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http://clevelandfed.org/research/trends June 1997 Best available copy The Economy in Perspective With a little help Ji.otn our-.fr-iencls . . . The United States continues to import more goods 21nd services than it sencls abroacl, ancl hy a wide t11:1rgin. Accorcling to preliminary estimates. the real trade deficit amounted to approximately $30 hillion in the first quarter. During the past several pears, o u r real net export deficit has been running ahout $100 billion annually, up sharply from the pace established earlier in the clecacle, but still below rates recorclecl in the micl-1780s. While some people regarcl this persistent tracle i~rlbalanceas a threat to national welfare. others view it as a boo11 to consumers. Few people, however, thinli about the connection between trade flows ancl capital formation. When Anlericans consume and invest rnore than they procluce, the ext1.a resources are obtainecl from abroacl. U.S. businesses pay for imr>orts 17)~either purch~~sing foreign exchange with dollars or clirectly remitting clollars to the seller. 111 either case: Americans receive goocls and sel~ices,and foreign parties acquire dollars, which they invest in \iarious ways. These clollardenominateel investnlents are essentially IOUs given to our trading partners for future reclemption. Their ultimate value stems fro111 foreigners' clainls on goocls ancl services procluced in the Uniteel States. For their part, foreign citizens collectively are proclucing more goods ancl services that1 they are using at home, and are sencling the extra procluction to us. They are sacrificing the current use of these resources for greater consumption in the future, ~ v l ~ they e n redeenl their IOUs. Foreign citizens ;we saving ancl exporting capital: while U.S. residents are elissaving atlcl i n porting capital. The U.S. current account balance represents the trade balance plus net income from foreign investments plus ~~~lilateral tr:tnsfers; a positive value nleans that we are generating net claims against the rest of the nrorld, ancl a negative value means that lve are generating net clai~lls against ourselves. The U.S. capital account recorcls the net flow of investment f u t ~ d sbetween the United States and our tracling partners. The current account and capital account rrlust mirror each other at all times: When the current account indicates that we are irnporti~lg on net, the capital account must show an equal net generation of clollar clai~nsagainst us. According to popular opinion, international transactions are driven by international tracte tlo\\ls. that is, foreign saving positions acljust passively to accommoclate the nlovement of goods and services. But this need not be so. If foreigners view the United States as a safe haven for their investment funds ancl have conficlence in the purchasing power of the dollar, they may be willing to slow their consumption and place some of their savings in the debt and equity offerings of U.S. businesses, anci in U.S. Treasury instruments. A strong clenla~lcl for these investment vehicles will strengthen the dollar's value it1 foreign exchange marltets, which in t ~ u nwill lower the inlport price of foreign goocls and ser\~ices it1 dollar terms. Through this channel. the capital account can actually clrive the current account. The U.S. international invest~llentposition, \vhich indicates our net creclitor/clebtol- status, re~x-exntsthe sum of all past current account balances (plus adjustments for changing asset values). In 198& the U.S. current account began a shift into the deficit position that has continued to the present clay. Consequently, our international investnlent position, wl~ichhacl been registering arouncl 10 to 15 percent of GDP bem e e n 1778 anel 1983, began to reverse. In 1795, our net foreign indebtedness reached nearly $1 trillion, or 11 percent of GDP. This nleans that foreign residents are enabling Atllerica~lsto invest ancl to consume at a greater pace than otherwise would have been possible. Without the net savings inflo\\i, E.S. interest rates certainly woulcl have been higher cluring this extenclecl periocl, as the clemancls for consumption ancl invest~uentcompetecl for the more limitecl pool of clomestic savings. Had we savecl more in response to higher