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http://clevelandfed.org/research/trends
June 1996
Best available copy
Tbe Economy in Perspective
Taking stock . . . Luckey, Castalia, Delphos, Ada.
Just bacli from a road trip to northwest Ohio,
talking with community bankers about econo~nicconditions ancl the banking business.
Something to be saicl for seeing the fielcls, the
housing stock, the truck traffic. Holiclay Inn,
Lima, Ohio: Breakfast is eggs, hash browns,
bacon, coffee, coffee, coffee.
Concerfz abozlt agriczilt~ire.In March, all was
well. Corn prices high, Ohio farmers feeling
good. Some contracted to sell their corn before
they even planted it, to locli in that good price.
April and May, very wet. Many farmers couldn't
get into their fields to plant at all. By June, finally dry. Too late for corn in some places.
Sugar beets? Forget about it. Some farmers
switched to soybeans just to be sure of getting a
crop in. Amazing thing is the variance in conditions. Even within the same county, depending
on soil and exact precipitation, some farmers
have seeded 95% of their fields, others only
10%. Those who contracted to sell corn they
clicln't plant are in a bind. Good thing so many
have a few good years under their belts, otherwise they'd be in a world of hurt.
Conseque?zces.High crop prices are driving
up lancl prices. Bankers remember (so do seasoned farmers) when 1980s' speculation in
acreage mined so many. Bankers ancl seasoned
farrners also know that $3,000 an acre won't
price out when crop prices settle bacli down.
They won't get involvecl in these cleals. Yet
acreage prices are still going north. Seems like
some buyers either clon't remember, or won't
listen to reason. Probably the young, collegeeducated ones. The other consequence is beef.
Expensive to feed cattle when corn is $4 a
bushel. Liquidate your hercls to clrive beef prices
clown. Next year, srnall herds will pus1 beef
prices up. (CPI, fasten your seat belt.)
Prodzictiuity. Used to be, a farmer had to let
the fields dry out, then till ancl plant. Get in too
early, you compact the soil under those tractor
wheels ancl nothing grows. Stays wet too late
into the season, no crop at all. Now, farmer
has a "no-till" technology. Uses new seed insertion method (without tilling first) and chemical sprays. You rig lights on your tractor, plant
all night long if you have to. Listen to music in
the cab. With no-till and late shift, farmer can
get crop in pronto. (Question for the Bureau of
Economic Analysis: Does no-till ability, versus
not planting at all, show up in the productivity
statistics?)
Breakfb.st again, Perrysburg. Eggs again,
bacon again, hash browns again, coffee, coffee,
coffee. Businesses keep expanding, labor markets tight as a drum. New plant here, new plant
there, here a plant, there a plant ... you know
the tune. Easy to find people to hire, harcl to
find the ones who want to work. Got to know
how to use computer-controlled machines; got
to know about TQM. Skilled wages keep edging
up; unsltilled wages follow. Engine pulls the caboose. More plants, stronger incomes, more
housing. Construction hopping everywhere,
putting more pressure on lancl prices. Consumers getting lulled into security-hope it's
not false. People think nothing of filing for
bankn~ptcyanymore. Sometimes send in Chapter 11 papers before the loans are even delinquent; no chance for a workout. Crectit card
debt all over the place, people just use one card
to pay off another. When the music stops, POP
goes the weasel!
Banking. Comnlercial lending's very strong.
Customers shop their deals all over town. No
such thing as loyalty anymore; they'll jump on
an eighth of a point. Especially those young,
college-educated ones. Looks like credit quality's holding up real well, but there are clouds
on that horizon. Bankers have learned to lend
on cash flomis, not asset appreciation, but their
borrowers are getting more leverage. That debt
will bite you if you don't watch out. Heads,
they win; tails you lose.
More banking. How to funcl the loans when
cheap deposits are hard to come by? Old customers may stick with the bank, but the new
generation has other ideas. They've seen the
bright fights of the big city, and its name is
Stocks and Mutual Funds. The depositor has hit
the road, Jack. Oh, sure, there's a financial disaster and it's bacli to the passbook account, but
who wants to cut off their nose to spite their
face? Face it, cheap deposits are histo~y.Pretty
soon s~nallbusiness loans will be packaged up
and securitized like mortgages. Someone will
figure it out, n u k e it look easy. Then bankers
will assess the credits, n~aliethe 1oans;ancl sell
them off. But you don't need to be a bank to do
that. What's banking coming to anymore?
L~inch,Htiron C o ~ ~ ~ Pork
z t y . chops, spiced
apples, iced tea. Bankers see monetary policy
in different ways. Crop prices, wage pressures,
land speculation, overextended consumers,
stock market bubble. Bankers who've seen it
all before say inflation may be gathering steam.
Harct to quantify-so~l~ething in the air. Another view is that monetary policy seems about
sight. Prices blip up, then clown. Too early to
tell. Some say, wait 'ti1 you see the whites of
their eyes. Maybe ask a few more bankers what
they think. Especially those young, collegeeducated ones.
http://clevelandfed.org/research/trends
June 1996
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Monetary Policy
Billions of dollars
Billions 01 dollars
420 \CURRENCY OUTSIDE BANKS
I
72
68
64
60
56
52
48
Billions ol dollars
1994
1995
1996
Billions of dollars
a. Growth rates are percentage rates calculated on a May over May basis. May 1996 data are estimated.
b. Adjusted for sweep accounts.
