The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
e
e
e
e
e
e
http://clevelandfed.org/research/trends
July 1997
Best available copy
o
The Economy in Perspective
11<y dii111~1.zoitln A1zd1.6 ... I really clid~l'tmincl that
my friencl was already 25 ~ninuteslate, or that
the restaurant he hacl chosen was in a clesolate
section of the city. Anclrt. is consistently 30 minutes behincl schedule: and his taste in dining is
impeccable. What worriecl nie \v;ias the newspaper coverage: Despite his brillizul~ce and
charm, I was concerned thstt he had finally bitten
off more than he coulcl chew. According to published reports, AnclrP, the economic tllinister of
Nedla\~-,had come to lecture C.S. leaders on
how to create jobs. How preposterous! With ernployment expanding so rapiclly 2uncl our jobless
rate at a 25-year low, what's left to say?
I heard the sirens ancl ltnew from their intensity that Anclrt. \i~ouldarrive in moments. But
inlagine my surprise mlllen he turnecl the corner in a rickshaw pulled by a trio of gasping
Necllawnians! Alighting with characteristic
grace. h e motionecl rile insicle the sestaul-ant.
The Sweaty Bro.cv.
"AndrP," I asltecl, "what's with the rickshaw?"
"Oh that," he saicl, as he sca~lneclthe nlenu
for appetizers. "'I3y traveling lilte that, I clenlonstrate how easy it is to create jobs. A cab woulcl
have recluirecl only one person's lahor; the ricks h a neecls
~
three!"
I ~~nclerstoocl
instantly. Always the showman,
he Itnew how clra~liatichis entrance woulcl he.
"Nice touch," I said, with a trace of envy.
"Where clid you find the rickshaw?''
"Brought it with rile on the steamer. Riclishaws and bicycles have hecome the clominant
mocles of transportation since I restricted the
use of ~llotorvehicles in Necllaw. By the way. I
picltecl this restaurant becac~see.i.erything,r 1s so
:ulthentic. I hope you can spare about six hours
for dinner."
"Andrt.!" I asltecl, "I ltnonr that since becoming economic minister. you've heen emphasizing johs, but \vhy restrict the use of cars and
truclts? They are so much Inore proclucti\:e than
human-powel-ed transpol-t."
"I take the direct apprc)ach." he repliecl, "ancl
it \x~orks.Everyone in Wedla\v is employeel, and
1'111proucl to say that they worli long hours! I'ass
me the mortar ancl pestle. woulcl you? I'd lilce to
start on that pesto."
"Mow clo you create jobs?" I :uslced suspiciously. "Do you just put people to worli for the
government?"
'
"Absolutely not!" he protestecl. "That tactic is
passP. \Ve loolt for opportunities to protect
jobs frorn being lost ancl for attracting others.
For example, your agricultural industries are
extremely procluctive, hut you ha1.e hardly any
farmers left. I've e\.en reacl that some of your
people \\rorry about firrmlancl heing turned
into housing clevelopments ancl shopping centers. We don't have those pro1)lems in Necllani
IIecause fr-~rmingmalies up about 20 percent of
employment. compared to your 2 percent.
Necllaw's government lteeps agriculture attr:uctive Ily paying farmers high-but fitis-prices
for their output. The program is so successful
that it employs all the Nedlawnians \vho used
to make and service cars!"
"But how car1 yo^^ afforcl to subsidize s o
many L~rmers?"I askecl.
"We collect funds through a payroll clecluction
progrzun calleclJobs 4 All," said Ancll-6. "Hey. I'll
trade you that potato ricer for this shrimp deveiner. Spealcing of trade. here's an esaniple of
I~eingalert to its dangers: Our neighl~oring
countty, Sergorp, wantecl to create a free-trade
zone with Nedlaw. But we were af~xidthat policy m~oulclput many of our fru-i-ns out of t7usiness! so we declined. \Ve saved tons of jobs!"
"\Vcoulcfn't Wedla\\; have l~enefiteclin any way
from Illore tlacle?" I wonclerecl.
"Theoretically yes," 111y frielld sighecl. "We are
sure that conlpanies in Sergorp would have hacl
to buy construction ecluipment, engineering
know-ho\v, and architectural senrices from Necllaw. But you're missing the point. \Ye don't
Itnow who woulcl get those johs, but we do
ltno\v all the farmers. Besicles, the people who
can procluce what the Sergolpians want alreaclp
have jobs. I11 fact, they're the higl~est-paiclworkers in Neclla\v! They're much too busy to satisfy
any Illore Sergorpizm neecls."
"AndrP." I cried. "I hope you can make our
leaclers see the light. \We are so l,aclc\varcl that
n.e only pay attention to proclucti\rity, thinking
goocl jobs ancl economic gro\vth \\.ill follow.
Tell me, what nil1 your nest initiative be?"
Moving away from the hearth where he hacl
I~eenturning the spit, he moppecl his foreheacl.
"Next," he exclaimed tri~~nlph;untly,
"I will raise
Neclla\v's stancl;url of living. \Yfhj. must I come to
your country for 21 dining experience like this?"
http://clevelandfed.org/research/trends
July 1997
Best available copy
Monetary Policy
Percent,weekly averages
65
Percent
6.0
IMPLIED YIELDS ON FEDERAL FUNDS FUTURES
Eiiecttve federal funds rate
Intended iederal funds rate
2.5
1992
1993
1994
1995
1996
1997
5.0
Feb
I
I
March April
I
May
I
I
I
June July Aug.
Contract month
I
I
1
Sept.
Oct
Nov.
Dec.
Percent
Percent
16-MONTHCD RATE AND EFFECTIVERATE
PAID ON M2 DEPOSITS
1
8.0 SELECTED INTEREST RATES
SOURCES: Board of Governors of the Federal Resene System: and the Chicago Board of Trade.
It has I~eenrnore tix~nthree rnonths
since the Feclel.al Open ,\/l:irliet Cornmittee (FOhlC) saisecl the inteneleel
fecleral flncls rilte from 5'/,%)to S'/LO/i,.
*Ihis
. sate hike \vas the first imlicy
rnove in I-i ~nontlisancl the first increase in more than t\\.o years. 13y
taking ttiis action, the FOMC ser\.ecl
notice that it stoocl re;kcly to aclclress
incipient in1l:itionary pressures.
In :innouncing the rate increase.
tile Committee statecl that "... the
slight firming of monetary conclilions is \,iexvecl 21s 21 p r ~ ~ c l e nstep
t
t S ~ tafforcls grc:lter :issurance o f
jxolonging the current economic expansion l,y sustaining the existing
I o n infl:ition environment t h r o ~ ~ g h
the rest of this year ancl nest. The
experience of the 1:lst sever211 years
has reinforceel the corlviction th:~tlo\\;
inflation is essential to re;~lizirlgthe
econosny's f~lllestgrowth poterlti:~l."
