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