NOTE: All data are seasonally adjusted. Last plot is estimated for May 1996. Dotted lines represent growth ranges and are for reference only.
SOURCE: Board of Governors of the Federal Reserve System.
Except for the monetary base ancl
currency, all of tile narrow measures of money Sell last month. Currency greLv at a 1.7% annualized
rate; total reserves contini~ed to
plunge, clo\i:n 15.1% after April's
11.7%drop; and MI, which inclucles
both currency and checkable cleposits. fell 5.1%. The monetary
hzise, ~vl~icli
mezlsures currency in
the hancls of the public pills reserves ancl cilrrency helcl 11): banlts,
increased a paltry 0.6%.
One factor that is depressing both
total resci-ves ;ind M 1 is the emer-
gence of sweep accounts. which
banks have initiated over the past
few years to econo~nizeon their reserves. These arrangements "sweep"
excess household checkable deposits, which are reservable, into
money nxlrlcet deposit accounts,
which are not. It is estimateel that
absent tliese sweep accounts, total
resel-ves x\~oi~ld
have expaneleel 4.5%
over the pzlst calendar year insteacl
of plummeting 5.7%. Similarly, M1
\\~\loulclhave growtl approximately
3.4% insteacl of falli~lg2.4%.
Over the past year, tlie federal
funcls rate has been cut repeatedly
from 6% last June to 5.25% toclay.
Hon7evec these Fecleral Reserve policy actions-ancl tlie ones that prefollowecl
ceded them-closely
changes in other marltet interest
rates. For example, the one-year ?'bill yielcl peakecl in January 1995
anel iliinlecliately st:lrted its clescent.
The feel funcls rate pealtecl t\vo
months later ancl dicl not start declining until July 1995.
This suggests that it may be a
nlistake to characterize the Feel's
(coiltinl~e~l
lot? ncxtpc~ge)
0
0
0
0
http://clevelandfed.org/research/trends
June 1996
Best available copy
.
Monetary Policy (cont.)
Percent, weekly averaoes
Percent
Percentaoe ooints
a. Predicted rates are federal funds futures.
b. The yield spread is defined as the 10-year Treasury yield minus the effective federal funds rate.
c. Real GDP growth is lagged one year and is a year-over-year change.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; Board of Governors of the Federal Reserve System: and Chicago Board of Trade
recent actions as reflecting an overt
easing in monetary policy. The latest increases in other short-tern~interest rates (the one-year T-bill
yield recently aclvancecl to 5.7%
from 5.5% in April) imply that the
fed fi~ndssate will have to start rising shortly to prevent an indirect
easing of monetary policy.
The market does appear to expect
a rnoclerate uptr~rrlin thc funds rate
before the summer is out. The average fecl funcis futures rate over the
last month implies that investors are
expecting the funcls rate to be trad-
ing at 5.4% by August.
Surprisingly, a strong signal of future GDP growth is given by the difference between the yield on a 10year Treasury bond and the fed
funds rate. Movements in the yield
spread can significantly predict output growth four quarters into the futurc. There are two possible reasons
for this phenomenon. The first is
that the spread primarily arises because of policy actions undertaken
by the Fed. That is, increases in the
fed funds rate today cause GDP to
clecrease nearly one year later. The
second theory posits that this correlation cloes not reflect the ability of
deliberate policy actions to affect
real growth, but occurs because
long-tern? bond yields are positively
associatecl with future GDIJ growth.
That is, if people expect future output growth to be high, savings will
decline today and thus put upward
pressure on the real interest sate.
A simple way to distinguish between these alternative explanations
is to examine whether the strong
correlation is coming from a positive
(continzled on nextpage)
. . Monetary
. . . .Policy (cont.)
0
http://clevelandfed.org/research/trends
June 1996
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Percent
Percent
Percent
Percent
a. Real GDP growth is lagged one year and is a year-over-year change.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; and Board of Governors of the Federal Reserve System.
association bet~veen GDI' growth
and long-term yields. or from a negative association between the fed
funcls rate ancl future GDI' growth.
The charts presentee1 here inclicate
that there is indeecl a strong negative correlation hetween the funds
rate ancl future GlII-' growth, and
dispute the stoq7 that long-term
yielcis rise when f~itureoutput is expected to increase.
Why, then, is the piclcl spread a
better preclictor of flture output
growth than the fed f~incis rate
alone? The answer
be founcl in
the fact that clecreases in the real
filncls rate-the
nominal rate acljustecl for inflation-shoulcl
be a
better predictor of future increases
in output than are clecreases in the
no~llinalfilncls rate. If the yield on
long-term boncls is a goocl proxy for
changes in near-term inflation expectations, then increases in the
yield spreacl could he a hetter gauge
of decreases in the real funcls rate
than are decreases in the nominal
funds rate.