'I'he policy move was no surprise
to financial markets. The feelem1 fclncls
f . ~ ~ t i ~ rrn>~rliet,
es
for instance, h:~cl
come to anticipate the sate increase
in {lie \v-eel.;s I~eforethe meeting. In
the pcriocl ininiecliately follo~ving
the Fccl's action, futures prices revealecl that investors were expecting
another n t e hilie Sly midye>~r.
Since
then. however, the inflation news
1x1sI~eenI'ivot.al,le, ancl f~ituresprices
currently suggest that n o imminent
policy move is ;inticip:1tecl.
&lone); rn;krliet irlteresl Utes rose
in concert \\;it11 the incre:isecl feelera1 fi~llclssale. 13ec;iuse the interest
rate p:iicl o n I,anli cleposits terlcls
to respo~icl slon.ly to changes in
marliet sates, the opportunity cost of
clelx)sits (the interest forgone o n
holding cleposits comparecl with a
marliet altcr'nxti\.e) has risen. For
e s a ~ n j ~ lthe
e . 3-ye:tr l'reasury note
(corrtijl~(cxi
or1 rzen-tpc~g~~)
http://clevelandfed.org/research/trends
July 1997
Best available copy
Monetary Policy (cont.)
Billions of dollars
Bill~onsoi dollars
4'050
1995
1996
Billions of dollars
I
ITHE
M2 AGGREGATE
1997
Billions oi dollars
830
Billions oi dollars
590
COMMERCIAL BANK LOANS
800
-
- 560
770
-
- 530
740
-
- 500
710
-
- 170
680
-
- 440
650
-
- 410
- 380
560
1992
Commercial and industrial
I
I
I
1993
1994
1995
- 350
I
1996
I
1997
320
a. MZM is an alternative measure of money that IS equal to M2 plus institutional money market funds less small time deposits.
b. Growth rates are percentage rates calculated on a fourth-quarter over fourth-quarter basis. Annualized growth rate for 1997 is calculated on an estimated
June over 1996:IVQ basis.
NOTE: All data are seasonally adjusted. Last plot is estimated for June 1997. For MZM, dotted lines represent growth ranges and are for reference only. All
other dotted lines are FOMC-determined provisional ranges.
SOURCE: Board of Governors of the Federal Reserve System.
n o w yields almost 100 basis points
more than a deposit of comparable
term. The spreacl bet~veenthe 6month Treas~lrybill ; ~ n dthe shareweighteel :nrerage of rates paicl on M2
cleposits also wicle~ledsubstantially.
The higher opportunity cost of
cleposits recluces their ;~ttractiveness
relative to marl<et alternatives. Thc~s,
the rise in opport~lnitycost has been
associated with a slowclo\vn in the
growth rate of all the monetary aggregates. Early this year, M2 exceecletl the 50/0 upper bouncl of its
FOMC-determined provisional range.
In May. hI2 clecelerated and 1 1 0 ~
stands within the specifiecl range.
The MZM aggregate, which haci I3een
expancling at nearly a 9% pace
in the first few months of the year.
cleclinecl in May and is expected to
follow :r flatter trajectory over the
1,alance of 1997.
The recent deceleration in 1412
ancl i\fZI\I reflects more than the increase in their opportunity costs. The
~~nexpectecl
strength in economic
activity lecl to larger-than-expected
7
tax payments, which \v'CI-c- : I C C L I ~ ~ L I latecl in Imnk cleposits. As payments
cleared in i\f:ly. the bulge in the 218gregates clissipatecl.
Banks continue to fincl S O ~ L I Sde~
ruand for commercial :mcl inclustrial
loans. To a great extent, these loans
have been financed .\\.it11negotiable
CDs, \vhich are incluclecl in M3 bc~t
not in M2.IHence. M 3 contincles to
espancl more sapidly than M2 ancl
senlains above the upper bound of
its specifiecl range.
(co)7til7~ic~d
ot? 17c>.1-/
pq~e)
http://clevelandfed.org/research/trends
July 1997
Best available copy
Monetary Policy (cont.)
Percent
13'0
M2 VELOCITY AND OPPORTUNITY COST
115
-
10.0
-
85
-
Ratio
2 07
I-
Percent
Raiio
I
l 4 MZM VELOCITY AND OPPORTUNITY COST
42
- 2.02
Velocity
- 196
1 91
Percent
8'5 1 ~ OPPORTUNITY
2
COST AND SMALL TIME DEPOSITSlM2
1959 1963 1967 1971 1975 1979 1983 1987 1991 1995
Ratio
1
55
Perceni
l4
Ratio
0 60
IMZM
OPPORTUNITY COST AND SMALLTIME DEPOSITS/M2 /
1959 1963 1967 1971
1975 1979 1983 1987 1991 1995
SOURCES: U.S. Department of Commerce. Bureau of Economic Analysis: and Board of Governors of the Federal Reserve System.
velocity jumped sharply clespite a
Since Ji~ly1993. tile FOhIC has
fall in oppottunity cost.
not p;iicI ;I great cieal of :ittention to
The discrepancy ~ v a slargely conthe gro~vthrate of the monetary agcentrateel in small time cleposits,
gregates. At that time, b12 \\-as dolvn\\~hichp l ~ ~ t i ~ n l eas
t e d;I share of &12.
graclecl as ;I re1i:ible inclic:itor of
l3alance lloltlers transferrecl :I large
rnonetiit-y policy. The I>r~:ilido\\.~~
in
share of their f ~ ~ n c itos stocl< and
its reliitionship \\:it11 economic acti\.boncl rntit~ial funds, which exity is reflectetl in a c1i;mge in the rep;indecl masliedly over this periocl.
1:itionship I)et\veen &#I2\'.elocitythe mtio of GI11' to hI2--:ul1cl its
Since a1,out 1994, however, the olcl
ol7port~111ity
cost. f3efot.e 1990. i~12 I-elationship has begun to reemerge.
velocity tenclecl to va1-y clirectly ~vith b12 1-elocity again varies directly
with opportunity cost, I ~ u taround a
oppc)rtii~litycost. 111 1990, llowever,
much higher average level.
