of Cleveland.

anel unemployment rates in opposite
T h e relationship bet\\-een infl;lreadily reveal the negative correlaclirections, others are not. In fact, the
tion anrl unemployment is often
tion hetween price changes and ungeneral p:lttern of inflation ancl Llntalien (if only implicitly) to be one of
employ~nentthat so Illally cornmen~OIIIchanges appears to
tators take for granted.
the most relial~lein [ I ~ ~ ~ C S O ~ C O ~e~nployment
ics. Evel7.;one Iino\vs that rising Llntrace out a positive relationship.
Still, the connection hetween tlie
employment means Ion-er inflation.
t ~ v o\.asiables shoultl be vie\vecl with
Analysts generally resolve this
:tncl falling unenlployriicr7t means
co~itraclictionof tlie "l'hillips curve"
some sitepticism: A negative correlahigher inflation.
relationship by focusing not on tlie
tion is one thing, but a stable relaTo he sure, such a negatii-e relalevel of inflation ancl u n e ~ ~ ~ p l o y r ~ i e ntionship
t
is quite another. Eviclence
changes. but rather on unemploytionship-referred to xs the '.Phillips
shows th:lt silnple estimates of the
c~irve"-is not :ll~v:lyseasy to see in
ment changes ancl the deviation of
I'hillips c u n e based on available
the cl:~ta.r\ltliougl~specific episocles
inflation from the level that ~liarltet data 1113)- shift over time.
over the p : 35
~ ).c.:lrs are chalacterparticipants expect. Viewed with
Nonetheless, the ['hillips curve
(contiii[red on ne.xtpug<~)
this modification, the data Inore
izecl hy movenients of tlie inflation

http://clevelandfed.org/research/trends
July 1996
Best available copy

Moneta~yPolicy (cont.)
Real GDP, percent charige

Percent

5.0

l 8 UNEMPLOYMENT AND OUTPUT G R O W H : 1960-1 996

ALTERNATIVE INFLATION PATHSa

Poient~alGDP growth=2 1%

Potent~al
GDP growth=2 5%

I
-1 0

-0 5

0.0
05
1.O
15
Change in unemployment rate, percentage points

Percent

2.0

Percent

''I

ALTERNATIVE UNEMPLOYMENT PATHS

20
110

lllQ
1996

IVQ

IlQ

IIIQ

IVQ

1997

a. Model assumes that NAIRU = 5.8%.
b. Model assumes that potential real GDP growth = 2.1%.

c. Adaptive expectations are based on past inflation rates.
NOTE: NAIRU is defined as the non-accelerating inflation rate of unemployment.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; U.S. Department of Labor, Bureau of Labor Statistics; and the Federal Reserve Bank
of Cleveland.

remains a focal p ~ i l i tfils policy discussions. I-'ar-t of the reason is that
n ~ o r esophisticatecl slatistical treatments appear to pro\-icie a reasonably stable unempIoyn1enr/i11fliitiol7
connection. The virt~leo f lulnting for
sucll stability is in turn rcinforcecl I>y
thc ease with n.hich inflation c:un bc
connectecl to o~ltputgrowth thro~igh
the fairly striking negati\.cx relationship bet\veen ilncrnployment ant1
output gro\vth, a corrcl:ltion genesally linown as "Ok~ln'sla\\.."

The Phillips curve, together with
Okun's law, essentially coclib milch
of the conventional ~viscloruabout
monetary policy in a formal statistical
way. Intirnately lillkecl to this fr-amework are the concepts of NAIIilr (the
~lnemployrnentrate below \vhich inflationaly pressures build), potential
GDI' growth (the long-run sustainable rate of output expansion), and
inflationary expectations.
Unfort~lnately,the measure of our
igrlorance about these important
v;iriahles is large incleecl, ;~ncl tile

magnitudes really matter. Si~uple
back-of-the-envelope calculations illustrate that the filt~~re
p:iths of irlflation i~nciercurrent policy, or :I p:ir-ticular rnonetary policy's effect o n
~inemploymerlt,or myriacl other irnportant policy questions, are quite
sensitive to ass~imptions a b o ~ ~ t
NAIRU. potential GDP gro~vth,ancl
the form:ition of irlflation expect;itions. To consLimers of policy anal>.sis, the best aclvice is always "let the
buyer hexvase."

http://clevelandfed.org/research/trends
July 1996
Best available copy

An Alternative Measure ofMonq
B~llionsoi dollars seasonally adjusted
3 300
THE MZM AGGREGATE^

Measures of Money

MZM growth, 1991-96b
10% .'

+
+

+
M2

+
+
+
MZM =

+
-

Currency
Demand deposits
Other checkable deposits
Traveler's checks
:.5%

M1
Savings deposits
Small time deposits
Retail MMMFs
M2
Institutional MMMFs
Small time deposits
2,800

Ratio

Percent

1994

1995

1996

Ratio

Percent

a. Last plot is estimated for June 1996. Dotted lines represent growth ranges and are for reference only.
b. Growth rates are percentage rates calculated on a fourih-quarter over fourth-quarter basis. Annualized growth rate for 1996 is calculated on an estimated
June over 1995:IVQ basis.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; and Board of Governors of the Federal R e s e ~ e
System.