Two co~lditionsmust hold for this
to he the case: First, changes in long
1,oncl yields rmlst prin~arilyreflect
changes in expectecl inflation. This
seems reasonable, since real interest
rates senlain fairly constant over long
periods. Seconcl, recent inflation developments 111~1stweigh heavily in
the formation of long-term inflation
expectations. Many econo~nistsbelieve this to be tlzle. Essentially, then,
revisions in inflation expectations
dominate changes in the 10-year
Treasury yielcl, ancl increases in the
yield spreacl will reflect decreases in
the real federal fi~nclsrate.
e
e
e
c
e
c
http://clevelandfed.org/research/trends
June 1996
Best available copy
e
Interest Rates
Percent, weekly averages
Percent
7.5
7E
I d
YIELD CURVESa
70
-
7.0
65
-
6.5
60
-
6.0
55
-
5.5
50
-
5.0
4,."5 -
1
I
3-ma.
6-mo.
I
y
I
I
2-yr. 3-yr.
I
l
l
5-yr. 7-yr. 10-yr.
I
30-yr.
4.5
0
1
2
3
4
5
6
7
8
9
1
Years
Percent
a. All instruments are constant maturity series.
b. Vertical lines indicate presidential elections.
SOURCES: Board of Governors of the Federal Reserve System; U.S. Department of the Treasury; and The Wall Street Journal.
Since last month, the yielcl curve has
shifted up across all maturities and
has steepened slightly. The 3-year,
3- non nth spreacl stancls at 116 basis
points, 2nd the 10-)7ear, 3-month
spread is at 159 basis points-both
above their historical :wesages.
Over the past year, the tilt in the
yielcl curve has come primarily fronl
the short end. Since last June, short
rates klve declinecl 54 hasis points,
while long rates have risen only 31
basis points, bringing the yielcl
curve hack to its rnore characteristic
concave shape. Rates on zero-
coupon bonds continue to traclc
those of standard coupons. With an
uptvarct-sloping yield curve, a pure
"zero" should have a higher yield, as
it currently does.
Analysts often suggest that in presiclential election years, the government pressures the Fecleral Iieserve
to keep interest rates low in an effort
to boost the President's chances of
1.eelectio11.This explanation has at
least three problems: 1) tile Federal
Reserve is independent of the government, 2) different parties often
control Congress and the White
IHouse, and 3) the effect of interest
rates on the economy is unclear. The
fecleral funds rate (controlled by the
Federal lieserve) ancl the 10-year
Treasu~yyield have often risen bcfore elections. At other times, such 21s
in 1992, declines are part of a long
clown~v;~rcl
trenct that harcily seems
related to election-year politics. Certainly, interest rates have dipped
around the time of national elections
(such as in 1968 and 1976), ancl political pressure may hole1 clown increases, but no strong pattern
etnesges to set election years apart.
0
http://clevelandfed.org/research/trends
June 1996
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InJation and Prices
12-month percent change
38
April Price Statistics
Annualized percent
change, last:
I mo.
12mo. 5 yr.
1995
avg.
36
34
Consumer Prices
All items
4.7
2.9
2.9
2.6
Less food
and energy
1.5
2.7
3.2
3.0
Mediana
2.9
3.1
3.1
3.2
Finished goods
4.7
2.6
1.5
2.1
Less food
and energy
0.9
1.8
1.7
2.6
Commodity futures
pricesb
56.6
9.2
3.3
5.4
Producer Prices
32
30
28
26
24
22
1993
Diiius~onindex, net percent rising
inn
1994
1995
1996
Percent
J
F
M
A
M
J
J
1995
A
S
O
N
D
J
F
M
A
M
1996
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. Upper and lower bounds for CPI inflation path as implied by the central tendency growth ranges issued by the FOMC and nonvoting Reserve Bank presidents.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; the Federal Reserve Bank of Cleveland; the Commodity Research Bureau; and National
Association of Purchasing Management.
Retail prices continued to climh
sharply in April, rising at an :innnalizecl rate of 4.7940.
Since last Ilecemher, the C o n s ~ ~ mI'rice
e r Incles (C1'1)
has averageel about a 4% pace. This
year's firm-level price rises have
also been on the increase, leading
:~nalysts to woncler wl~ether the
new claw presage a higher inflationaIy trencl.
At the moment. those concerns
s e e m premature. 'The median CI'I
(the core infl:~tion estimate) is still
running in the neighborhoocl of 3%,
as it has for al3out three years. The
12-month trend in the core retail
price measures, which mras 3.1% in
April, slightly exceeds the Fecleral
lleserve's central tenclency projection for the CPI this ye:tr.
Purchasing managers' d:lt:1 inclicate some increased cost pressure
from incl~istry,although this mostly
represents a dissipation of the
clownw;~rcl price pressures seen
since December. The ovemll p ~ i r chasing managers' price incles of
ahout 50 in May (up from about 40
in Janua~y)is a sign of generally balancecl price movements.