MZhI cloes not itlclutle tinle cleposits. Thus. hlZM ~'~elocity
\\;:is unaffected I,y the shift from sm:ill tiriie
deposits to stocli ancl i,oncl f~intls.as
is eviclent in the relationship hetween the :iggsegate's velocity and
its o p p c ~ r t ~ ~ ncost.
i t y l'rior to 1975,
however, 1-elocity gre\v sapiclly ;is
funds were transferrecl from savings
deposits to srilall time cleposits.
which at.' incl~lcleclin M2. The consequent shift in i\I%i\/lvelocity stabilized and has remainecl intxct for
more than 20 years.
http://clevelandfed.org/research/trends
July 1997
Best available copy
Real CDP.Trend and Cycles
Percent change
10
Economic Expansions
Economic Contractions
Number of
quarters
Average annual
growth rate
1949:IVQ-1953:llQ
14
7.5
1948:lllQ-1949:IVQ
5
-1.2
1954:liQ-1957:lllQ
13
3.9
1953:llQ-l954:llQ
4
-2.6
8
6.4
1957:lllQ-1958:IQ
2
-7.6
1960:IVQ-1969:lilQ
35
4.9
1960:IQ-1960:IVQ
3
-2.4
1970:IVQ-1973:IVQ
12
5.2
1969:lllQ-1970:IVQ
5
-0.5
1975:IQ-1980:IQ
20
4.2
1973:lVQ-1975:lQ
5
-3.0
1980:lllQ-1981:IIIQ
4
4.2
1980:IQ-1980:lllQ
2
-4.9
1982:lllQ-1990:llQ
31
3.8
1981:IIlQ-1982:lllQ
4
-3.0
1991:IQ-I997:1Q
24
2.7
1990:llQ-1991 :IQ
3
-2.7
Trough to peak
1958:IQ-1960:IQ
Number of
quarters
Peak to trough
Average annual
growth rate
a. Chain-type quantity index: 1992 = 100.
NOTE: All data are seasonally adjusted.
SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis
History is the stanclarcl (a tenuous
'I'he comlmsition of GDI' lixs
o n e at tlcst) 1,). \ v l ~ i c lw
~ e often
ch:lngecl 21s n.ell. In 1952, k)r exirn~ l l e a s ~ l rcurrent
e
m a c r o c c o ~ l o ~ ~ l i c ple, exports ancl imports each acperfor111;~nce. i\ccorcling to the
counteel lor slightly more th:~n 4%
Commerce 1lep;~rtment's recently
of total o i ~ t p i ~ t13y
. 1996. those
releaseel O L I ~ ~ ~incleses,
L I ~
long-term
shares had risen to 12.0% and
growth in the 1I.S. slowecl horn an
I3.6(%1.respectively. A l t h o ~ ~ gperh
average ;innci;ll sate of -t.2(%) besonal consumption espenclit~rres
t w e e n 1950 ancl 197.3 to 2.5"/i1llehave rern:~inetl a fairly constant
t w e e n 197.i ancl 1996. Gron.th in
two-thircls o f GDI' since 1952, the
o u r stanciarci of li\.ing, nieasured in
fmction of that speslcling devoted to
terms of real per capita person;~l
ser\.ices has halloonecl from onecorisumption expenclitures. also dethircl to more than one-half.
celeratecl, fror~l2.0f%1per )-ear to
The [T.S. h:is experiencecl nine
l.9?4101-er-the sanie time fumes.
econoniic ~ O W I I ~ L I ~ since
IIS
1945.
i2lthough cliffering s~~t)stantially
in clepth a~iclclulxtion. these contractions ha\.e avelxgecl ne:uly Soclr
clu;wtess. \\.it11 a 3.1% annuxl out1 ~ 1loss.
t
The correlation I~et\\;een
the clur;~tionof a contraction xncl
the :~ccornpanyingo ~ ~ t j loss
x ~ t suggests that mild clon-nturns are Fellelally longer li\-eel. l':xpa~lsions last
longer than recessions-almm
18
cluarters 011average-with 2111 average annu211 gron-th rxte of 4.3%.
I.ong reco\-eries :lppear to proceecl
more s10\\-ly.
http://clevelandfed.org/research/trends
July 1997
Best available copy
Interest Rates
Percent,weekly averages
9'5 CAPITAL MARKET RATES
Percent, weekly averages
1
YIELD CURVESa
45
0
I
5
I
10
I
I
I
15
20
25
Years to niatur~ly
Percent monthly averages
l o TREASURY AND EURODOLWR DEPOSIT RATES
9
I
30
I
I
Basis points
140
-
a. All instruments are constant-maturity series.
b. Est~mateof 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. The TED spread is the 3-month Eurodollar rate minus the 3-month Treasury bill rate.
SOURCE: Board of Governors of the Federal Reserve Svstem.
'I'tie yielcl cLil7.c. has tlztttenecl noticeably since 1;ist month. i\lthoi1gl1 rates
h:~ve Inllen at 2111 maturities. longer
rates liave clroppecl more. tiglitening
up spre:~cls. The 3-).e:kr. 3-month
spreatl cleclinecl from 135 to 110
lx~sispoints, ancl the important 10year. 3-~iionthspreacl Sell e\.en further. from 166 to 135 l);~sispoints.
Longer-tel-nl capital n1:krIiet rates
h;ive also 1ie:kcletl clo\\.n. \\.ith mortgage.. utility. ancl 30-\e:u. ~ ' S ~ : I S L I I - ) .
1)oncl rz~tes :dl k~lling r o i ~ g l l l ~30
.
Iusis points ancl n:~rro\\.ing their
spre:~cls zkgainst municipal honcls.
O n e possil>le esplanation for t l ~
clecline it1 long rates is recl~iceclinflation expectations. but l 0 n . e ~longterm real rates c o ~ ~ also
l d I,e ca~lsecl
1,). clecre;~secluncertainty ;kl>o~~t
(IIture econo~nicgro\\~th.
In :iclclitio~~
to tern1 spre:icis. or clif
krences in the yielcls o n Ix~nclso f
different ~naturities,investors ancl
marliet analysts also watch risk
spreads, o r differences I,etn.een
1)oncls with different rislcs. O n e of
the rnost closely \v;itcllecl rislc
spreatls is I>et~veenTreascir!~ 21ncl
Il~irodollarrates, known as the '['El)
spread. f):krt o f this measure's attl.;icti\-eness is t h : ~it reflects risk ancl (In-
cert;~itlt!. ;iI>o~lto\.erse;ks cleposits
\vitlio~it the coti~plication of cxchange u t e risli. A c:ks~lal glancc
suggests th:it 'Tre:~sury ;lncl Eciroclollar rxes traclc each other closely, 11ut
a more thoroiigl~es;umination of the
clata reveals an :~cti\.espreacl. (Kotc.
for instance. the large spilie around
the onset oS the Gillf M r . ) 7'he 7'EIl
sl7reacl has I ~ e e n\\.iclening in 1997.
pcr1i:ips reflecting the international
financial ~~ncert:~int!;
caiisecl hy clisputes over tlie intsocl~ictionof the
I;LISOor tlie transfer of I-tong Kong t o
Chinese nile.
http://clevelandfed.org/research/trends
July 1997
Best available copy
Mortgage Lending in Cleveland
American Indian/Native Alas
Asian or Pac~frcIslander
Percent
10
UNEMPLOYMENT RATE: CLEVELAND PRIMARY
METROPOLITAN STATISTICAL AREA
Thousands of current dollars
20
SOURCES: U.S. Depariment of Labor, Bureau of Labor Statistics; U.S. Department of Commerce, Bureau of Economic Analysis: and Federal Financial Institutions Examination Council.