interest rates, consumption woulcl have been curtaileel. During the past few years, net foreign i~lvestrne~lt conling into the lJ11itecl States has accountecl for more than half of all clornestically generateel personal saving and for about 13 percent of gross domestic investment. So the next tinle you purchase an i~nportecl car fro111Japan, coffee fronl Brazil, or toys from China, silently thanli the people of those countries for their willingness to delay their gratification. They are partners in America's future, ancl they have $1 trillion worth of reasons to hope that our goocl fortune continues. Q O Q * @ l e http://clevelandfed.org/research/trends June 1997 Best available copy e Monetary Policy Percent, vreekly averages 6.5 RESERVE MARKET RATES 1 1 IMPLIED YIELDS ON FEDERAL FUNDS FUJURES - 60 55 Efiecl~vefederal iunds rate 50 45 40 35 30 50 Feb 1 March April May June July Aug Con~racimonth Sep! Oct Nov Dec Percent Percent ACTUAL AND PREDICTED FEDERAL FUNDS RATEa 1 TREASURY BILL YIELDS a. Predicted rates are federal funds futures. SOURCES: Board of Governors of the Federal Reserve System: and the Chicago Board of Trade At its Play LO meeting. the I:eclcral Ol>en A~larlier Committee (f:Oh'IC) clecidecl to maintain the existing clegree of pressure o n the fctleral funcls rate. expecting i t lo remain arouncl 5.5%. The rate \vas last increased 25 IxIsis points to its current lei-el at the 31~1rch25 nieeting, after st:l).ing iinchangccl for nearl). 14 ~ n o n t h s .Financial marliets. as representeel 13.); the kclel-:il fi~ncls fi~tcirestnarliet, h ~ ~ Ic~l e e n:~nticip:tting another r:Ite increase of' 25 points hy Jul).. ancl many luarl<ct particil>antsl~;~cl cspec.tec1 a n i~pticl< to b e annoii~lcecl;it the f:Oh~IC's Nlay meeting. The impliecl yielcls o n feclerxl fiitlcls fi~turesprices are reasonal~ly c~tll~iasecl preclictors over horizons of three ~nontlisor less. The rather :1l>rii17tsliift in impliecl ):ielcls folio\\.ing the M:ly meeting suggests that the I:OA,IC's clecisiotl was :I siirprisc to some. Since then, espectations of a sate increase have shifted ourn.arcl. ancl financial rllarliets tiow expect ;I 25-l>asis-point rise 17): Septeml>er. The FOMC \\.ill reconvene July 1. rI'reasiiry l>ill yielcls 11;lve eclgecl L I since ~ the beginnirlg o f the year; \vith the .?-month ant1 6-month yiclcls stancling at 5.3% ancl S.6iH/i,, respecti\-ely. This is al~o\.ele\.els seen in the seconcl half of 19C) ancl in 1993. I>cit \\.ell l>elo\v those that pre\';~ileclearly in the clecacle. Tile h.12 anel 5/13 aggregates clecelcn~teclnoticeaIAy kotn the end of ilpril tlirough the first f a \ - v-eeks o f May. ?'his I>rought h.12 gro\\-th I~elo\v its pro\.isional u n g e of 5% whicll \vxs zunnoiincecl in Fehrii:u-). during Ch:~irmzm Alzui Greensp:ul's semi:ttlnil;~l report to Congress (the I - l c ~ m p l x e ~ ~ f - I ~testimony). ~~v~ii~~ Als though the M3 :Iggregate has slo\\.ecl signific;tntly since April, it continues to esceecl its pro\.isional range of 6%. 'I'lle 1997 annualizeel growth sates fix (cot/tii/lie~/ ot/ t~e.x?p~~gc~i http://clevelandfed.org/research/trends June 1997 Best available copy Monetary Policy (cont.) Billions oi dollars B ~ l l ~ o nofsdollars 4'100THE M2 AGGREGATE 5'200 THE M3 AGGREGATE 1 Billions of dollars 1 Billions oi dollars a. Growth rates are percentage rates calculated on a fourth-quarter over fourth-quarter basis. Annualized growth rate for 1997 is calculated on an estimated May over 1996:lVQ basis. b. Adjusted for sweep accounts. NOTE: All data are seasonally adjusted. Last plot is estimated for May 1997. For M I and the monetary base, dotted lines wpresent 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. A42 :uicl hi3 are c~~rrentl!; 4.5'?41anel G.G?h, rcspecti\.cly. just last month. ztnnualizecl gro\\-ti1 r:ktes stoocl at 5.SYo for hI2 anel 7.9(%1 for b13. The cleceleration restlltecl from the settling of tax liai~ilitiesthat n.ere clue in April. The recent 11~111 nlztrket in stoclis. \\.hick1 creatccl :t wincllrtll for in~.estorsin 1996, f(~rcecltl1e1il to I>~lilditp p:tyments :tccoLlnts early this year to co\.er larger-than-nosnl:tl tas hills. The hI;u.ch l?clcr~~l Ic~ncls rate increase, com1,inecl \vitll the release of deposits helcl t o meet tax li- alilitics. should allow &I2 gro\vth to finish the year within its pro\.isional range :mcl should help lxi11g iVI3 gro\j.th more into line xvith its provision:tl unge. Gro\vth in the monetary Ixtse, a n;irro~~.er. measure co~lsistingof currency helcl 13). the public plus t>:~nli resen.es, slo\veci from a 4.6% annualizecl sate in April to May's 4.5% sate. 7'he &I1 zlggregate continctes to frill at a 3.4?41annualizeel rate. The sta1)ilization of MI I~etn.een 1996:IVQ xncl 1997:IQ con\.incecl many that s\veep accoilnts \Yere hecoming sat~~ratecl. Mo\vever, Inoney marliet cleposit accounts (hIhil1As) c o n t i ~ ~ utoe gro~\.