One nlajor influence on this year's
price clinlh was the unexpected
surge in gasoline prices. Ilising at an
ann~~alizecl
rate of over 40% since
December, gas has aclclecl roughly
'/r% to the average householcl buclget. A jump in crucle oil prices contributecl to higher gas costs: Between early January ancl mid-April,
fco)zlilzllec/ on n e x t p ~ g e )
http://clevelandfed.org/research/trends
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Inflation and Prices (cont.)
Dollars per barrel
Cents oer oallon
24
'""
I COMPONENTS OF GASOLINE PRICES
I
23
22
21
20
19
18
17
16
15
14
1993
1994
1995
1996
April 1995
April 1996
Index. 1982-84 = 1
Percent of income
1.4
1.2
1.o
0.8
0.6
0.4
7.8
17 6
27.1
38.2
82.1
157
0.2
1965
1970
1975
1980
1985
1990
1995
Average annual income (thousands of dollars)
SOURCES: U.S. Department of Labor. Bureau of Labor Statistics;the Congressional Budget Office; Platt's Oilgram Price Report; and The New York Times,
May 13,1996.
crude oil went from 311oi1t$19.50 to
Illore than S23 a barrel. But that is
not the whole story. Thoi~gh1: gallon of gas cost 12.3 cents nlore in
April 1996 t11a11 in April 1995, higher
crude oil prices account for only 7.5
cents of that increase. lietailing and
distrilx~tio~~
C O S ~ S(wllic11 are profit
margins for gas st;ttions and wholesalers) represent the remaincler. Gasoline inventories are reporteclly low,
perhaps becailse of refiners' slowness in shifting procluction from
lleating oil to gasoline.
The rise in gasoline costs has in-
spirecl sorne members of Congress
to call for gasoline tax rolll,acks.
However, a number of economists
have criticized this proposal, ol~serving that environmental and health issues, the deteriorating national infrastructure, and U.S. depenclence on
foreign oil all argue for higher-not
lower-gas taxes. Indeed, other nations have used tax disincentives
much more aggressively to curtail
gas consumption. In western Europe, a gallon of gas costs $3 to
S4.50, of which roughly 65% to 80%
represents taxes.
However compelling, such argu-
rnents often overlook gasoline taxes'
regressive nature. In 1993, gas taxes
accounted for 0.22% of poor A~nericans' annual inconle ($7,800), ancl
0.12% of micidle-income people's
t
0.05(%
earnings (S38,200), 1 ~ 1only
of the incomes of those making
5157,000 a year.
Finally. we should note that gasoline remains cheap compared to
other goocls in the U.S. Acljustecl for
inflation, the real price of a gallon of
gas is ahout the same nom7 as it was
10 years ago, and allout 30% below
its 1970s average.
http://clevelandfed.org/research/trends
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Economic Activity
Billions of 1992 dollars
1992
1993
1994
1995
1996
Percent chanoe from corres~ondinomonth 01 orevious vear
Percent of forecasts
Estimated economic growth, percent
a. Chain-weighted data in 1992 dollars, seasonally adjusted.
b. Seasonally adjusted annual rate.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; and Blue Chip Economic Indicators, March 10 and May 10.1996.
Recent econoinic data, including
clownm~arclrevisions in first-quarter
GDP estimates, suggest continned
noder rate growth with high levels of
The Commerce
resource ~~tilization.
Depart~nent lowered its 1996:IQ
growth estinlates fronl 2.8% to 2.3%
clue to downm~arclrevisions in business inventories. Estimates of both
consumer spending and business
fixed invest~nentwere revised upward. The sharp clecline in lxlsiness
inventories, the first in f o ~ years,
~r
primarily reflects a strike-induced
drop in automobile stocks. Stronger
consumer and business spending,
togetller with lower inventories,
favor continued growth.
The meclian forecast of economists participating in the most recent
Blue Chip survey anticipates economic growth of 2.1% this year. Although the median forecast is little
changed since March, when conficlellce was on the ebb, the clistribution of forecasts shifted upward with
the release of stronger first-quarter
GDI' estimates. (The nlost recent
Blue Chip forecast, however, prececles first-quaster GDP revisions.)
Consunler spending slowecl in
April as households cut baclc o n
purchases of durables, particularly
automobiles. I-Iowever, on a 12month basis, consumer spending
~ v a sup a solicl 2.8%. Since February,
year-over-year consumer spending
has outpaced income growth, which
(conti~zz.te~Eo~7
?zextpugci
http://clevelandfed.org/research/trends
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Economic Activiv (cont.)
Percent
I
M~llionsof units, s a a r a
lo O HOME SALES AND CONVENTIONAL MORTGAGE RATE
Percent change from corresponding month of previous year
15
Billions of 1992 dollars, s.a.a.ra
145
Ratio
Ratio
Percent risino
2.5
2.0
1.5
1 .o
0.5
0.0
a. Seasonally adjusted annual rate.
b. Chain-weighted data in 1992 dollars.
c. Seasonally adjusted.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the Census; the National Association of Purchasing Management; the
National Association of Realtors; and the Federal Home Loan Mortgage Corporation.
suggests ;L decline in the savings
COIISLIIII~SS' clebt 12urrate. Altlio~~gh
cfens continue to generate concern,
the asset side o f householcl Ix11:unce
sheets ancl co~lsur~lers'
net \vorth
seem healthy.