Since the early 1990s. tremendous
strides ha1.e heen ~naclein improving minorit). access to mortgage
creclit. I3asecl o n clatzt ~nacle:t\.:iilable t l ~ r o ~ ~the
g h I-Iome Mortg:tge
13isclosure Act (I-IMIIA), zt\\. clenial
rates of' hlacli anel Hisp:~nic ~iiortg a g e applicants ill tlie Cle\.el;tncl
area \\.ere nearly h:~lvccl I,et\\.een
1990 :inel 1995. the latest yeztr for
which data are ;t\.ailahle.
Of course, these r;i\v clcni;ll rate
disparities tell onl?. pzut of the story.
A lender's clecision to accept or re-
ject a loan clepencls on m;my f:ictors
not included in the HMDA tlat;~.sevem1 of u.hich are correlatecl ~ v i t h
n c e . Thc~s.while the HMI>A figiires
clo inclicate that rather sul,st;~ntial
(alheit smaller) clenial rate clisp;~rities
still esist, they canliot tell LIS
\vhether these clisparities are the result of legitilllate clifferences in cretlit\\.orlhiness across racial gro~lps.
I'erhaps the ~llostimportant Itctor
I>ehinclminorities' increasecl access
to mortgage creclit has heen the
health of the overall Cle\-eland
econolny in the last se\.el-al years.
Since tile I~cginningo f the tlec:~cle,
Ohio resiclents' per capita disposa l ~ l epwx111;il income lias risen approsim:ttely 25(X1.to S 19.123. \\:bile
Cle\-ela~icl i~nemployment rates
have settlecl near 5[%. At tlie same
time, mortgage interest zttes halre
ktllen clr:imatically. 11-0111al2ove 10(H1
in 1990 t o l>elo\\-S'XI o\.er the last
fen. years. I3olh of these trencls
hz1r.e contril~uteclto mal<ing home
loans Inore afforclahle for those
\\.ho were pre\-iously sclileezcd out
of the 111;i~liet.
http://clevelandfed.org/research/trends
July 1997
Best available copy
Inflation and Prices
D ~ i i u s ~ oIndex
n net percent rislng
PURCHASING MANAGERS' PRICE SURVEY
May Price Statistics
Annualized percent
change, last:
I rno.
5 rno. 12 rno.
1996
5 yr.
Consumer Prices
All items
0.8
1.4
Less food
and energy
2.1
2.6
Mediana
3.1
3.0
Finished goods -3.6
-3.9
Less food
and energy
-3.3
Commodity futures
micesb
32.5
2.3
2.7
3.3
2.5
2.9
2.6
2.7
2.9
2.7
0.3
1.3
2.9
-0.5
0.1
1.1
0.6
8.0
-2.9
3.8
-0.7
I
Producer Prices
40
-
30 - ' l l l ' l ' l l ' l l l " ' ~ l ' l l ' l " " l l I ' l " l l " ' l l l l g l ' l l l " l ~
1993
1994
1995
1996
1997
12-month percent change
38
12-month percent change
34
36
32
34
30
32
28
30
26
28
24
26
1993
1994
1995
1996
1997
22
1993
1994
1995
1996
1997
a. Calculated by the Federal Reserve Bank of Cleveland.
b. As measured by the KR-CRB composite futures index, all commodities. Data reprinted with permission of the Commodity Research Bureau, a Knight-Ridder
Business Information Service.
c. Median expected 12-month change in consumer prices as measured by the University of Michigan's Survey of Consumers.
d. 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 Univers~tyof Michigan; and the Commodity
Research Bureau.
May marliecl the thircl consecuti\-e
month that the Consiimcr I'rice
Incles (CI'I) rose at an annual r.:tte of
just 0.8%. bringing the ye;tr-to-elate
average incre;~seto l.fi(H1. Over the
first five months of the year, the CI'I
is tracl<ing ;dmost 2 percentage
points helon. its 1996 average.
f-lowe\-er. other Ineasures o f ret:lil
price movements have l x e n ~111,skintially higher. The CI'I less hocl
arlcl energy goocls is up 7.6%) for
t h e !-car. ancl the ~lietlianCI'I has
increaseel j.0'"i1-:t~,proxi11i~1teIy the
s:tnIe rates its 1:tst year.
1'rice behavior at the \vholesale
le\.el h;ts l ~ e e neven more sul,di~ecl
th:ln the CI-'I. The Proclucer Price
Inclex (1'1'11 declined at a 3.9(H1annilal rate during the first five months
of 1997, following a 2.9% increase in
1996. Even exclucling foocl ancl energy goods, wholesale prices are
clown 0.5% since knst December.
Survey clata show the same basic
patterns. The [Jniversity ol Nlichigrrn's sulvey of households indicates
that consurners expect retail prices
i o ji~mp:tbout 3% over the nest 12
months, roughly the same increase
they were projecting at this time
last yew ant1 not m i ~ c hclifferent
from the current trencl in the '*core"
retail price measures. W11:tt's morc,
householcls see i n f l a t i o ~holding
~
steacly at this I.;lte over the next five
to 10 years.
On the other hiincl, reports from
~x~sch;lsing
managers continile to reveal little i~pwardpressure on inclilstrial prices. The National Association
of I'~~rchasingI\IIanagement's price
inclex h;ts been hovering :troiincl the
50 mark for most of the past year.
(cotztincicd 012 ncxtp~fgc)
http://clevelandfed.org/research/trends
July 1997
Best available copy
Inflation and Prices (cont.)
12-month percent change
ITRENDS
I N THE CPI: 1 2 - M O N T H P E R C E N T C H A N G E
Monthly percent change annual rate
9
Percentage poinls
5
12-month percent change
7
4
6
3
5
5
2
4
4
1
3
0
2
8
7
6
3
2
-1
1
0
1984
1986
1988
1990
1992
1994
1996
-2
1984
1
1986
1988
1990
1992
1994
1996
a. Calculated by the Federal Reserve Bank of Cleveland.
b. Hor~zontallines represent trends.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; and the Federal Reserve Bank of Cleveland
inclicating that ro~~ghl!.the s;ir11e
percentage of Ixiyers are repot-Ling
higher prices 21s lo\\.er ones.
This pear's CI'I performance has
corne as a bit o f a s~lrpriseto inflation forecasters. inclueling tlic I'cclera1 1ieseri.e. The recent 12-nlontli
trenci increase in tlie inclex. at only
2.396. is almost i/L percentage point
helobv the hottom encl o f the 1007
range i7rojectecI I>!;
the Fecler;il
O p e n hI;irket Committee (FONC) in
I : e I ~ r ~ ; ~Ar ylie).
. question fr~cingtlie
FC)h,IC is whether this yexr's rlnexpecteclly lo\v CI'I increase is the Ixginning of' a nm\-, lo\\.er inflatiorl
trcncl, o r merely a transitory clip in
the cl21ta that n.ill ultimately turn u p \v:trcl again.
'This is exactly the question that
tlie ,'core" inflatiotl statistics ;Ire clesignecl to aclclress. For ex;tmple. the
meclian CI'I is constructeel to follo\v
the same trencl as the CPI over long
periods, although at any p;trtiallar
mornent it should reveal a more
;~cc~rrate-ant1 rliore stable-re>~cling
of' the inflation trencl.