\vith the prolifelation of s\veep accounts. These ;tllo\\: Innlis to economize on reser\.e Ixilzunces 1,). "sn.eepingWexcess h o ~ ~ s e holcl checlial7le cleposits (\vhich are rese~svalde)into h1hII)As (\vtiich are 11ot). These arrangements :kccount for the continueel ilnexpectecl strength it1 h~IbIIlAs~unclthe \veal.;ness in M I . \\.hich i~lcl~icles checliing (co~zti~zzlc~l 011 ~ ~ e x t p a g e ) http://clevelandfed.org/research/trends June 1997 Best available copy lMonetary Policy (cont.) IINFWTION Percent 20 Change in M2, perceni I AND THE FEDERAL FUNDS RATE I l 6 CHANGE IN THE FEDERAL FUNDS RATE AND 14 Effective iederal iunds rate 12 10 8 6 4 2 Change in federal funds rate Change in M2, percent I6 IFEDEF~ALFUNDS RATE AND CHANGE IN M2.1965-96 2 4 6 8 10 12 14 16 Change in CPI percent I 18 l4 CHANGE IN M2 AND INFLATION. 1965-96 0 2 Federal funds rate 4 6 8 10 12 14 Change in M2, perceni SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; and Board of Governors of the Federal Reserve System accounts t ~ c not ~ t bIMl)l\s. \'i'hen :kc[justecl for s\\Teep :Iccounts. $11 continues to rise. It is genemlly I,elic\.ed that the fecleral funcls rate must I,e increasccl if inflz~tionis to I,e lo\\.ered. Yet the correlation l,et\veen inflation 21ncl the f ~ ~ n rate d s is p0sitiL.e. suggesting 21 more complic:~tecl connection. 'The reasons for this positive relationship are that the Seclex~lf'uncls is also positi\.ely relatecl to Inone!. (M2) gro\\itli-and laster mone!. gro\vtln is a caus:11 f ~ c t o rin f11tclr.einflation. I-low. then. can increasing tlic feelcr;rl f ' ~ ~ n tsate l s lo\ver infl~~tion? 'l'llc :uns\\:er is that xvhile the le\.el of the fc~nclsrate is associateel \\.it11 high inflation, increases in this interest rate ;ire :~ssociatecl.i\.ith lo\\.er RL2 gro\vth h l t h o ~ ~ graising h the f ~ ~ n c l s mte lo\\,ers inflation, once inflation h ah. cI~, .~. ,l.t ~ ~ the s e cfilnds t, I-ate ~ini~st I,e I~rought1,acli clown. I.ilie all nominal interest I-ales. the kcler:~l fc~nclsrate consists of 1)otli a real Ute ancl an expecteel inflation component. I11 the short term, expectations are fixccl. anel the monet:try authority controls the f't~tncls rzlte by changing tlie rezll r:hte. T'o increase the real-ancl hence the nominal-funcls rate. moncy gro~vtli is slo\\-eel. whicli Ixings clo\vn inflation. yet. in tlic long t e r ~ n everything , is re\.ersecl. since ultimately the only \\.;I). the monet;lry authority cat1 control the f~~ncls I.:lte is hy changing cxl~ectecl inf1:ttion. l'herefore. to l>er~i~;~nantly recluce inflz~tion,the nionetar!. ai~thoritys h o ~ ~ l cfollo\v l the initial S O L I I I ~of tightening ~vitli recli~ctionsin the funcls rate. as infl21tion star-ts to fr-111. The ti~rningof tliese s ~ ~ l > s e c l ~reciuctions ~ent is crucial: If tlle). arc not anticipateel. money gro\\.tln tvill incrense. unclermining ~x)lic).~nz~licrs' zunti-inflation efforts. http://clevelandfed.org/research/trends June 1997 Best available copy Iizterest Rates YIELD Percent, daily quotes Percent, weekly averages 8.5 YIELD CURVES~ CURVES ON MAY 30,1997 Years to maturity Years to maturity Percent a. All instruments are constant-maturity series. SOURCES: Board of Governors of the Federal Reserve System; and The Wall Street Journal, various issues Since April. interest mtes ha\.e shif.tecl down\\-;~rd.The bell\vether 30-ye:lr rate clroppecl 13elo\\?770.ancl shorter rates responclecl sinlilarly. 