In recent years, cleregi~lationancl financial itlnovation I1:iI.e \vreaked
havoc on relationships 17etlveen
ttxclitionally clefinecl rneasilres of
money-M1
ancl hl2-ancl
economic :ictivity and interest rates.
W h e n these relationships 1,re:ik
clown, :lnalysrs often propose 11exv
monetary aggreg:ltes. One such
measure. MZM, comprises all rnonet:irp instruments th:it !la\-e zero maturity ancl hence we recleemablc at
cl.
are M1,
par 011 d e ~ ~ ~ a nIncludeti
savings cleposits, ancl all lnoney
m:irket n~utualfilncls (MMMFs).

hfZM's i~lln~lilnity
to recent deregillation anci financial innovation is
evident in the relationship between
I\lZhI velocity (the ratio of nominal
GDP to MZM) and its opportunity
cost (clefined here as the clifference
I2etxijeen the 3-month Treasury
yielcl anel the share-weighteel average of yielcls paicl on MZM components). Virl~ileessentially tse~lclless
since 1974. MZM velocity varies
systematically with its opporiunity
cost. It is estimated that a onepercentage-point increase in its opporti~nitycost eventually loxvers the
level of MZM der~la~lclecl
by more

than four percentage points.
In contrast, the relationship hetween M2 velocity and its opportunity cost broke clown in the 1990s,
when &/I2velocity persistently rose
i11 the face of killing opportunity
cost. This distortion is believed to be
a consequence of the pro1ifer:ltion
of bond anel equity mutual funcls,
xvhicl~grew largely at the expense
of small time cleposits. Because
MZhI cloes not inclucle s~llallt i ~ n e
cleposits, it was not afl'ectecl by the
wiclespreacl substitution of I,oncl ancl
equity funcls for hank cleposits.

http://clevelandfed.org/research/trends
July 1996
Best available copy

Interest Rates
Percent, weekly averages

Percent weekly averages

YIELD CURVES~

9.5 CAPITAL MARKET RATES

Percent

INTEREST RATES IN MEDIEVAL AND
RENAISSANCE EUROPE^

n
12111

I
13th

I
14th

I
15th

16th

17th

1700 1710

1720

1730

1740 1750

1760

1770

1780

1790

1800

Century
a. Three-month and six-month 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. Rates are the lowest reported during each half century for each type of credit, regardless of location.
SOURCES: Board of Governors of the Federal Reserve System; and Sidney Homer and Richard Sylla, A History of Interest Rates, 3d ed. New Brunswick, N.J.:
Rutgers University Press. 1991.

The yielcl curve has changecl little
since last rnonth. Daily :mcl n.eelcly
shifts ha\-e occurrecl :tt hot11 the
long ancl short encls, clepencling on
the market's assessment of the
economy's strength and the chances
of t h e Federal Iieserve mising or
lo\vering rates. The closely watchecl
3-year, 3-month spre:tcl ancl 10-year.
3-rnonth spreacl staricl at 122 ancl
164 basis points, respectivel\-. Long
rates h:lve genesally contin~~ccl
[he
~ ~ p \ v a rp:tth
d t1ie~-began early in the
year, :lltlioclgh they remain a point
k~elowthe levels of late 109.4 ~uncl
early 1992.

Interest sates can provicle a fascinating historical perspecti\,e, as
recorcls for A4eclieval anel Renaissance Europe exist as far hacli as the
t\velfth century. They can also provicle some important lessons h r
toclay. Even on a long time scale, invariaterest rates show trenlendo~~s
tion: One century's average interest
rate is easily double that of :tnother.
Great Britain cle~nonstratesthat 60
years of sates near 3% can I)e folloxvecl l>y 20 years of r;ttes near Soh.
'I'liese figures should malie :in:ilysts
tllinli twice Ixfore calling a 7(!4/i,
long
I)oncl Kite "unsustainal~le."

Still. the clo\vn\varcl trend as Europe eleveloped ancl industrializecl
may presage a pattern for countries
no\\; going through the same
process. It is significant that the lowest interest rates appear in seventeenth century I-Iollancl, a country
with :I financial system aclvancecl
enough that government I~oncls
(anel tulip lutures) tlxclecl o n :tn eschange. The data even hold a warning 11bout the clangcrs of inflation:
The high rates in the sixteenth :tncl
seventeenth centuries arose from
the oversilpply of golcl ancl silvcr
l ) r ~ ~ ~l>;lclc
g h t fro111 the Ne\\ \Kic)rld.

http://clevelandfed.org/research/trends
July 1996
Best available copy

Inflation and Prices
Percent change annual rate
9
[MEDIAN CPI BREAKPOINTS~

May Price Statistics
Annualized percent
change, last:
I mo. 5 mo. 12 mo. 5 yr.

1995
avg.

Consumer Prices
All items

3.9

4.1

2.9

2.6

Less food
and energy

3.0

2.7

3.2

3.0

Mediana

2.9

3.0

3.1

3.2

Finished goods -0.6

2.6

2.3

1.5

2.1

Less food
and energy

0.3

1.5

1.7

2.6

0.0 13.8 10.5 3.6

5.4

Producer Prices

-0.4

Commodity futures
pricesb

Difiusion index, net perceni r~sing

PPI manuiacturing, annual growth rate, percent

3
4
5
CPI, annual growth rate, percent

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 KnightRidder Business Information Service.
c. Horizontal lines represent trends.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; Board of Governors of the Federal Reserve System; the Federal Reserve Bank of Cleveland;
National Association of Purchasing Management; and the Commodity Research Bureau.