Consicler the most recent 12rnonth perioci. The rise in the medi:un
CX'I since last year has exceedeel [lie
clo\\-nu-arc{-movingCI'I 17~'0.4 pet'-
centage point. In ktct, the meclinn
measure appears to h:t\.e heen f'ollo~ving:I nearly ste:~cly 3%) gro\\.tIi
trencl since earl!; 1901. In lighr of'
this clivergence-ancl
consiclering
that over long horizons these two
incleses tencl to folio\\. tlie s:imc
p;~th-is it more likcl!; tIi:~t the CI'I
\\.ill acceler-ate o r tlut the median
CI'I \\.ill k~ll?I-Iistorical experience
k~\.orsthe fornier. In 1087. 1992. 1P)011.
:inel L996-foi1r recent episocles
\\.hen tlie CI'I fell relati\-e to the
nieclian CI'I-the
CI'I tendecl to ; ~ c celer:~te 01-er the sul)secl~~ent12month ixriocl.
0
http://clevelandfed.org/research/trends
July 1997
Best available copy
Economic Activity
Percent change from preceding quarter
1 GDP AND BLUE CHIP FORECAST
Real GDP and Components, 1997:lQa
(Final estimate, s.a.a.r?)
change,
billions
of 1992 $
101.1
Real GDP
65.5
Consumer s p e n d l n g
Durables
27.3
16.3
Nondurables
Serv~ces
22.6
Buslness fixed
~nvestment
21.0
Equipment
18.0
3.2
Structures
R e s l d e n t ~ arnvestment
l
4.5
Government spendlng
0.4
Nat~onaldefense
-8.2
Net exports
-22.3
Exports
22.4
Imports
44.7
Change in business
lnventorres
31.5
I
Percent change, last:
Four
Quarter
quarters
5.9
5.7
18.8
4.6
3.4
4.1
3.2
7.9
2.0
2.8
11.0
12.7
6.6
6.7
0.1
-10.2
10.8
19.9
9.3
9.6
8.8
3.7
1.5
-3.4
9.7
10.5
-
-
Percent change from corresponding month of previous yearb
6
Percent change from preceding monthb
I5 1 HOUSING INDICATORS
1
a. Cha~n-we~ghted
data in billions of 1992 dollars.
b. Seasonally adjusted annual rate.
NOTE: All data are seasonally adjusted.
SOURCES: U.S. Department of Commerce. Bureau of the Census and Bureau of Economic Analysis; and Blue Chip Economic Indicators, June 10, 1997
The econoiny shot L I 5.9'!0
~
in [lie
first cjil:tr[er. :~ccorclingto the (:ommerce 1)e~~artment's
final :tpp~tisal.
The slight uptic.Ii t'som the pre\.ioc~s
estim;~te resc~ltecl f r o ~ n \vealierthan-espected ~ r o \ \ . t hin ini17orIs.
The csception:~l first-cluarter performance-the hest in nine years
-ret'lectecl acl\.ances in personal
consunlprion. in\.entor); a c c u n l ~ ~ l a tion, eslx)rts, :tncl procluccrs'
c1~11-able
ecl~lip~nent.
Economists p;wticipatitig in the
]cine 1 0 f31ue Chip sur\-e>.expect the
espansion to ?:is? I,acl< into a pace
more consistent n-it11the economy's
i1nclcr1~-ing
growth potentiztl. ?'lie);
fill-esec re:d GI>P expancling 2.3%1in
the current cluztrter ztncl t h r o u g h o ~ ~ t
the remaincler of 1997, then t:lpering
OK to 2.01!/ii11); the last li:~lfor 1998.
Forecasters believe that consumers \\.ill tighten their belts some\vh;ti in the current cluarter. (Consumer spenciing typically accounts
for :tl)out t~vo-tliirdso f GIII'. 11~1sing 11171'il ancl May, real personal
consumption expenditures rose at z~
L.3'hi ann~lal rate-some\vhat
oft'
pace, hut still r e k the f'irst-cl~~arter
ti\.cly str.ong. Growth in real clispos;~l>le
~xsx)n";l
income remains solid.
:tltllo~~gll
it ztlso ~.;ttcIieteclclon-1121 hit
in hkty.
, I l o n t h - i o - ~ ~ ~ch:wges
o ~ ~ t I ~in st~uiclartl Iloilsing inc1ic:ltor.s ~lsuallycont:tin more noise than infor1n:~tion.
:tncl incli\.iclu:tl series oRen move in
opposite clirections. h'Ia)-'s ~ . S ( XcleI
cline in housing st:u-ts is not partic~ll~trly noten.ort11y \\-hen conlp;trecl
nitti the recen~ I)eha\.ior of this
inclcs, hut ir tlicl m:trli the thircl co11secuti\.e montlily clecline. While a n
eztenclecl clrop in st:uts is not unpreretlenlecl in a n espzt~ision,it is
relati\-el?. r;trc. Ne\.ertheIess. 1,otll
( c ' o r ~ l i r ~ ~ ~r~e.x?pcigc>i
ec/o?~
II
e
0
.
e
e
e
http://clevelandfed.org/research/trends
July 1997
Best available copy
e
Economic Activity (cont.)
Billions of current dollars, s.a.a.ca
Percent change, s a a r a
Billions 01 current dollars, s a a ia
30 ~ U S I N E S S
SPENDING ON PLANT AND EQUIPMENT~
A
25
Percenl changea
7
PRODUCTIVITYTRENDS IN MANUFACTURING
Index, 1992 = l.OOe
Dalis' supply'
a. Seasonally adjusted annual rate.
b. Chain-weighted data in 1992 dollars, seasonally adjusted.
c. Excludes inventory valuation adjustment.
d. Includes inventory valuation and capital consumption adjustment.
e. Seasonally adjusted.
f. 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; U.S. Department of Labor, Bureau of Labor Statistics; Board of Governors of the
Federal Reserve System; and Ward's Automotive Reports.
I~i~ilcling
permits :lnd st:irts remain at
relati\-el>-high le\.els. ancl anecclotal
eviclence suggests that the housing
sector remains strong. I3uilclers report tlizit nen. home sales are rising.
mortgage >ipplications continue to
stre:im in. ;i11d C O I I S L I I I I ~ ~ Sattitiides
'
almut home lxtying are \\.idcly char~icterizeclas ~ l p l ~ e a t .
13~1sinessfisecl investment, p;trtic~il:trly lbr computers ancl other infor1n:ltion 'cliiipment. has increaseel at
a r:ipicl clip throughout the current
espansion. More recently. investment in nonresidential structures
also seerns to have killen ill line.