Sales of existing homes rose 0.5%
in April. LIP22% over the past year.
New home sales ;~lsoincreased. up
6.7% in April 2nd 28% over year-ago
levels. The recent pattern of home
sales and mortgage rates cautions
against an uncritical acceptance of
the notion that high mortgage rates
cli~ninishhousing activity. Instead,
strong housing nlarkets can raise
mortgage rates.
The recent weakness in manufacturing activity is abating. An im~xc~vecl
relationship between inventories ancl sales at all levels of
1,usiness favors increased proci~ic-
tion. New orclers were up 5.5% in
April over the last year. \vhile the
mtio of unfilled orclers to shipments
remainecl little changed. The National Association of Purchasing
i\ianagement's inclex of manufact~iring activity stood at 49.3% in ivlay.
The ratio has genelxlly improved in
recent months, hut at 50% still indicates neither strengthening nor declining manubcturing activity.
e
a
b
e
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e
Demographics
Percent change
Percent
77
""
I AGE DISTRIBUTION OF POPUWTION
I
1990
40
2025 (projected)
17 and under
18-24
25-54
55-64
65 and over
a. Latino is not a racial category.
NOTE: All data refer to resident population.
SOURCE: U.S. Department of Commerce, Bureau of the Census.
The Census Bureau estimates that
the U.S. population now stands at
66 times
265 million-rougllly
larger than in 1790, x\r\ihen the first
census xvas taken. This total implies
~t clensity of 70 incliviclurlls per
squzre land mile. Approximately
83% of the population is white,
nearl). 13% is blacli, and a b o ~ l 9x1
t
is of Latino 1,acliground. Women
constiiute slightly more than half of
the total.
Over the last 30 years, the population has expanclecl at a rate of
l?4) annually. Most of the ~ 1 1 1 turn stems fro111 natural gro~vth,hut
there hzts also been a steady rise in
immigration. On average, 332,000
inclivicluals irnmigratecl each year in
the 1960s, whereas 1.2 million arrivecl yearly hemeen 1991 and 1993.
Apl?roxiniately 42% of recent immigrants are from North Anlerica (notnhly Mexico and the Caribbean),
while 35?6 come fro111Asia.
The meclian age of Americans is
crlrrently 34 years, but the population is growing olcler. In 1990, 21;1170ilt
most '43% of Americans were of
psime worliing age (25 to 54 ye:lrs),
13% were over 64, and 25% were
uncles IS. Census projections sho\v
that hy 2025, the proportion in their
prime \\.orliing years \xiill fall to 37%
while those of retirement age \\.ill
rise to 18%.
The population center of the L.S.
continues its southwesterly drift.
Over the p s t 10 years. Nevackt, Arizona. \Yi:lsllington, Florida, ancl
C;eorgin have been the fastest-growing si:ites.
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Labor Markets
Chanqe, thousands of workersa
to dale
1996'
'
Percent
Percent
Millions of workers
a.
b.
c.
d.
Seasonally adjusted.
Industry-level data for 1995 are unrevised.
Production and nonsupetvisory workers.
Vertical line indicates break in data series due to survey redesign.
SOURCE: U.S. Department of Labor, Bureau of Labor Statistics.
Nonklrm
payroll
employ~llent
surgecl by 348,000 in May, about
twice as high ;IS espectecl: while
April's figure was revised upward
from 2,000 to 163,000. 1.abor markets have aclclecl an average of
222,000 jobs per month this year.
The Bureau of Labor Statistics'
annual rehenchmarking and updatecl seasonal acljust~l~ent
factors
also boostecl earlier figures. A total
of 737,000 jobs were added to the
previous
employment
tally-
399,000 as a result of rebenchmarking that revised data collecteci between April 1994 and Decenlber
1995, and 338,000 due to improved
seasonal adjustment methodology
that was applied to data from January 1988 to February 1996.
E ~ l ~ p l o y ~ n e nint the goodsproducing sector improved slightly
last month. Manufacturers posted a
small net increase of 6,000, while
construction added another 28,000
workers. The service-producing industries created 313,000 jobs on net,
with nlore than half of this increase
concentrateci in the narrow senrices
category (including hospitals, hotels,
auto repair shops, and computer/
data processing firll1s).
The ~lnerllploy~llent
rate edged up
to 5.6% in Play fro111 5.4% in April,
due rllostly to a surge of reentrants
into the labor force. Nonetheless, the
employment-to-population ratio (the
proportioll of the worlting-age population holding a job) edged LIPto
63.1% high by historical standards.
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June 1996
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State Labor Trends
Percent chanoe, veal over vear
Number of slates
a. Not seasonally adjusted. Shaded bars indicate recessions.
SOURCES: Mark E. Schweitzer and Kristin M. Roberts, "State Employment 1995: Slowing to a Recession?" Federal Reserve Bank of Cleveland Economic
Commentary, March 15,1996; and U.S. Department of Labor, Bureau of Labor Statistics.