'The Consiinwr ['rice Incles ( CI-'I)
continueel to accele~ltein May. rising at :ln annual rate o f 3.9% ancl
contributing to ;I year-to-date increase of 4.1%. l'his represents a
substa~lti:ll d e t e r i o ~ ~ t i otl.0112
n
the
2.6% rate ol>ser\.ecl in 1995. I-Io~vever, ~niichof the ~ ~ p t i chas
l i been
attributecl not to actu:~l ~~nderl\.ing
inf'kltion. I>ut to tmnsitor). shocks in
the typicall\. \.olarile energy ancl
.
these
food c o t ~ ~ p o n e n t sWllcri
itenis are excludeel from the incles,
its annc~alizecl,year-to-ci:ltc. growll~

is iclentical to 1995's rate. The meclian CPI through May is actually
l>clow last year's posting, but shows
n o clear signs of straying from the
3.1% path it has followed for the last
five years.
I-'roclucer-level prices provide a
more optimistic picture of current
inflation. The Producer Price Incles
(1'1'1) and the purchasing man:lgers'
price incles both suggest only moclerate ~ ~ p \ ~ ipressure.
rcl
The PI'I :inel
the PI'I less foocl ancl energy each
receclecl slightly in May, ancl \vtlen

footl ancl energy items are excluclecl.
the inclex has remained essentially
i~nchangeclthis year. In addition, the
I'PI grobvth rate is more than t\vo
percentage points below last year's
r-ate. Similarly, purchasing managers
have generally reportecl prices to I,e
Ellling or holding steacly since late
last ye:m
Recent ~ n o d e m t eprice behavior
at the inclustrial level prol,al>ly reveals more ahout conclitions specific
(coi~titztrcdot? t7(',~.tp~zge)

http://clevelandfed.org/research/trends
July 1996
Best available copy

Inflation and Prices (cont.)
Index. 1982-84 = 1
1.59
FOMC'S IMPLIED CPI PATH

12-month percent cliange
36
FOMC'S CPI GROWTH PROJECTIONS

1.50

Percent oi lorecasls
70

15-1 9

Percent of iorecasts

-- I DISTRIBUTION OF ECONOMISTS' 1997 CPI FORECASTSC

2.0-2 4
2 5-2 9
3 0-3 4
Annuallzed percent change

3.5-3.9

1.8-2.2

2 3-2 7
2.8-3.2
3.3-3 7
Annualized percent change

3 8-4 2

a. 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.
b. 2.2% annualized growth represents a reference point between current CPI growth and the upper bound of the FOMC central tendency.
c. Consensus forecast of the Blue Chip panel of economists.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; Board of Governors of the Federal Reserve System; and Blue Chip Economic Indicators,
January 16 and June 10,1996.

to manufrict~~rers
than aI>outgener;il
inflationary trencls. Incleed. since
1990, the correlation I,et\veen m;lnLIf,ict~lring
:.
pricesand retail prices has

much less optimistic than it ciocs
toclay. An annualizecl gro\vth Itlte of
n o more than 2.2% for the remainclcr o f 1996 would b e recluirecl for
l>cen \veal<. LVhile CI'I gro\\.th has
the CPI to end the year within the
Feel's projected range.
hovered :iro~lncl2 %Yo to 3%).rnanLlfactusing prices have fluctc~atecl
It appe:arstthat many econo~nists
.cviclely, fro111 a lo\v of about - I '/L%
have 1,ecome more pessimistic
in 1991 to nearly 3?0 last year.
:il)out price trends for 1996. In JanuT h e CI'I continues to cli~nl,t o ary. approximately 65% of the H I L I ~
w r d the upper bouncl of the centlxl
(:hip panel expected the sate of retenclency r.;unge projectecl I)y Fecleml
t;iil price i~lcreasesto remain I>elo\v
Reserve officials for 1996. When the
3% this pear. By June, only 59% lleltl
rangc x a s announcecl in Pet7r~1al-y. 1l1at view. The percentage anticipaiing that the inflation rate wo~lldstay
:in iipper limit of 3.0'Xr appe:irecl

l~elo\v2.5Vi1clropped from H.i(?41to
less th:an 2%)01-er the sariie period.
.rhis
,
increased pessimism has
not, ho\ve\.er, been as clearly reflectecl in the forecasts for 1997. In
June. more than half o f the 1 3 1 ~ 1 ~
Chip economists predicted that the
CI'I \v\iould kill into the 2.8% to 3.2%
range nest year. co~nparecl \vith
onl). 36% in J;inuary. The 1-a11l<sof
those e s ~ c c t i n ggro~vthabove 3\',?4>
ant1 those w f ~ oanticipate Iess thzun :i
2'/,%1rise ha\re I~othcl\\~indleclsince
January.

http://clevelandfed.org/research/trends
July 1996
Best available copy

Economic Activity
Real GDP and Components, 1996:lQa

Revisionto Real GDP and Components, 1996:lCJa

(Final estimate, ~.a.a.r.~)

(Billions of 1992 dollars, ~ . a . ~ )
change,
b~llions
of 1992 $

Percent change, last:
Four
Quarter
quarters

36.2
Real GDP
Consumer spending
40.9
12.1
Durables
12.7
Nondurables
16.4
Services
Business fixed
21.5
investment
Equipment
18.2
3.5
Structures
Res~dentialinvestment 4.8
Government spending 4.9
National defense
2.9
Net exports
-1 8.0
Exports
4.0
Imports
22.0
Change in business
-1 8.6
inventories