Business investment helps boost
or lie^ prod~ictivity,nrliich is necessary iS \vorliers are to see their real
\\.ages rise. Moreover, proclucti\-it17
:~ci\.:lncesare an important source of
long-term economic growth. Since
1991, 1"-ocluctivity gains in the manitkicti~ritlgsector have accelerateel. In
frict, they hay-e exceedeel their 3jyexr trcncl since 1975. The continuecl
strong ~xrSonnance of corporate
profits, re1:ltively high levels of cxp:icity utilization. low interest rates,
:~nclthe hoomitig stocli market all
I~ocle\\;ell for cotitinucd strength in
pl;int ;inel equipment spencling.
Procluction o f motor vehicles ancl
parts rehouncled somew1i;lt in May,
as the strike against Chlysler enclecl.
Altlio~tgh inventories of cars ancl
liglit trucl;s increased sharply i r i
April. they clo not appe;ir to I,e a1
~ t n ~ ~ s ~ high
i a l l ylevels.
0
.
0
0
0
.
http://clevelandfed.org/research/trends
July 1997
Best available copy
0
Labor Markets
Chanse, thousands o i workers"
Labor Market Conditionsa
(Seasonally adjusted)
Average monthly change
(thousands of employees)
1996
Year
Payroll employment
Goods-producing
Manufacturing
Service-produc~ng
Services
Buslness services
Retail trade
Government
Local
Household employment
212
19
-5
192
99
33
48
14
19
232
1997
IIQ
April
237 327
14 -3
8
6
222 330
117 158
19
17
44
84
29
34
31
22
63 209
May
June
166
217
34
12
5
14
132
205
130
63
13
28
-9
58
-14
66
-6
78
255 -275
Average for period
Civilian unemployment
5.4
rate (%)
Manufacturing
workweek(h~urs)~ 41.5
-200
0
1991 1992 1993 1994 1995 1996 1997
lo date
4.9
4.9
4.8
5.0
42.0 42 1
42.0
41.9
IlQ Aoril Mav June
1997
I
Thousands
j50 INITIAL CMMS FOR UNEMPLOYMENT BENEFITSO
a. Seasonally adjusted.
b. Production and nonsupervisory workers.
c. Vertical line ~ndicatesbreak in data series due to survey redesign
d. Four-week lagged average of seasonally adjusted data.
SOURCE: U.S. Department of Labor, Bureau of Labor Statist~cs.
Although tlie o v e r ~ ~ l~lnemployl
ment rate eclgecl L I to~ 5.0(H1in June,
the 111ost recent employment statistics continue to portray :I rohust
labor 111:1rliet. Nonk~rm p:~yrolls
were L I a~ healthy 217.000 for the
month, ~ii;~int;~ining
tliis year's \;it?D
orous ave12se pace.
,.
I he scr\-ice-procl~ici~ig
sector ;lccountecl for the \.ast m;~jorityof the
jobs p i n , aclcling L05,000 nen. positions in June. IY'ithin illat category,
ecI~ic:~tionpl:~yecla significant role
(+-i9,000),p;~rtlybecause of shorter
s ~ ~ r i ~ nv;ic;~tioris
ier
and seasonal actj~lstriient hctors. Iietail tl-:lcle
(+SS.000) ancl local government
(+7S.000) lvere also rnajor contrih~ltors t o June's advance. In contr;~st,
employment in the goods-proclucing
sector slo\ved fro111bkly's pace.
While tlie ~ x ~ y r o employment
ll
numl~ersfor June paint a rosy picture, householcl survey results
she\\- a loss o f 275,000 jolx. This
~iionth-to-moritliclivergence in the
clati~is not un~isu:~l:
over time, ho\vever. the tn.o measiires 17rovicIe ;I
consistent enil,ko).ment pict~ire.
New jol3less claims rose 5,000 in
tlie \\,eek enclecl J ~ l n e28, to 337,000.
A l t h o ~ ~ claims
g l ~ 1iz1veincl~eclL I this
~
year, the o\.erxll n~irnl,er of unemplo).ecl \\.orlters applying for bencfits renuins lo\\-.
0
.
0
.
0
.
http://clevelandfed.org/research/trends
July 1997
Best available copy
0
Exports and Emplgyment
B~llionsof dollars
1
760 U.S. GOODS AND SERVICES EXPORTS
Percent
U S EMPLOYMENT ATTRIBUTED TO GOODS
11 AND SERVICES EXPORTS
-----,. -
/-"--2vd--&v~'"
42
-
-" "
pi-
"&A".
Total
&
,,"
,Ase9e
"
fit
-
Serv~ces
I
1
I
I
I
I
I
I
Change in U.S. Employment
Attributed to Goods Exports
Foreign market
Thousands
of workers
1986
1994
Total
4,385
6,836
56
Canada
Mexico
Other Latin America
Japan
1,040
250
308
485
766
64
57
104
1,311
1,460
729
504
754
1,133
138
151
229
1,738
40
192
64
55
48
116
165
120
33
EC-I 2a
China
Hong Kong
Taiwan
Other
Percent
change
a. The EC-12 countries comprlse Belgium. Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands. Portugal, Spain, and the U.K.
SOURCE: Lester A. Davis, "U.S. Jobs Supported by Goods and Services Exports, 1983-94." U.S. Department of Commerce, Research Series OIMA-1-96,
November 1996.
For \I-liom are these goocls :~nclsen.procl~~ction.Ilo\vever, \viiile the
As the U . S . economy opens L I to
~
ices lxoclucecl? America's t\vo
more international tncle. the ~ ~ P L I F-- ; ~ L I L ' of internatio~lal tmcle has
I..
. >t .s. lias
largest tracling partners, Mesico and
cliruhed steadily over the last 10
'11 p ~
s teilclecl to focus o n the
C:~n:lcla. together account for alye;irs. tile share of employment deloss of American jol~s associ:itecl
most a thircl of o~1rexport-clri\-en
\.otecl to exports flatte~ledout after
with increasing imports. I-lo\\.e\ier.
ernp1o)ment. Other kitin Arneric~in
1991. ?'he sharp increase prior to
exports :ire :11so gron.ing ;IIICI :ire
c o ~ ~ n t r i e.I:lp;ul.
s.
:~ncl Europe are
psovicling employment opport~lni- that tillle reflects the irnpact of the
responsiible
for
most
of the rernain1990
recession,
mihen
the
cle~lla~lci
ties for I1.S. \\.o~liers-;1 fact that is
ing jol~s.f-Io\vever. this is changing.
for [i.S. esport goocls rose and tlootien overlooliecl.
While employment c l ~ ~ r i n gthe
mestic elemand \ve:tkenecl. 'l'he flatCommerce Ikpartment cl;~t:l
1936-94 periocl grew [nost rapiclly
tening out is the result of the recovsilo\\- that 1i.S. esports have esfor goods :inel services shipped to
ery of cloniestic demand.
panclecl mucll faster than the econI\llesico. the nest-1':~stestgron-th \\.as
So\\!., more than 10% of all I:.S.
orny OF-erthe last clecade. As ess ~ x ~ r r e11)' d exports to f long liong.