13etween April anel Allay. the yielcl curve also steepeneel somewhat, with the 3year. 3-month sprezicl Iviclening from 130 Imsis points to 1.35,and the 10-year, 3-month spre~iclmoving from 155 I,asis points to 166. Altho~lghthese spreacls remain t~igherthan average, they are still well I~elow those of November 1994. xvhen they stood :I[ 202 :1nd 264 Ix~sispoints, respectively. An ;iltern:~ti\.e yield curve, Euroclo1l;ir futures contracts, shoxvs a clifferent :ispect of the market. Based o n the l*onclon Interbank Off-.ereel Rate. which includes clefault risli, this ;iltemative is higher than the Treasury yielcl cur\,e. It is also steeper. \vitli :I 10-ye:ir, 3-111onth spre;~clof 194 17asis points. .I .he expectations hypothesis tries to esplain the yielcl cur1.e as 2x1 :iver:~geof toclay's short rate :~ncl c>.y/~l-'"c~ed f~1tur.eshort rates. If this is so. the yielcl curve shoulcl preclict fi~tureshort szttes. The espectecl ~ L I ture interest rate clerivecl in this manner is callecl the i~?~plied,fi~zi~~~~'cl late. As a preclictor of future sates, the 6-1nont11 irlipliecl for\\~arcl cloes not clo so well. Generally. the k)r-\\.ar.cl rate rises lvith current sates rather than cvith future rates. l'liis suggests that long-term Ix)ncls pay higli rates. not I,ecause sates are e s pectecl to rise in the fi~ture,hut Ixcause the return to holcling hontls is high. For esample, people may cle~n:incls~1c11long-tern1 I~onclstill- retiremcnt or college tuition. http://clevelandfed.org/research/trends June 1997 Best available copy Gold Markets 1 Dollars per iroy ounce Dollars per troy ounce O I GOLD SPOT AND FUTURESPRICE BASIS GOLD SPOT AND FUTURES PRICES I Thousands of contracts Dollars per lroy ounce 1 100 430 GOLD FUTURES TERM STRUCTURE I OPEN-INTEREST GOLD FUTURES CONTRACTS~ Months to maiuriiy a. Contracts are for July 1997. SOURCES: DRIIMcGraw-Hill;and The Wall Street Journal, various issues Having long ago settleel clon.n after the turmoil of the earl!. 1980s. golcl prices h;i\.e continuecl to cleclilie steaclily from their recent pe:~li o f Felx.ciary 1996, as ha\^ prices o n the futilres marliet. 'The cliffercnce hetween the spot ancl filtiires price. calleel the Ixisis. 11;~s sho~vnless movement (as espectecl). although price tias esceeclecl the the f~lti~rcs spot ~ x i c e11); a \\.icier m;~rginsince late 1996. Normally. the e;lse of storage ;inel large oiltstanclinp stock of golcl 1n;ilte it a fi~ll-carrymarl<et.th:lt is, on? in \\.liich the I'ut~iresprice ~c1ii;ilsthe spot price pli~stlic cost of c:irsy (storage ancl financing). 'l'his i~lipliesthat fiit~iresprices esceecl spot prices. producing a neg1ti\.e basis. :I situation lino\vn to f i l tures tr;icler,s ;is a contango. 1)espite the cont:lngo, other golei Iiitiires i11clic;ite :I normal rnarliet. n.1iere longer futures co~ltractsh:l\;e higher prices. This term st~ucti~re of golcl f'ut~lresremains cluite 1ine:lr (conq>:~reclwith that of i~ltercsr r;ites) 2nd lias recently shifted iip\\-;~rcl. The shift represents ;in increase in the spot price of golcl since c:irly hl:ty, altho~ighthis is not ;ip~ : I S C I Ihorn ~ the monthly a\,el.ages of the first chart. The spot price increase clominated falling interest sates (.v\.liicli retluce the cost of carry, since stosage sates are clnliliely to cli:i~igemilch). One import:inl measure of activmarliet is open ity in any f~1ti1r.e~ interest-the nilrnl~erof contracts fix n.hich clelivery is ohligateel. O p ~ interest 1 t>uilclsslo\vly. re:icl~ing its pe;ili :ll~oi~t three months befi)re expiration of the cotltract for delivery in Ju1). 1997. The clecline occilrs \\,lien t~~lclers close o ~ t their t positions to :i\.oicl talcing clelively. I http://clevelandfed.org/research/trends June 1997 Best available copy Inflation and Prices 12-month perceni change 3'6 CPI AND CORE INFLATION April Price Statistics Annualized percent change, last: Imo. 4 mo. 12 mo. 5 yr. 1996 avg. Consumer Prices All l t e m s Less food and energy 0.8 1.5 2.5 2.8 3.3 3.6 2.7 2.6 2.9 2.6 Mediana 3.6 3.0 2.7 2.9 2.7 0.8 1.4 2.9 -1.7 0.2 0.6 1.3 0.6 Commodity futures pricesb -4.1 2.3 -5.2 3.4 -0.7 Producer Prices Finished goods -7.0 Less food and energy -4.0 Diifusion ~ndex,net percent rising 12-month percent change 1 PURCHASING MANAGERS' PRICE SURVEY 30 I 25 20 15 10 PPI less food and energy 05 00 -0 5 , 'J 1993 1994 I I I 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. Upper and lower bounds for CPI inflation path as impiied 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; National Association of Purchasing Management: and the Commodity Research Bureau. Retail prires incllecl i ~ ipl l ilpril ;it LIII annu;ilizecl 0.S'Ki. nflile \\-holesale prices actiialiy cleclinecl 7.0'!41. Incleecl. tile April niimI>ers estc~iclthe gener;~ll)-mocle~itegro\vth rate of prices seen since the heginning of the yelir. li.:ir to elate, thc Consumer f'rice Incles (C1'1) is 1117 ;u1 ;i~xiu;~Iizecl 1.5(H1-less th~inh:~lf its 1906 a\.erage increxse ( ?.?'