Index 1987 = 1 00
1 20
AUTO PRODUCTION AND INVENTORIES

2.2
3.6
8.5
3.6
2.5

1.7
2.7
6.2
1.4
2.7

12.4
14.1
7.9
7.4
1.6
3.8

6.0
6.6
4.5
2.0
-0.6
-4.0

Real GDP
Consumer spending
Durables
Nondurables
Services
Business fixed
investment
Equipment
Structures
Residential investment
Government spending
National defense
Net ex~orts
~xpohs
Imports
Change in business
~nventories

2.0
10.2

6.4
5.0

Days' supplyd

Revisions

Final
level

Second

First

6.812.7
4,655.0
602.2
1,436.9
2,616.8

-2.8
-0.1
0.6
-0.4
-0.2

-8.1
1.6
1.4
2.1
-1.9

746.8
561.7
186.6
271.2
1,255.3
312.2
-114.6
803.8
918.4

0.2
1.1
-0.7
0.5
-3.3
-2.7
-4.0
-5.5
-1.5

0.3
-1.6
1.6
1.4
2.5
0.0
0.4
4.1
3.7

-2.1

3.6 -13.6

Percent change irom preceding quarter,s a a r
4.0

a. Chain-weighted data in 1992 dollars.
b. Seasonally adjusted annual rate.
c. Seasonally adjusted.
d. 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; Blue Chip Economic Indicators,
June 19,1996; and Ward's Automotive Reports.

Accorclirlg to the Commerce 11ep;~rtrnent's final figures, the econom).
exp:inclecl at ;I 2.2% annuzll late in
1996:IQ. The initial estimxte of 2.8%
was scvisecl clo-\vn\varcl primarily
I>ecause of a massil-e clr.:l\vclo\vn of
inventories.
In the first clu:lrtcr, nearl). all
i~ro:~cl
sectors of tlie economy registerecl faster growth than they clicl
ewer the past yexr. The most rlotal,le
exception lvas in\-entories. After L:
$10.5 \,illion increzlse in 1995:I\'Q.

l,usinesses clrew clown their stocltpiles at a $2.1 billion annual sate in
the first cluarter. Much of this reflected a strike-inclucecl reduction in
automobile stoclts.
Althougl~the drop in inventories
was a cll-ag on first-quarter GDI? it
also represents brighteneel prosjxctsfor near-term growth. IvI~ichof
the atlticipatecl acceleration in
scconcl-cluarter output reflects a n
espcctecl rel>ouncl in motor vehicle
procluction as ~nanufacturers at-

tempt to rehc~ilclstoclts and 11leet
strong sales clemand.
>/lost economists par'ticipating in
the J u n e Blue Cllip su~veylook for :I
temporary surge in second-quarter
activity, largely hasecl o n the rebuilcling of inventories. Through the
remaincler of 1996 ancl in 1997, they
foresee the economy expanding a~
:~l,oc~t
a 2% clip. 'I'his ~lloclerationis
consistent lvith recent estimates of
the nation's potential gro~vth-;L
(cotrtitrr red 017 ncxtp~lge)

http://clevelandfed.org/research/trends
July 1996
Best available copy

Economic Activig (cont.)
Index. 1987=1.OO

Ratio

Percent change irom corresponding month of previous year

l 2 [RETAIL SALES AND CONSUMER CONFIDENCE

Index 1985=100
130

Percent change from corresponding month of previous year
30

J S
1994

J S
1995

M M
1996

NOTE: All data are seasonally adjusted.
SOURCES: U.S. Department of Commerce, Bureau of the Census; Board of Governors of the Federal Reserve System; and The Conference Board

rate that is sustainable at high levels
of resource uti1iz:ition.
B ~ ~ s i ~ i e sat
s e:ill
s stages of procluction ancl tratle have managed to
lower their inventory-to-sales mtios,
even e s c l ~ ~ s i vofe a ~ ~ t o m o l ~ i lFures.
ther trimming of stocks seekus
unlikely, and in some sectors, inventories appear lean. Inclustrial procluction increasecl 0.7%)in Map for.
the second consecutive month, but
whereas April's gains cvere largely
concent~kteclin autos, May's were
~ i l o r chroaclly 1,asecl. The nzltion's
~nan~~f>icturers,
~ltilities.:inti ~liines
ol7er;~ted ;it 83.2% of capacit), in

May, somewhat higher than in
1995:I\'Q.
On a year-over-year basis, retail
sales (acljusted for inflation) have
I ~ e e nincreasing at a healthy 4% sate.
Reviseel figures for personal consumption expenditures, a I>roacler
nieasure of consunler outlays, have
also shocvn moderately strong
growth since February, often esceecling aclvances in real clisposal>le
income. Hocvever, while consumption rose ;tbout 3% in may, real clispc)sal~leincome itlcreasecl slightly
fnster. at ahout 3.1%.Although consunies attitc~clesappear fairly erratic

on a month-to-mont Imsis, they remain at a tavorable level. While
clel~t-servicingI>urdens and delinq~lencysates have piclced LIP,gains
in stock ancl housing prices have
1,olsterecl householcl wealth.
thsiness fisecl investment spending, tliough still strong, may soon
I~eginto rnoclerate. New orders for
nondefense capital goods jc~nlped
9.6?6 i i ~May. clue mainly to a n increase in expenclitures for commercial aircraft. I-Iowever, even excluding this \.olatile sector, orders have
recently Ixen declining on a yearover-yeas l>asis.

http://clevelandfed.org/research/trends
July 1996
Best available copy

Labor Markefs
Change, thousands oi workers"

600 [AVERAGE MONTHLY NONFARM EMPLOYMENT GROWTH

Labor Market Conditionsa
Average monthly change
(thousands of employees)
1995
Year

Payroll employment
Goods-producing
Manufacturing
Construction
Service-producing
Services
Computer
Retail trade
Federal govt.