\\.orliing hoc~rsare spent proclucing
ports ila\.c gro\vn, so S~asthe share
iterns that are consumecl al>roacl. T'xixan. :lncl China.
o f the lalx~rforce elex-otecl to their
Regional Update:
eeling, W Va.
http://clevelandfed.org/research/trends
July 1997
Best available copy
Percent
Industry Share of Total Nonfarm Employment
(Percent)
Wheeling
Mln~ng
Construction
MSA
West
Virginia
U.S.
1986 1996
1986 1996
1986 1996
4.1
2.3
6.8
3.7
3.8
4.9
0.8
0.5
4.8
4.5
3.1
3.6
12.2
9.6
Durables
5.7
3.5
8.2
6.9
11.3
Nondurables
6.5
6.1
6.3
4.8
7.8
6.4
5.5
4.9
6.2
5.6
5.3
5.2
Manufacturing
TPUa
Trade
FIRE^
26.7 25.2
4.6
4.2
14.5 11.7
22.9 22.9
4.0
3.9
19.1 15.4
9.0
23.8 23.5
6.3
5.8
Serv~ces
27.3 34.0
20.3 27.4
23.1 28.8
Government
16.5 16.1
21.6 19.9
16.8 16.3
Annual percent change
IPOPULATION AND NONFARM EMPLOYMENT:WHEELING MSA (
Annual percent change
I REAL PER CAPITA PERSONAL INCOME
I
a. Transportation and public utilities.
b. Finance, insurance, and real estate.
NOTE: The Wheeling Metropolitan Statistical Area comprises Belmont County, Ohio; Marshall County, W. Va.; and Ohio Countv, W. Va
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics: U.S. Department of Commerce. Bureau of the Census; and West Virginia Bureau of
Employment Programs.
The ccxd rnining iincl~~stry-llistorinonkirm employment increased
tally a preclo~iiinantl'eature o f the
2111o~1t1.3% a111l~lallyover the last
Wheeling. W. Via.. are:~-is t3ecomclecacle. Service i n d ~ ~ semployment,
t~y
ing an incse:~singl)-less i~llj>ort;lnt let1 h). tile area's expanding medic;~l
p r t of its econo~nic lanclscape.
k~cilities,acco~lnteclfor a large p:rt
Hetween 1986 ancl 1996, rnining
of the o\-era11 gain. Service-sector
employment in the city ancl its enpayrolls now represent 34% of the
virons cleclinecl : ~ t3n Llver-age an:lrea's total emplo)ment, comp;~secl
i ~"7.3(%
ig
in 1986.
nual rate o f . t . , i ( M ~ . A I a n ~ ~ k ~ c t ~ ~ rto
jobs also si~ranli(:il>out L.l(!h per
While more jobs h;~ve t,ecome
ax.ail:~l>le.1VheeIing.s popu1:ltion has
year) ancl not\. :lccount t i ~ rless
than 1 0 ( M > o f the area's toral noncleclinecl over the last 10 years. the
far111 employment.
result of a net outmigration of \\;arkDespite tile clo\vnt~~rns
in lnining
ers ancl I: relatively slow rate of famancl f n ; ~ n i ~ f ; ~ c t ~
\Vhceling's
~ r i ~ ~ g , tot:ll
ily esixmsion. In 1990, ahout 18% of
the area's residents n.ere o\.er the age
of 65. coml>;~edto 12(!/0 nation\\-icle.
Still. the city ;Inel its surroundin:,.
commuliities ha\;e esperietlcecl
strong inconre gso\vth. Since 1993,
real per capitzi personal income h:ls
risen at a n :I\.el.age rxte ol' al>oc~t
3.3%)per ).ear. more than 21 percentage point aha\-e the stxte a v e n g e .
Althoi~gh the segion's ~~nemplo).lllellt sate is still relati\~elyhigh. it 11:~s
been rececling in recent years ancl is
appro;~cliingthe nation;ll a\.erage.
http://clevelandfed.org/research/trends
July 1997
Best available copy
http://clevelandfed.org/research/trends
July 1997
Best available copy
Banking Conditions
Ratio
Ratio
1 30
l7
PERFORMANCE AND CONDITION RATIOS
Percent
55
MARKET INTEREST RATES
I
Ratlo
35
NON-INTEREST EXPENSWNET OPERATING INCOME,
BY BANK ASSET SIZE
Percent
20
LOAN RATES
18
16
-
14
-
12
-
10
30-year fixed Tiortgage
6
1995
I
I
I
I
I
I
1996
I
I
I
1997
SOURCES: Federal Deposit Insurance Corporation; and Bank Rate Monitor; various issues.
Insured commercial 1,anlcs reportecl
recorcl le\.els of net income in the
first cluarter, which tK~nslateclinto
the fo~~rth-highest
return on assets
(IIOA) ever. Non-interest income
was u p 11.6% over last ye;lr's level
ancl was largely responsil,le for the
increase in ROA.
Higher fee income accountecl for
half of the rise in non-interest
income. Net-interest income was
boostecl by grolvth in interestearning assets, despite a clecline in
the net-interest margin associateel
with those xssets. Rates of retilrn on
e:~rningassets (such as creclit carcls
ancl loans) have wealtened recently,
while inclicators of the cost of Ixnk
filncls (such as money market rates
ancl sates on 6-rnonth CDs) have
l ~ e e nrising.
O n e of the dinlensions along
\vhich large and small banks cliffer is
their reliance on non-interest income. B:~nlis with less than $100
million in assets gain roughly 20% of
their net revenues from this source,
c o ~ n p a r e dto almost ~iO%for larger
banks. Net revenues at both the
largest (over $10 billion) anel smallest (under $100 nill lion) institiltions
have also Ixen boosted by cleclines
in non-interest expenses.
Loan-loss provisions totaling S-i.3
l~illioncut into 1,anlcs' first-c1~1;lrter
earnings. as clicl net charge-offs of
$4.0 1,illion. The creclit c;lscl conlponent of net charge-offs continues
ic.
carcl
to h e ~ x o l ~ l e ~ i i : ~ tCredit
clx~rge-offswere LIP $560 million
over last year's level, while all other
c:~tegoriesof ch:~rge-of&fell $113
million.
May's Senior Loan Ofl'icer S~lniey
inclicates that since February, banlis
have hecome more accon~moclating
to I,usinesses 11ut h21x.e tighte~lecl
creclit for households.
~ c o t z t i t ~ ~ r eI ~~el .o~)t~l ~ a g e l
http://clevelandfed.org/research/trends
July 1997
Best available copy
Banking Conditions (cont.)
Net percent
I
l o RESPONDENTS TIGHTENING STANDARDS FOR C & LOANS
I
I
Net percent
50 RESPONDENTS REPORTING STRONGER
DEMAND FOR C&l LOANS
Net percent
1
40 RESPONDENTS REPORTING INCREASED WILLINGNESS
I
EXPECTED CHANGE IN CHARGE-OFF RATE, BY BANK SIZE
More than $15 billion in assets
;than $15 blll~onin assets
Increase
Remain steady
Decrease
SOURCE: Board of Governors of the Federal Reserve System. Senior Loan Officer Opinion Survey on Bank Lending Practices.