%I). A sul,stantial share of this ).ear's clown\v:ircl pressure on prices. I>oth retail :incl \\.holesale. originateel in the highly \.ol:ttilc (i)ocl :mcl energy areas. I,oth ol'\\-llich sho\vetl net clcclines during the first four months o f 1997. ?'his has obviously I ~ e e na \\.elcome trend for U.S. hoiiseholcls ancl I>~isinesses.Still, the clrops in Coocl ;~nclenergy costs. \\-hich \\-ill not continue inclefinitely. inasli the 1,ro:iclly 1,xsccl inflation that the Fecle ~ i Reserve l hopes to control. It is cliit'icult to gauge the 2imount o f unclerl~.ingor "core" i~lflationary ~ X ~ S X iIl l I the - ~ economy; ho\\.e\.er, t \ \ - o llleasures. the CPI less foocl :mcl energ). xncl the meclian CI'I. are rising :U ne:irl>. the sarne pace in 1997 :is the!- a~.er.ageclin 1096 (aro~incl 2.75'W)).Ii;~rlierthis year. the Fecle~ll C)pen ,\'I;irl<etCommittee, the chief p o l i c y m a l i arm of the Feclelal Kesert-e S!.stem, projecteel consumer price increases hetxveen 2.75%):ind j06 for 1997. IIo\v one juclges the economy's inflation:il->.trencl clepentls on onc's [>:irticu!:~r\-:inrage point-price incrciiscs in the ~n:ln~ikict~~ring sector seem signific;intly less than those in the nonmanukicturing economy. Re!x)ris froln p i ~ ~ h a s i nmanagers g 11a\,ckiilecl t o reve:il any net ~~p\varcl (cot//itr~iec/ or/ t/e.~t pcigei . ) e e s b O http://clevelandfed.org/research/trends June 1997 Best available copy Q Inflation and Prices (cont.) 12-month percent change 12-month percent change 1 4 5 CPI LESS FOOD AND ENERGY GOODS VS. SERVICES . Services less iood and energy Index 1992 = 100 120 OUTPUT PER HOUR: GOODS VS. SERVICES I Percent oi GDP 1 SHARE OF OUTPUT: GOODS VS. SERVICES 70 t Goods Services a. Services product~v~ty is output per hour in the nonmanufacturing sector, calculated by Heinemann Economic Research, Great Neck, N.Y. SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; U.S. Department of Commerce. Bureau of Econom~cAnalysis; and Heinemann Economic Research. movement in prices for :tl~outt\\.o years, ancl that impression is largely sitp~x)rteclby the slight o\-er~tllrise in the I'rocluces l'sice Incles less food ancl energ). o\.er the espansion. l.ilie\vise. price incre:tses for goocls continue ivell I)clo\v those fix services. i\t the retail le\.el (esclucling foocl xncl energ).). the rise in goocls prices has been running several percentage points l>elon. that for ser\.icc prices. The large cliscrepancy is something of :tn enigma h r economists- :inel :t 17sol>le1nfor policymaliers. It m;ly be t l l ~ t t the economic filnclrrmcntals I>ctween these tn-o I,roacl cl:tssii'ic;itions are clifferent. s o tlist goocls ;KC :tcti~allyI~ecomingless espensi\.e relati\.e to se~vices.This clifference may also reflect :i me:tsuseInen[ pro1,lem: 'The price of a goocl 1112)- I)e rn~lcheasier to me;tsilre th:~n the price of a n intzul~gihleses\,icc. I he challenge for policym:tliess is th~tt it' \ve are overestimating the prices o f ser\.ices, we llliist IIe unclcrcstililating their procli~ction, I\-hich suggests t k ~ U.S. t inflation is F . lon.er-xncl 1.7,s. gron.th highesthan tlte of'f'iciai statistics state. I t is certainly curioi~sthat reportecl 1"-oclucti\-it)-in the goocls sector continues to she\\- impressive gains. n-ilile psocl~~cti\-it>gro\x.tl~ in the service sector has I:tngi~isliecl.This potcnti:tl ni~easurerncnt error ma). r c p s e x c ~:t gro\\.ing inacciiracy in gauging I i.S. econornic perlormance. 