IIQ

1996
April
May

June

185 265
-5
26
-12
3
9
22
190 239
110 111
11
13
36
68
-5
-6

191 365
13 49
1
16
13 30
178 316
79 156
14 15
79 51
-3
-2

239
16
-7
23
223
99
9
75
-13

Average for period

Civilian unemployment
5.6 5.4 5.4 5.6
5.3
rate (%)
Average hourly
earnings (dollars)b 11.5 11.8 11.7 11.7 11.8
Mfg. workweek
(hours)b
34.5 34.4 34.3 34.2 34.7
to date

1996

Percent

Percent rising, one-month span

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.

June was cl~arz~cterized
12); wickspreacl strength in the nation's labor
markets, as nonfarm payrolls aclcleci
239,000 workers. That expansion
pushecl jobs growth for the first six
months of the year above the 1.3
nill lion m:lrk, slightly better than
1995's first-half posting of 1.2 mil's
inclcx of emlion. J ~ ~ n ecliffusion
ployment (61.7%) reveals that the
increase was clistri1)utecl among a
wick v:u.iety o f inciustrics. Like~vise.
the Bure:lu o f Lal~orStz~tisticsre-

portccl that both the rise in the nonklrm ~vorkweekand the recorcl increase in average hourly earnings
reflecteel broaci-based gains.
.I he setvice-producing sector led
the June advance, creating 223.000
new jobs on net. Growth in the narrow services industries was slightly
I~clowaverage, while retail tracle establishtnents acldecl 75,000 ~ ~ o r l t e. r s
nearly half of whom were hirecl 12).
rcst:~~~rants
and bars. The gooclsproclucing sector posted a small net

increase of 16.000, although m a n w
facturing employment was negative.
The fecleral governnlent continued
to trim payrolls, cutting 13,000 ~vorliers cluring the nionth.
Ilouseholcl suxvey data also
pointecl to strength in the nation's
1:ibor marliets. The unen~ployrnent
Kite droppeel to 5.3% in June-its
lo\\rest level in SLY years. In :~dclition,
the employment-to-pop~~l;~tio~~
ratio
mse once again, cclging up to 63.20/1.

http://clevelandfed.org/research/trends
July 1996
Best available copy

Education and Earnings
1993 dollars

Percent
FULL-TIME WORKFORCE BY EDUCATIONAL LEVEL

Percent

Percent
240
REAL MEDIAN WEEKLY EARNINGS BY EDUCATIONAL LEVEL
AS A SHARE OF HIGH SCHOOL GRADUATES' EARNINGSa
220
,

180

More lhan 4 years of college

1 6 0 '

b ' - '

*
, '

- - . ... ',

-.
,".,
I

1 UNEMPLOYMENT RATE BY EDUCATlONAL LEVEL

.PJJ

4 years of college ,=-=,
140 &-"

5V/--"
-"%"d%ez

/w#-J

<Pa

1-3 years of college

100

Less than 4 years or h ~ g hschool

a. Refers to full-time workforce.
SOURCES: U.S. Department of Labor, Bureau of Labor Statist~cs;and U.S. Department of Commerce. Bureau of the Census

Arnerici~n t\.orliers are 1,ecoming
more ec1uc:itccl. 13et1veen 1963 :inel
1993. the fr-:iction of the full-ti~ne
workforce ~ v i t h o ~ ai t l ~ i g hschool
cliplonla fcll from :il>ocit .iOO.;, to
arouncl LO'%). \t,hile tile sh:~reof college gracluates rose from approximately 10'%1t o :ii,o~lt2%~.
Weelil!. meclian earnings vary
widely 1)). eclucational group, reinforcing the common Ixlief t i n t
morc schooling means larger p:~yc h e c l i ~ .\Yliile t l ~ ' real (inflation:idjusteel) nleclian \\.e~lilyearnings
of tliose \\.it11 less illan a college cle-

gree have been falling since the
early 19705, the opposite is true for
those \vho have earned at least a
I>achelor's cl~,
-0ree.
kIoreo\.er. the earnings clisparity
hetween college graduates (inclucling those with advanced degrees)
ancl other worliers has ~viclenecl.In
the early 1960s, the median earnings
ol' :Lperson who continuecl past college 1vcr.ea1,out 1.6 times more than
those of an indiviclual with less than
foils years of high school. I3y 1993,
that gitp 1i:~Imore than doubleci.
EXI-ningsclifferences across eclu-

cation:ll groups. however. reveal
only p x t of the variation in gross returns from education. Substantial
clifferences also exist in unemployment sates. Worliers tvho failed to
finish high school w e roughly five
tinies Illore liliely to be jobless than
those who continuecl their education past college. 111 other ~vorcls,
higher eclucation leads to both
Iligher wages :~nda better prol>ability of being ernployeel.
The trends in educational attainnient I,y various r:ice ancl sex
( ~ 0 1 / t i i / ~ ( ~ ~I~Il o
~ 1. 7Y I ~ G ~ ~ )

Education and Earnings (cont.)
1993 dollars

http://clevelandfed.org/research/trends
July 1996
Best available copy

1993 dollars

1 REAL MEDIAN WEEKLY EARNINGS

Percenl
22
[ UNEMPLOYMENT RATE BY EDUCATIONAL LEVEL: BLACKS

[

Percent
18
UNEMPLOYMENT RATE BY EDUCATIONAL LEVEL: WOMEN

a. Refers to full-time workforce.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; and U.S. Department of Commerce, Bureau of the Census.