U.S. employment growth stallecl
during the past year. Despite solne
recent episocles of rel;ltively strong
job adclitions, net employment
growth clroppecl from a year-overyear change of 3% in January 1995
to only 1.5% in March 1996. Historically, such decelerations often occur
before recessions, but this is not always the case, as the mid-eighties
showetl. C~~rrently,
the ~narketand
professionz~lforecasters seen1 to believe that the econonly is esperienc-
ing a temporary slowclown, rather
than a full-t~lownsecession.
A review of the past year's state
employment figures supports this
impression. Alr~lostby clefinition, recessions reflect employment reciuctions in a significant nurnber of
way
l to gauge the
states. One u s e f ~ ~
health of state labor markets is to
measure their current rate of employrnent growth relative to their
long-NIII growth (over the past 15
years). This accounts for trend differences, tilie migration toward the
Sunbelt states, that are not features
of the business cycle.
In each recession of the past 16
years, as datecl by the National BLIreau of Economic Research, a majority of states experienced slow o r
negative employnlent growth.
("Slow" is defined as a rate that is
less than half of what a state typically esperiences.) During the micleighties, :llthough there were 16
such states, the economy ultilllately
(corrtinucd on ?zcxtp~~gcj
State Labor Trends (cont.)
http://clevelandfed.org/research/trends
June 1996
Best available copy
a. Percent of average employment growth from 1980 to 1995.
SOURCES: Mark E. Schweitzer and Kristin M. Roberts, "State Employment 1995: Slowing to a Recession?" Federal Reserve Bank of Cleveland, Economic
Commentaiy March 15, 1996; and U.S. Department of Labor, Bureau of Labor Statistics.
pickecl up gain without entering a
recession.
The current clistribution of state
growth r-ates is rem:~rlcably balancecl. As o f i\Iarch 1996, 23 states
had employment gains that were
below their 15-ye:lr growth rate,
while five states were at less tha11
half their avelxge mte: Alaslca,
Maine, ivI:~rylancl. Wisconsin. ancl
E-Iawaii (n.her-e the change was negative). 'l'he s1on.e~-growingstates
were of'fser I>y eight whose net johs
groxvth
more than double their
long-run r:lte. including Illinois,
Louisiana, ancl Oregon.
In any case, this pattern suggests
a suhstanti:~lslowclown fro111 Januzuy 1995. \vhetl more tl1i111half of all
states were gro\ving at rates that
more than cloubled their long-run
:lverages, ancl only t\vo had slow
gro~vth. Some m:ljor states, lilce
t'ennsylvania, Michigan, ancl Ohio,
were eshil~itingnet job additions as
high as three tirnes their long-run
averages. Jolx growth in these three
states is 11ow proceecling at about
half that pace. Indeecl, these states
c l sustain such roprobably c o ~ ~ lnot
I ~ u s t gro\\,.tl~ mtes, which woulcl
rapidly cleplete their slomr-gromri~lg
labor forces.
In general, the current employment slo~vclownh:~soccurrecl fairly
evenly, with states maintaining their
relative ranltings, albeit at a lower
rate of johs grox\.th.
http://clevelandfed.org/research/trends
June 1996
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Regional Conditions
M ~ l l ~ o noisbushels
2,000
TOTAL ENDING STOCKS OF WHEATa
1
Billions of 1982- 84 dollars
I
( U.S. AGRICULTURAL IMPORTS AND EXPORTS~
I
a. Based on existing stocks, not including the current season's harvest, as of June 1. The wheat crop season is June 1 to May 31.
b. Fiscal years are July 1 to June 30 for 1960-76; and October 1 to September 30 for 1977-96. 1996 figures are projections.
SOURCES: U.S. Department of Agriculture (USDA), National Agricultural Statistics Service, Economic Research Service; and Mike A. Singer, Federal
Reserve Bank of Chicago, "A Banner Year for Agricultural Exports," AgLetter No. 1871 (December 1995).
Every weelc, the U.S. Ilepal-tment of
Agriculture reports on weather conditions and crop progress. Tliere has
recently been consiclel.able concern,
in both the Foi1rt11Fecleml Iieserve
District and other regions. ahout the
weather's negati\.e effects. 7'he harsh
winter dalliagecl crops that were already plantecl. while rain. floocling.
ancl persistent cold have delayed
pktnting in wicle :tre:t.
Ohio is one o f t h e 19 states that
11rociucecl 92%) of the 1995 winter
wheat crop ancl is the largest proclucer of soft reel winter wheat. As of
&/lay 26, 0 1 1 1 ~ 7 32% of Ohio's crop
>tias ratecl good or excellent, comparecl to 81% last year. For the other
major procli~cersof winter wheat,
acreage u~ithcrop ratings of goocl or
excellent langecl from only 6% in
'Sexas to 96% in Orego11 (versus last
yeas's 23%)and j2%, respectively).
Wheat can be stored from season
to season, offsetting temporary set11acks. However, wheat stocks nationwicle are :tt their lo\vest levels
since 1973-74 ancl are only sligl~tly
higher than the previous lows of
1950-51. This dearth results from
the smaller harvests of the past five
years and the increasecl clemancl for
gmin in Asia, and to a lesser extent
in Africa a11c1 western Europe.