'I'llirt!. years ago. the scr\.ice sick of the cconomy accoilntecl for less tllan 5006 of n;itional o i ~ t p u t ; tocl;~)..t11;it sll:lse is alrnost (,O'X.i,. http://clevelandfed.org/research/trends June 1997 Best available copy Economic Activity Percent change irom preceding quarter 7 Real GDP and Components, 1997:IQa I GDP AND BLUE CHIP FORECAST I (Preliminary estimate) change, billions of 1992 5 98.8 Real GDP Consumer spending 66.2 Durables 28.0 Nondurables 17.4 Services 21.6 Business fixed investment 21.8 Equipment 18.9 Structures 3.1 Residential investment 4.0 Government spending 0.2 National defense -8.1 Net exports -28.4 Exports 23.1 Imports 51.6 Change in business inventories 34.3 Percent change, last: Four Quarter quarters 5.8 5.7 19.4 4.9 3.3 4.1 3.2 8.0 2.1 2.8 11.5 13.4 6.4 5.9 0.1 -10.1 11.1 23.3 9.5 9.7 8.7 3.5 1.5 -3.4 9.8 11.2 - - - 10 " Perceni change i i ~ m corresponding month of prevlous year 6 Real personal consumption expenditures n 110 Ill0 IVQ 10 110 IVQ Perceni change iroin correspond~ngmonth of prevlous year I REALPERSONALINCOME AND SPENDING TRENDS^ 1)- I Aclual Real disposable personal income 1 25 EXISTING SINGLE-FAMILY HOME SALES I / a. Chain-we~ghted data in billions of 1992 dollars. NOTE: Ail data are seasonally adjusted. SOURCES: U.S. Department of Commerce. Bureau of Economic Analysis; National Association of Realtors; and Blue Cli~pEconomic Indicators, May 10, 1997. I'reliminar). estim:ites sho\v that the cconom!. grey\\- 5.S'Kl in the first e ~ u : ~ r t uslightl?, laster than psevi~LISI;. sc~>ostecl.LJp\\-:trclre\.isioris to inventory :iccu~ni~lationzinc1 e s portq>;irti;~ll~. offset a sm:ill clo\vn\v;~rd : i ~ l j ~ ~ s t ~ l i tu e n t coiis11111er slxncling. 'l'lle first cl~i:ister'so\.er:ill strengrh rcflects acl\.~incesin personal consumption. in\.enLo~)-accumcllation, esposts. ancl procl~~cers' c l u ~ i l ~eciuipmcnt. le Econotnists participating in the I31~1e Chip survey :lnticipate gro\vth will I,e :ipp~)sitn:itely 2.3'><1 in the current c1~1;wterand \\'ill taper off to 2.O(% h;. ye:u's encl. Forec:~stsof ecoiio~nicgro\\-ih cisually revert to a 2% tre~lci-:I sate that many be1ie1.e reflects the economy's unclerlying gso\vth potential. Recent e\.iclcncc o n lal>or force p:lrticipation. c:lpital :icc~~rnrll:ition. ;inel pr(,clucti\.it), gro\\.th. Iio\\.ever. suggests tli:it 2?0 may be :in unclerestimate. In fact. I..S. economic gro\wth h:is ar.el.:~gecl ~.S'%I o\-el-the past 30 years. Tile consumer sector remainecl r o h ~ ~in s t A17sil. Re:d clispoxdl'le person:il income grew :it ils kistest ye:ir-o\.er-ye:ir p : ~ esince J a n ~ ~ a t - y 1995 ( u p y t . 5 0 6 ) . Lvhile real person:il consum[>tion espenclitcires continuecl to I,e hcalthy. S e u . single-kimily liome sales pl~lngecl7.7% in .%psil. the biggest elsop in sis months. hIc~chof illis cleclitie came from a 16.i(X1fall in (cotiti121~e~lo12 rle.vtp~~gei http://clevelandfed.org/research/trends June 1997 Best available copy Economic Activity (cont.) 3-month moving average 1.6 [ HOUSING STARTS AND PERMITS Percent change lrom correspaiiding month oi previous year 20 NEW DURABLE-GOODS ORDERS I Percent change from corresponding month of previous year 7 Ratio 1.8 INVENTORIES/SALES Percent 86 I NOTE: All data are seasonally adjusted. SOURCES: U.S. Department of Commerce, Bureau of the Census; and Board of Governors of the Federal Reserve System to striltes. Exclueling the \Xest. Sales fcll (,(XI in the S o ~ ~ t h \\.as ;tttril~~~tahle ancl 2.9?<1in the Miel\\-est, I)LII the autos. the inclex acl\;ancecl O.S(HIl'os the month. I'ollo\ving a 0.5?41g:lin in Northeast heltl steacl!.. Sales o f existing homes also slippeel in ilpril the o\.el-all h1:trch inclcs. On ;I >.ear(clown L..i'!.i,). In contrast. :I surge in o\.cr-\.c:~rIxtsis, ind~~stri:tlprocli~cc o n s t r ~ ~ c t i oof n multihmily homes tion contin~lesto aclv;uncc at a good clip. \\-it11 especially strong g:tins in pusheel i i o ~ ~ s i nstarts g L I 2.i"Xi ~ for I > ~ ~ s i n eecli~ipment. ss Since Ilecemthe month. 130th starts anel permits have ;tcl\.:tncecl hisly steaclily this I3er 1990. procli~ction of b ~ ~ s i n e s s ecluilxne~~t has aclv~mcetl10.2% (allyear ancl rem:tin \.igoroi~s. 1nclustri:il proclc~ction Ivas unnual sate), tllree times the rate ol the ovelall incles. A rehoitncl in [sanschanged in April I ~ e c a i ~ so ef ;t sh:~rp 17ort:ttion hell>ecl p ~ ~ sApril l i orclers clecline in riiotor \.chicle ancl parts for c l ~ ~ ~ t lgoocls ,le u p 1.3%. slightly ~xocluction,ruore rhan hall' ol' \\.hich more tli:tn man); ol>ser\-ers expectecl. 7'1iis n;ts the tliircl ad\-ance in orclers in the past ~ O L I S111011th~. I3i1siness in\.entories gre\\. 