g r o ~ i p sSolloxv milch the same pattern. Over the past three decacles,
more full-time \v-orkers have c o n plctecl high school, ancl more have
at least some college credits. T - I ~ I ~ ever: there are notal>le clifferences in
the effect of eclucation on both the
earnings ancl unemployment level of
I>lacks ancl females.
For the entire full-time worliforce,
the earnings gap Ixtxi~een "more
than college" anel '.less than high
school" was zibout cloul,le in 1993.
For blacks. however, the clifference

was ;llready nearly double in 1963
anci was even higher in 1993 (about
2.6 times). As the median weekly
earnings of those with advanced degrees approached $800 (in 1993 clollars): worlcers lacking a high school
ctiploma were taking home about
$300. For females, the difference is
larger yet. Note also that the clisparity is still incre:lsing for both of these
groi~ps.For blacks and women, the
xv\iage premiurn due to education is
greater- than it is for white males.
This eclucation premium for

l~laclcsancl females does not sho\v
LIP as strongly in unemployment
rates. Here again, persons who
never gracluated from high school
are a h o i ~ tfour ti~nesIllore lilcely to
find themselves xvithout a job than
those who hold at least a bachelor's
clegree. Furthermore, since the micl1980s, ilnenlployrnent rates for
women ancl l~lackswith a college
clegree or postgr:lcluate work have
been much less volatile than fix
those \vho never finished high
school.

http://clevelandfed.org/research/trends
July 1996
Best available copy

Federal Budget Pyojections

Percent of GDP
15
FEDERAL SPENDING PROJECTIONS BY CATEGORY

Perceni oi GDP

l o FEDERAL REVENUE PROJECTIONS BY CATEGORY
lnd~v~dual
Income tax

*=-*

?-a=*

6 -

Payroll tax

-4--""-

--au wT--enawa-#--

-erz

-"
x*-rA

Corporate income tax

-Z~

--=*----

a
-

=-m&-"mp---

-~-----s-~-.d~

Exc~seand other taxes

0
1995

l
l
1997

l
l
1999

l
1
2001

1
2003

l
2005

2007

Percent 01 GDP
34

Perceni oi GDP
50
MANDATORY SPENDING PROJECTIONS BY CATEGORY

40 35

Soclai Security

28
26
24
Medlca~d

15 -

*../@

0
1995

/
&
9
4
e
A

*@/vz&*

I
1997

-- -

I
I
1999

-d-

I
I
2001

i
2003

f
2005

i
2007

18
1995

1997

1999

2001

2003

2005

2007

NOTE: Dates are CBO fiscal years. 1995 data are actual
SOURCE: Congressional Budget Office.

Congression;ll Buclget Office (CI30)
projections show that. ~unclercurrent
fiscal policies, total fecleral revenue
as a shue o f GD1' \\rill clecline fronl
18.9% in 1995 to about 18.5% in
2001, ancl \\rill rem:tin at that level
through 2006. Over this periocl, the
only r e v e l i ~ ~category
e
expected to
pick u p as a share of n:ttional output
is the incliviclual income tas (8.2% to
8.79'0). 1':tyroll taxes s h o ~ ~ lholcl
d
steacly at arouncl 6.6%).
while corporate t:ises ancl excise and other taxes
arc seen as edging clown. These
trencls reflect :t continuation of those
ol,se~veclin the past. except for pay-

roll tax revenues, whose share of
GDP has increased consistently over
tlie last foiu decacles.
The iup~vardtrend in projected
fetleral spencling continues to be
clonlinated hy increased m:lndato~-j~
outlays. Escl~~clingoffsetting receipts, mandatory spending is espectecl to grow froril 10.3% of GDP
in 1995 t o 12.9%)in 2006, mainly as a
result of increased health care costs.
Medicare's share of national output
is seen as rising 1.3 percentage
points over the next clecacle. while
Medicaicl is projectecl to expa~lcl0.8
percentage point. In contrast, the
CHO z~nticipatesnet interest outlays

will reniain unchangecl, while clefense ancl no~ldefensecliscretionary
spellcling are each espectecl to fall
about 1.0 percentage point relative
to output.
As a result, the I~aselinefecler~l
cleficit is on course to jump fro111
2.3% of GDP in 1995 to 3.3% in 2006.
Ilowever, clespite the attention the
deficit receives in the ~necliaand o n
the campaign trail, what the govemment spencls our Ilioney on ancl how
it taxes us to pay for that spencling
are more important than the size of
the overall cleficit.
(corzti~
~1c.don n~rtpcige)

http://clevelandfed.org/research/trends
July 1996
Best available copy

Federal Budget P~ojections(cont.)
Percent of GDP

Percent of GDP

IFEDERAL DEFICIT PROJECTIONS

Percenl oi GDP

Perceni oi GDP

NOTE: Dates are calendar years. 1995 data are actual.
SOURCES: Congressional Budget Office; and U.S. Depaliment of Commerce. Bureau of Economic Analysis