The Department of Agriculture's
lllost recent forecast for 1996 shows
exports rising S 5.9 billion over their
1995 level arlcl inlports remaining
about the same as before. The
(cot?li??llc~c/
oi7 ne\rtp~lgc>)
http://clevelandfed.org/research/trends
June 1996
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Regional Conditions (cont.)
1982- 84 U S, dollars per bushel
Percent
Kentucky
Ohio
Pennsylvania
17 statesb
a. For wheat prices, the year begins June 1 and ends May 31. For corn prices, the year begins September 1 and ends August 31
b. These 17 states accounted for 91 % of the 1995 corn crop.
SOURCES: U.S. Department of Agriculture; National Agricultural Statistics Service; and Agricultural Statistics Board.
recent gain in export prices, associated with the tight supply of cornmodities like wheat, is expected to
offset the clecline in export volume.
While real grain prices are at a historic low, production cost has also
cleclinecl, malting g12ii1 a relatively
impostant source of fa]-nlincome.
Farmers in inany states are also far
behind scheclule in corn planting,
threatening fall crop yields. Ohio is
o n e of 17 major coril-producing
states. Corn, along with pasture and
range conclitions, is vitally important
to the state's large daky industry.
In a typical year, Ohio fariners
plant 91% of their corn crop by May
26. This year, they have been able to
plant only 39%, putting this state last
among the il~ajorcorn producers.
Georgia and North Caroliila have
plantecl 99% of their crop, while in
Michigan only 49% of the crop has
been planted, compared to 84% in a
normal year. However, the corn outlook has brightened somewhat with
the recent improvement in weather
conditions.
Past~lrageis another food source
for livestock. In Ohio, 50% of pasturage is rated good or excellent,
con~paredto 76% last year. In the 48
contiguous states, 49% of pasturage
was rated goocl or excellent, versus
71% last year.
http://clevelandfed.org/research/trends
June 1996
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Small Business Lending
Billions of dollars
Midivesl
Southwest
Millions of loan contracts
4.0
BUSINESS LOANS, 1 9 9 5 ~
ISMALL
West
Southeast
Aniount outstanding blllions 01dollars
200
1
Central
Northeast
Percent
3.5
3.0
2.5
2.0
1.5
1.o
0.5
0.0
<I00
100-~250 250-1,000
(100
100-~250 250-1,000
Loan contract size. thousands of dollars
"
Midwest
Southivest
West
Southeast
Central
Northeast
a. Includes loans secured by nonfarm, nonresidential properties, plus commercial and industrial loans to U.S. addressees.
NOTE: All data are for FDIC-insured domestic depository institutions. Small business loans are those with original amounts of $1 million or less.
SOURCE: Federal Financial Institutions Examination Council, Consolidated Reports of Condition and Income, June 1994 and June 1995.
Between June 1994 :mcl June 1995,
small business lencling increased
4.9% nationwide (to $282.3 billion),
hut it showed striking regional variations.
T h e Southeast and Miclwest
posted the strongest gains. At the
other extreme, lending in the Northeast, which had the largest clollar
v o l u n ~ ein 1994, fell 11y 13.9%. Such
a decline is perhaps less ~vosrisotne
here than it would h e in the rest of
the country, since small business
lencling comprises a relatively minor
fraction of this region's total lxisiness credit extended (26.2Yo). In
contrast, although small business
lencling was only $25.4 billion in the
Midwest, it constituted 53.5% of all
business loans outstanding in the region in June 1995.
Compared to 1994, there has been
little change in the compositio~lof
small business lencling. Loans for
arilounts less than 9100,000 account
for 76.8% of all contracts outstanding. This is slightly higher than in
1994 (75.10/0),perhaps reflecting the
shift away from lencling in the Northeast. On the other hancl, contracts for
ruore than $250,000 still account for
over half of all dollars lent to small
I~~isinesses.
0
0
0
e
http://clevelandfed.org/research/trends
June 1996
Best available copy
e
Secondary Mortgage MarketActivity
Billions of dollars
Percent
Billions of dollars
120
Percent
60
100
50
80
40
60
30
40
20
20
10
0
0
1992
1993
1994
1995
1996
Percent
8.5
Billions of dollars
8.0
7.5
7.0
6.5
6.0
5.5
1991
1992
1993
1994
1995
1996
5- fl-
May
July
Sept.
1995
Nov.
Jan
March
May
1996
a. Purchase data include both conventional and government-insured mortgages.
b. Percent of new conventional mortgage originations with adjustable rates.
c. Secondary-market purchases by Fannie Mae and Freddie Mac as a percent of total mortgage originations.
SOURCES: Board of Governors of the Federal Reserve System; Office of Thrift Supervision; U.S. Department of Housing and Urban Development;
and Bank Rate Monito( various issues.