0.3% i r i h~lascli.n.ith niost of the g21i1lscoming :I[ the \vholesale Ie\.el. Contrztry to so111e recent nen's accounts. :in inventor!. correction does not seem imminent. In\.eiltory-to-s~tlesratios at the m;tnuf:tcturi~ig. \vholes;kle. :ulcl retail le\.els remain fa\-ol.:tl>le :tncl sul>st;tntially t>elo\\.the levels of' :I year ;tgo. http://clevelandfed.org/research/trends June 1997 Best available copy Labor Markets Chanye, thousands oi hvorkers 1 600 AVERAGE MONTHLY NONFARM EMPLOYMENT GROWTH^ I I Labor Market Conditionsa I Average monthly change (thousands of employees) 1996 1997 Year IQ 212 Goods-producing 19 Manufacturing -5 Construction 24 Servlce-producing 192 Servlces 98 Busmess services 33 Retall trade 48 Government 14 Household employment 232 March April 228 182 43 17 14 14 29 5 185 165 97 85 47 56 11 23 10 -2 440 745 Payroll employment May 323 -7 2 -10 330 146 16 91 33 209 138 20 -5 23 118 125 8 -4 -28 255 Average for period Clvlllan unemployment rate (%) 5.4 53 Manufacturing w o r k w e e k ( h o ~ r s ) ~ 41 5 - 2 0 0 1 I I I I I I 1991 1992 1993 1994 1995 1996 1997 iodate 5.2 4.9 4.8 41 9 42.1 42.1 42.0 I I I I 10 Mar Aprll May Perceiii Percent 64 5 8.5 LABOR MARKET INDICATORSaxC Temporary Help Services Occupation Share of temporary Average hourly employment\arnings Total White-collar Professional specialty Technical Executive, administratwe, and manager~al Clerical and administratwe support Blue-collar Machine operators, assemblers, and inspectors Service 100 52 3 4 $ 7.74 9.37 24.1 1 12.60 1 17.22 41 42 7.96 6.02 11 5 6.26 6.28 a. Seasonally adjusted. b. Production and nonsupewlsory workers. c. Vert~caliine indicates break in data series due to survey redesign. d. Shares are adjusted for minor discrepancies In reported data. SOURCE: U.S. Department of Labor, Bureau of Labor Statistics. Nonf'irn~ pa).rolls grc\\- l)y 138.000 in Ma!-. a smaller-ihar1-cs17ectecl gain that maskecl other\\-ise rol>i~st labor m;irliet. The a.ealc performance \\-as cii~ein p;~rtto si~hstantial clpwarcl re\-isio~~s i n the hI;irch ancl April crnplo~.inentfigilres. Meanwhile. the ilneluployrne~~t sate continuccl its clo\\-n\varcltrencl, frilling from .t.9r!4~in April to t.S% last month-the lo\\.est le\.el since Octoher 1973. -Ilie employment-~opopulation ~xtioeclgecl 11i7O.lo/ilo\.er the salne pcriocl. to a recorcl high o f 63.9r1/;,.;inel ;i\.cl.:~gcI1oi1r.l~. e:irnings rose 4 cents to $12.19, 3.8%)>il>ove last bla).'s level. ?'he goocls-procli~cing sector aclclecl 20.000 new jobs in h4:iy. more thzil offsetting April's 7.000 loss ancl eclipsing March's 17,000 gain. ?'he construction incli~stry;ilso fr~recl\yell, piclcit1g up 23.000 johs. Once :~g:~in, however. the ser\.ice~xoducingsector lecl the nation's o\.erall ernployinent growth, aclcling 1 18,000 ne\\- jol>s in May. The inost notal>le gain came in the narro\v sel-\.ices category. \vhich aclclecl 125.000 \vorkers t o its pa)-rolls. In contrast. go\wnment trimmeci its \\.orlcforce 11)- 28.000 last mo~lth. \\-it11 cleclines concentrateel prirn:irily :it the stxte (-13.000) ant1 fecleral (-1 1,000) le\-els. O\.er the 1:ist few years. tempo~.;~r-y help ser\.ices have ex1,eriencecl 21 prolongetl I7oom in employment. 'I'he recent ti~htnessin the Lal>or market zip1>e:irsto h;ive turnecl this iirouncl, 11on.ever. 111 ilpril. .j8,000 ten~por:~r!. ~x)siiroitls\vere eliinin~itecl. :inel in ,\I:iy. 17.000 more lvere tilt. http://clevelandfed.org/research/trends June 1997 Best available copy Labor Productivity OUTPUT Annual percent change Annual percent chanqe PER HOUR Annual percent change I ~ G D PIMPLICIT PRICE DEFLATOR n Annual percent change 5 Nonfarm Noni~nanc~al Manufacturing SOURCE: U.S. Department of Labor, Bureau of Labor Stat~stics Crro\~~tIi in lal>or p~.ocl~~cti\.it). (tj-pically ~neasurecl21s real o i ~ t p ~ per ~t hour of \vorli) is critic:~lto ccononlic healtli 1)eca~lse it is the prim:1ry source of real n q e gron.tii. Linus~l:illy strong oiltpilt (C;L)i') in the first clual-ter of 1997 1c.tl to a L041 incre:isc in nonfarn~ I>~~sincss procli~cti\~ity. the 1:irgcst of the l:ist three years. Nonfr~rm1,usiness j>ro~lilcti\.it);h;is inspirecl some con[ro\ers!. I>cc2i~lse. ~ ~ n l i l iless e closel!