I-Zaseline deficit ancl clebt IILIIIIhers are witlely ~lseclto measure the
hi~dget'simpact o n national saving
a n d 011 the extent to which current
will have to
government pi~rchz~ses
b e paicl for I>>, future generations.
Analysts use several measures to address these concel-11s.For ex:lmple.
the ~'stanclarclizecl employment
deficit" refers to the amount of publ
if
lic borrowing that w o ~ ~ l coccur
the econolny n-ere operating at fill1
potential. ?'he "on-l~i~clget"
deficit
refers to gener:ll government operations. >u.l)itrarilyexclucling Social Se-

c~lrity2nd Postal Service accounts.
In general, holvever, deficits are
inaclequ:ite measures of how fiscal
policies shift the burden of taxes and
espenciitures fro111 older to younger
generations, ancl of how that shift affects interest sates and national saving For example, stn~cturalchanges
in taxes and trztnsfers may leave clebt
ancl deficit levels untouchecl, yet
tmnsfer hurtlens fro111 older Americans to younger a11cl fi~turegenerations, thel-eby affecting U.S. saving.
Some clra~llaticstn~cturalchanges
in taxes and transfers have taken

place during the postwar periocl:
L:il>or income a11d payroll taxespaid by younger. worliing generations-have i~lcreaseclas a share of
GDP, whereas taxes on capital income-paicl ~rlostlyby olcler inclivicl~~als-have dropped su1,stantially. Moreover. Social Security.
Medicare, and Meclicaicl transfers,
n.11ich go mainly to olcler Americans,
have sliyroclieted relative to nation;~l
outpilt, nhile welfare tra~~sfers,
which rnairlly benefit younger indi\ricluals (especially single mothers),
have remained nearly constant.

http://clevelandfed.org/research/trends
July 1996
Best available copy

Bank Lending Standards
Percent oi respondents

Percent of respondents

loo I FDIC SURVEY OF LOAN UNDERWRITING PRACTICES

60 I RISK LEVEL FOR ENTIRE LOAN PORTFOLIO^

Change in standards

Risk level for new loans

Below average

Average

Above average

Percent of respondents

100

0
Eased somewhat

a. Includes old loans.
b. Survey was conducted in May 1996 for the previous three-month period. Includes commercial and industrial loans and credit lines.
SOURCES: Federal Deposit Insurance Corporation Report on Underwriting Practices; and Federal Reserve Senior Loan Officer Survey, May 1996.

13:lnlis face clelicate tmcle-off in
rnzlliing loans. O n the one hand. if
they lencl only l o uncleni:ll,ly safe
ancl secure creclitors, then lentling.
profits, anti perhaps economic
growth n.ill s u f i r . If they relas their
stanclarcls :lncl lencl to a hrozicler
spectr-urn of crcclitors, then defaults
may increase, threatening profits
froln the other sicle. Furthermore,
what is :~pprolxi:ite :it the clepths of
:I recession may cliffcr from \\:hat's
bc.st dnring ;l strong recover-!..

One measure of how banlis are
responding to the challenge cornes
from a recently released report on
hank lencling stand;lrcls. The Federal
Ileposit Insurance Corporation surveyecl examiners of 2,000 b:~nlison
loan untlerwriting practices. Most
I2anlts reported no change in lencling st:mtiarcls; of those that clicl note
ch:ul~ges,nearly twice as many tightenecl as eased. The numl>er of
hanlis that saisecl their standards
ro~ighlycorresponcls to the numher

reporting ahove-averxge risk o n
new loans. When characterizing the
risk of their entire portfolio (including olcl loans), most batllts again
noted aver-ape or belo~v-average
risk. Some states h;ld more than the
usual numl~erof banlts reporting
above-average sisli. notably California (jS"/o), Louisizwa (25%), and
New York (24%).
Another measure of bank lo:ln
standards comes from the Federal
fco?ztinue~l
071 izextpqqe)

http://clevelandfed.org/research/trends
July 1996
Best available copy

Bank Lending Standards (cont.)
Percent of respondents

60 1 KEY SOURCES OF CONSTRUCTION LOAN RISK

Percent of respondents
100

0
Failure lo consider
alternative
repaymenl sources

Failure to verify
alternative
repayment sources

Speculative
projecls

lnlerest paid by
lender or deferred
during loan term

Percent of respondenls

Tightened
considerably

Tightened
somewhat

Basically
unchanged

Eased
somewhat

Eased
considerably

Tightened
somewhat

Basically
unchanged

Eased
somewhat

Eased
considerably

Percent of resoondents

Tightened
somewhat

Basically
unchanged

Eased
somewhat

Eased
considerabiy

Tightened
considerably

SOURCES: Federal Deposit Insurance Corporation Report on Underwriting Practices; and Federal Reserve Senior Loan Officer Survey, May 1996.

Reserve's Senior Loan Officer Survey.
For the I,road category of busi~less
loans, banks reported almost 110
change in lencling standarcls over the
1:lst three months, with a slight bias
towarcl tightening.
Conlmercial real estate loans,
which include construction ancl la11d
clevelopment loans ancl loans secured by nonfarm, nonresidential
land, can be risky I~ecausesuch
projects typic;illy clo not produce an
immecliate return for the horrower.

Banlcs mitigate this risk by modifying the terms of the loan contmct,
but some practices that have led to
proble~nsin the past remain common. Of these, the most prevalent is
banks' failure to check the quality of
alternative repayment sources. This
h
i ~ p111ost
concern, ~ v l ~ i cshowed
often in New England, may be the
source of the slight tightening in
sta~lclarclsfor a nlinority of commercial real estate loans.
The consumer lending side fol-

lows a broaclly si~nilarpattern, nit11
most banlis reporting little or n o
change in standards. About 10% of
the responclent banks expressecl
concern over collateml quality ancl
repayment ability, but this seems not
to have filtered down into major
changes in behavior. Stantlartls for
credit carcl loans are tightening,
however. with rnore than a quarter
of reporting hanks raising standards,
some co~lsiclerably.

http://clevelandfed.org/research/trends
July 1996
Best available copy

International Developments

Percentage po~nts
INTEREST-RATE DIFFERENTIALS~

Billions of U.S dollars

Percent change lrom corresponding month of prevlous year
45
CONSUMER PRICES

9
-*/flB -

Uyi

151005

-05
-10

,
4
.
.
,
'/Y'
Japan

%%-8
l

F M

A M

S O

D J

1995

F M

A M

J J

1996

a. 10-year minus 3-month interest rate.
SOURCES: Board of Governors of the Federal Reserve System; and DRIIMcGraw-Hill.