I3anlis th:tt easecl their terms on
commerci:~l :~ncl incl~~strial(CSI)
1o:tns i~lclicateclth:tt tile). llacl clone
s o in response to competition from
other 1,anl;s as n.ell as nonl>ank
lenclers. In reg:trcl to CSI loans to
large- ;mcl ~niclclle-~n:trl<ct
Ix~rr-o\vers.
one-thirci of the clomestic responclents inclicatecl th;tt the!. had reclucecl their sate spreacl o\.er mzu-lcet
sates, n.liile o11e-fourth lo\\.eretl the
cost of' their creclit lines. Snlallnxtrltet l~orro~vers
\\.ere less liltcly to
esperience a n ei~singof terms. In
fitct, fi~reignI~anlis'hrnnches ancl of-
fices. representing almost 30(!41of the
res17ondents. tightened terrrls sornewhat o n these loans. The sur\.ey
sho.rvecl 110 strong inclication of either weaker or stronger demancl for
CSI lo:1Ils.
A significant fraction o f I ~ n l i s
continue to report tighter stanclarcls
o n consumer loans. Intieeel. nearly
half reportetl raising their terms on
nen. creclit card accounts. I-lo\\~evec
l~anlis' \villing~less to mal<e consumer loans is essentially unctlangecl since the previous survey.
The May report also incluclecl a
new set of cl~~estions
regarcling loan
officers' expectations o f clxtl~gesin
charge-off rates on consunier ancl
CSI loans for the rest of 1997. Onethircl of the responclents notecl that
the)- foresee charge-off sates o n
consumer loans rising zts :t result of
the presumecl increase in h o ~ l s e holcls' \\-illingness to cleclare banliruptcy. One-Soilrth :tnticip:tte higher
ch:trge-off rates on C&I loans 1,ecause of an easing of stanclarcls :tncI
:L cleterioration in I ~ ) t h
I>~~siness
I'inanci~tlconclitions :tncl the gener:tl
econolnic o~~tlool;.
http://clevelandfed.org/research/trends
July 1997
Best available copy
Monex Inflattion, and Exchange Rates
Percent change from corresponding quarter o i previous year
Percent change from correspond~ngquarter of prei/lous yea1
I"
I
THE M I AGGREGATE
Percent change irom correspond~ngquarter o l prevlous year
12
CONSUMER PRICES
1
I
1
l 6 THE M2 AGGREGATE
I
Index. March 1973 = 100
170
160
150
140
130
120
110
100
90
80
a. Trade-weighted average.
b. Quarterly average of monthly data, adjusted for sweep accounts.
SOURCES: Board of Governors of the Federal Reserve System; and International Monetary Fund, International Financial Statistics.
ivioney. inflation. ztncl exchange
rates :ire ;ill 1inl.recl. I I L I ~ the connections are relatively complicatecl. Infl:ttion occurs when a nation's centrztl lxmk attempts to supply a
greater qc~antityof' Inone); than the
17~1blicdesires to hold. Rising prices
Ilelp l>alance tlie ztruo~intof money
clernariclecl ancl s~ippliecl.
Conventional money measures
like &I1 ancl >I2 sho\v only the stocl<
of money that rcs~lltsf'rom this ecluililxating process. Consecl~~ently.
the
near-term connection hetween small
fl~ictclationsin money measures ancl
prices clepencls on whether. the 011servecl changes in the money stocl<
reflect growth in money clemancl
holciirlg supply fisecl, o r : I I expansion of the money supply Iiolcling
dem:tncl fisecl.
A country that creates a n e x e s si1.e amount of money will experience inflation, hut Ilow its exckinge
late responcls depencls o n the inflation mtes of other nations. Countries
wit11 re1:itively high inflation I.:ite,s
experience currency clepreci:~tions.
Hence. the el'fcct of i t nation's
money creation on its eschange rate
depends on 110th money clemancl at
home ;mcl the relati1.e growth of
money scipply anel clemancl ahroacl.
)Ill of these ktctors help cxplain
xvhy econo~nistshztve trou1,le cleveloping sirnple monetiiry rnodels of
exchange rates. Genemlly. these
moclels perform \vorsc than :t si~nple
projection o f toclay's exchange rate.
http://clevelandfed.org/research/trends
July 1997
Best available copy
Exchange Rate Policy
Intervention Amounts and ~ r e q u e n c i e s ~
(May 1,1990 to March 19,1997)
Sales of
yen
Purchases
value
Count
21
17
4
Mean
331.6
396.1
57.5
Standard
deviation
215.5
186.2
29.9
Minimum
30
165
30
Maximum
800
800
100
Absolute
of yen
a. Positive values are official sales of yen; negative values are purchases of yen.
b. "Count" is in number of days; all other figures are in millions of dollars.
c. Based on a b~nomialdistribution in which the probability of an individual success is 65%.
SOURCES: Federal Reserve Bank of Cleveland; Federal Reserve Bank of New York; and Board of Governors of the Federal Reserve System
T h e L.S. l'rcasi~r).and the Feeler-al
lieserve seem increasingly hesitant
t o inter\.ene in fr)reign exchz~nge
rn:trkets, :mcl fils goocl reason. Since
1970, l.1.S. interventions have often
seernecl incffectiial in stahiliziilg key
dollar exc1i:~ngerates.
U.S. interventions xgainst the
Jap'unese yen o f k r :in esatnple. 1>i1t
similar resi~ltsc:in I,e seen for actions against the German m;trli.
Since May I . 1990. the U.S. h:ts
sold yen o n 17 clays ancl pi~rch:lsed
y e n o n t'oiir clays. The average
an?oLlnt of' tl-iese siiles \vas eqiiiva-
lent to approxim:ttely $396 million.
which is high hy previous norms.
7'he a\-erage amount of the yen
p i ~ r c h a x s , lhowever, was lo\i:ahout S5S million.
Of the yen sales. 12 seemecl successf~llin that they were associatecl
\vith an immediate clollar :lppreciation o r 21 sm:~llerdepreciation. Siiililarly. of the official inte~ventionpurchases, three were successful. '4 70%1
to 75%)success rate seenls consicler;~l>le,but it is not large enough to
rule out the possibility that the resiilts occiirrecl ranclomly.
I'he Fetleral Reserve r o ~ ~ t i n e l y
ne~itralizes;my effects tlxlt U.S. intervention might hztve o n the
intencletl fedel21 funds rate. 'I'his
closes an important channel thro~igh
\x-hich intervention might affect exch:tnge Kites. Some have specul:ttecl
that U.S. interventions coiilcl still influence exchange mtes 1,)- offering
the market new or Ixtter information. Ho\\.ever. as the results :hove
suggest, monet:u)- >tuthosities m:ty
not regiil;trly possess better inform:ttion than market particip;unts.
@FedFRASER