The rapicl rise in interest rates clc~ring
1994 lecl to a marliecl clrop in mortgage purchases I>y the t\v;o major
players in the seconcl:~rynl:u.lcet, the
Fecleral National hforigage Association (Fannie i\iIae) ant1 the Federal
H o m e Loan hlortgage Corporation
(Freclclie blac). 7'hese purchases
reached 3 low of $5.4 billion in January 1995. Since tlien, they have rehounclecl somewhat, \vitlioc~tcoming
anywliere near their coml>inecl$41.5
billion high of December 1993.
These changes can be attributed
to two factors. First, rising interest
rates in 1994 lecl to an overall clecline in mortgage originations. At
the salne time, these rising rates
sliiftecl borrower preferences toward
acijustable-rate mortgages. Since
such mortgages tencl to be helcl in
portfolio by loan originators (particularly savings banks), the fraction of
originations purchased by the sec-
ondary market necessarily fell substantially.
Both of these factors reversecl
themselves in 1995. leading to a re11ouncl in seconcla~y-marlietactivity.
in purDespite these fluct~~ations
chases, the total mortgage holclings
of Fannie Mae and Freddie Mac
have continued their steaciy growth,
increasing 25.0% (to $372.8 billion)
between Februaly 1995 and February 1996.
http://clevelandfed.org/research/trends
June 1996
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The Mexican Economy
Percent
Billions oi Mexican pesos
S L "
I MEXICAN CENTRAL BANK CREDIT
I
J M M J S N J M M J S N J M M J S N J
1993
1994
1995
1996
Mexican pesos per US dollar
Percent change, year over year
60
8
CONSUMER PRICES AND THE EXCHANGE RATE
Billions of U.S. dollars
35
Billions of Mexican pesos
175
-
-
I
I
I
I
I
a. One-month Treasury rate minus 12-month consumer price change.
SOURCES: DRI/McGraw-Hill; and Bank of Mexico.
Observers were surprisecl by firstquarter data showing that the Mexican econorny shrank only 1(!4)ccompared to the first cpiarter of 1995.
I,ut they remain concernecl that this
strength is limited to the export sector, which has benefiteel from a
sharp decrease in the intern:~tional
value of the peso since Deccml)er
1994. A contin~~ecl
general we:tl<ness in economic activity may be related to the 1)urclen of' iinp;~iclloans
on consumers and tx~nlis.
The Mexican central banli has
supportecl a series of progfilms cle;lling with I,acl-debt problems. 7'he deposit insurance f ~ l n dhas heen used
io buy hack clebt from banks anti to
provicle credit for recapitalization.
Other programs include helping
banks incles debts to inflation and
supporting clebt renegotiatiolls hetween banks and consumers.
Lourer interest rates help consumers meet loan paynlents ancl increase their xvillingness to renegoti-
ate overclue debts. However, the recent negative real interest rates enable borrowers to filncl ~ineconolllic
projects. Iiapitl price increases since
1)ecernber 1994 may result partly
from the weakening of the peso. Rising inflation due to central hank efforts to support banks, on the other
confidence in
hand, may ~~ncierlnine
Mexican policy reforms. Any consequent loss of rese~vesor rise in interest rates \\:oulcl clalnage both the
banking sector and the economy.
http://clevelandfed.org/research/trends
June 1996
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Fiscal Balances and World L;conomk Growth
Annual percent change
Percent of GDP
L
Annual percent change
""
I CENTRAL GOVERNMENT FISCAL BALANCE
Billions oi U S dollars
a. Broad money equals M2, except in Japan, where it equals M2 plus certificates of deposit.
NOTE: EU stands for European Union: NIC stands for newly industrialized countries.
SOURCE: International Monetary Fund.
Fiscal deficits (or surpluses) influe n c e economic gro\vth. ancl p~il>lic
spending can I~oost procluctivity
through wise investments in infrastr~icture.Ho\ve\.er, intlustrialixecl
countries increasingly vimv l>ersiste n t fisc:il clef'icits ;lnd the res~~lting
accum~11:~tioil
of pul~lic cleht as
cletrimentz~l to long-term grow~th
:tncl competiti\-cness. Althoug11 reclucing government cspenclit~iresis
often ~x)litic:~llycliff'ic~ili:mcl c:ln
slow: gro~vthtemporarily, current
clcficit levels Inay not I)c sustainal>le
as incl~istrialcountries' populations
grow older.
111 the European Union (EU),the
absence of wiclespreacl, effective
~ x o g r a ~ n s ofiscal
f
consoliclation
threatens to limit monetaql policy's
independence anct creclil>ility. In
japan. calls for fiscal consoliclation
once economic
may become lo~~cler
gro\\~th has recoverecl more f~illy
born asset q~lalityproblems at major
financial institutions.
In the US.,the current-acco~~nt
deficit is sornetirnes viewecl as a
source of snvings f r o ~ nabroad that
partly offsets the fiscal deficit's clmin
on private s:lvings. I'rogress on the
fiscal side may permit a Illore credible monetary policy and, hence, a
stronger clo1l:lr. In cont~xst,fiscal
ancl current-account surpluses in the
newly inclustrialized co~intries(NIC)
of East Asia-Hong
Kong. Singapore, South Korea, a ~ l dTain.anhave been associateel with strong
growth in 130th rnonetary aggregates
:inel real economic activity.
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