The sl>re;~dIxtlveen long-term :lncl
short-term interest rates has expanclecl cl~lringn ~ o s tof 1996 in the
U.S., Germany. ancl the LJ.Iil. Over
the I:~stmonth, this \viclening has
stemmed from higher long rates, reflecting signs of economic strength
and perh;~pshigI~er
expecteel short
rates. Despite some e\.iclcnce of renewed vigor in Japan, interest rates
have not increased cl~lringthis same
periocl. The dollar h;~s gainecl
groclncl ;lg:iinst the yen in spite of
periodic expectations of Jap:lnese
morletary tightening. Recent statements suggest t1i;~tJapan's central
k~anliis still ;~ttemptingto sustain the

nation's recovery with low rates.
The clollar has generally risen
ag:iinst the German mark this year on
signs of a strengthening U.S. economy. hut recently droppecl in the
wake of reports showing renewecl
Germ~ungrowth. The recent appreciation of the British pouncl can be
p:trtially explained by the nation's
continueel moderate expansion.
Short-term interest rates have fallen
over the past month, and the inflation
r:lte contin~lesto clecline.
Inflation pressures generally reConsumer prices in
main s~~bcluecl.
Japzln fell over in~lchof the last year,
1,ut llave been rising since Januai-y.

Inklatioil in Germany remains stahle,
and the U.S. llas seen only a slight
uptick.
Foreign exchange rates react to
~ t tracle balances ancl
news a b o ~ 130th
economic strength or weakness,
~vhiletlxcle 1,al;lnces are in turn infl~le~lcecl
by excl1:lnge rates. However. these reactions often take time
ancl are cornplic:ltecl by the uncertainty surrouncling futnre econorliic
policies. Thus, it is not surprising
that the Japanese trade surplus has
declined clespite \\?e;lltness in the
yen, while a first-quarter cteterio~ition in the U.S. balance has accompaniecl strength in the clollar.

http://clevelandfed.org/research/trends
July 1996
Best available copy

Balance-ofpayments Trends
Billions of U S dollars
250

Billions 01 U S dollars

loo

IU.S

BAWNCE OF PAYMENTS

OFFICIAL CAPITAL F L O W S ~

Current account

Billions of U.S. dollars

U.S. Current Account: Savings and Investment

[ NET INVESTMENT INCOME

(Percent of GDP)

1993

1994

1995

1996

14.3

15.2

15.8

16.2

Private

14.7

14.5

14.7

15.1

Government

-0.4

0.7

1.1

Gross saving

Foreign capital
inflowC

1.5

2.2

2.1

1.9

Gross domestic
investment

16.5

17.7

17.8

17.4

Statistical
discrepancy

-0.7

-0.3

0.1

0.7

a. Private capital flows have signs reversed and include the statistical discrepancy as unrecorded capital flows. Positive values represent a capital oufflow.
b. Positive values represent a capital inflow.
c. Foreign capital ~nflowsare the current account deficit with the sign reversed.
NOTE: All 1996 data are annualized f~rst-quarterfigures.
SOURCES: U.S. Department of Commerce. Bureau of Econom~cAnalysis; and the Federal Reserve Bank of New York.

l)relimin:iiy clata sllon. the U.S. c~irrent account cleficit r~lnningat a
S 142 billion arinu:11 rate in 1906:IQ.
*The current account inclucles tmcle
in goocls ancl sei-\,ices, net investment inconlie, xncl i~llilateraltransf CIS.
- - . h[ost eco110111istse s j x c t this
year's current account cleficit to exceed last year's $1-tH 1,illion posting
some~vlia
t.
A coilntry running a current :kccount cleficit is applying ~iioreof the
world's oiitpiit to its oxvn consumption 311~1in\'estments th:~nit is pro-

ducing. To finance its imports, tile
l1.S. must export financi,<I1 i1ssetsclai~nso n o ~ nation's
~ r
fxiture procluction-~ul~cl a net inflow of foreign
capit'il milst occur. Any te~lclencyfor
the foreign capital inflow not to
match the ciirrent account deficit \\;ill
initiate changes in interest rates, exchange Kites, and other economic
variables to restore balance. Interestingly, a net private capital outflo~v
accompaniecl the 1996:IQ current account cleficit. 'The recluisite net capital inflow canie when foreign gov-

ernments aclclecl $206.5billion (annual rate) to their official holclings.
Often, foreign governments \\rill
mal<e such :I move to :lvoicl acljustments in the exchange rate.
A country's al~ilityto service future foreign claims on its o ~ l t p u t
without a decline in its standarcl o f
living clepends on \vhetIier it uses
foreign c:ipiral to finance consLlrlil,tion or investment. Apparently, recent net foreign-capital inflolvs ha1.e
supported U.S. in\-,cstment.
'

Full text of Economic Trends (Federal Reserve Bank of Cleveland) : Economic Trends - July 1996

FRASER