- I;)llo\\.eci measures, it has she\\-n little :innu21 growth t l i r o i ~ g l ~ this o ~ ~reco\.ery. t 7'he nonfin:incial business protl~~cti\.it!. series cliffers from the nonfiirnl series primarily 1,ecause it is Ixised o n tile income mther than the out1x1~ sick of the k;ation;~llnco~neantl I'rocl~ict Accounts. Such clifferences are ~inexpectecl:In theory, the t\\.o sides of the accoLlnt shoulcl 1):~lance. Sonfinancial ~>rocluctivit!.gro\\-th h:is lecl nonk~rmImsiness procI~~cti\.it). gro\\-th I>ec:~usethe numerator of the fi)rmer-mcasurccl re:il income gro~\~tli-- has c ~ c c e t l ~the t l numerreal ator of the latter-lne:lsuretl C ) L I L ~ L I gro\\-tll. ~ \\~hen the incomeIxisecl measure is ~lsecl.a substantial f ~ ~ c t i oofn the higher income results fro~nl o n w iillplietl inflation sates. h/Illan~1hicturi11g. \\.here procl~~ctivit); is easier to me:ls~lre,has sho\\.n consistent1j. stronger gro.i\.th. sup1x)rted 111ostl).hy s l o \ ~ e increases r in t. enters as the labor i n p ~ ~\\-hie11 cleno~nin:~tor. The i~nplieclinflatio~l rare for m:~nukicturi~~g. ;i\.:iil~ilAe only t h r o ~ ~ g1093. h has :itso I>ecn persistentl>. lo\\.er than that of the econorn). as a \\.hole. http://clevelandfed.org/research/trends June 1997 Best available copy Employment Variability Index 1992 = 100 130 Index, 1992 = 100 AVERAGE HOURS PER WORKER 125 - Deviation from trend, perceni 1 l o CYCLICAL EMPLOYMENT I Cyclical Behavior of Manufacturing Sectors, 1960-94 (Standard deviation, percent) Deviation from irend, perceni 1 l o CYCLICAL AVERAGE hOURS PER WORKER 1 U.S. Japan Belgium Denmark France Germany Italy Netherlands Norway Sweden U.K. Total hours Employment Hours per worker 3.6 2.7 2.8 3.4 2.1 3.0 3.2 2.3 2.2 3.0 3.5 3.1 2.2 2.5 3.2 1.6 2.8 2.7 2.3 2.1 3.0 3.0 1.O 1.4 1.4 1.3 0.9 0.9 1.5 1.I 0.9 1.O 1.O SOURCES: U.S. Depactment of Labor, Bureau of Labor Statistics: and Federal Reserve Bank of Cleveland. that e m p l o y ~ i ~ e cloes n t incleecl \xry Conventional \I-isclorn s:tys that less ;~ro~lncl its long-run trencl in Japanese \\.orliers tencl to esperiJ:t13;111 than in the 1I.S..ancl ho~lrs e n c e less volatility in employment than clo i\iiiericans, p ~ ~ r t Il y~ e c : ~ i ~ s e per n.orlter 1-alp.morr. These effects many ~vorlters in Japan's largest clo not cancel each other oc~t.ancl r s \.e:~r firms ha\.e n-hat ztmounts to a lifetotal rn:unuklctc~ringh o ~ ~ per \a17si~hstanti:~lly less in Japan. time elnployment contr:tct. One , I llere are also several re:isons to might espect, then. that total emexpect employment to I>e less \ x i s ployment o\.er the h ~ ~ s i n c scycle able in Europe than in the L.S. hl:tnj. \vciould \-as!. less in Jtp:tn th~tnin tile countries h;tve regc~l:tU.S., ancl that Jap;lnesc firms x\~oc~lcl Ei~ropea~n tions, such :IS relatively 1:~rgelegisresponcl to cyclical fluct~~:ltions xith l21tecl se\.elance payments ancl laws Izurger changes in hoc~rsper n-orlier. restricting plant closings, th:tt m:lke Data for m:~nu~tctc~rin:i: employit costly for firl-ns to ;rclj~tstthe n u n rment ancl lioi~rsper \\'orlies she\\- I x r of \vorliers they employ. In aclclitio~~, the ct~nemploymelntinsul-ance systems o f se\.eral E ~ ~ r o p e coiln~ln tries encoc1r:Ige firins to recl~ice h o ~ ~ lper - s \vorlter insteacl o f laying off emplo)-ees. Again. manc~hrct~~ring clata show that ernplo);ment \.aries less arouncl its long-I-LI~ trerncl in most of Ellrope than in the U.S. Althoc~ghhours per \\.orlies 1-:[ry more in some ELISOpe:~n co~lntries.the I1.S. has the greztkest \-ariahilit); in total m a n ~ ~ h ~ c turing 11o~1l-s. http://clevelandfed.org/research/trends June 1997 Best available copy Social SecuriQ -A Problem Millions of people 55 AGE DISTRIBUTIONOF THE U.S. POPULATION Ratio 5.5 POPULATION RATIOS 5.0 Percent 70 [ REPLACEMENT RATE UNDER CURRENT LAWa n Loiv earnings Average earnings I Percent 17.0 Percent oi eainirigs I MAINTAINING PAY-AS-YOU-GO SOCIAL SECURITY High earnlngs Max~mumearnings a. Percent of annual earnings replaced by Social Security benefits. b. Indicates the tax rates or benefit reductions required to maintain pay-as-you-go Social Security. SOURCE: 1997 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and D~sabilityInsurance Trust Funds, Wash~ngton,D.C., April 24, 1997. I>emogr.al>hic~ x o j w t i o n sinclicate that the ni~ml>erof elclcrl>.retirees \vill %so\\. sharply t ~ y2025. Ilut the n u m l ~ e rof j.oung, \\-orl.ring-age incliviclu~tls\\;ill incre:~se only slightlj.. This implies a steep cleclirie in the ratio of contrilli~ting~vorltersto retirecl I~eneficiaries in the Social Security sj,stem--frorn 3.3 toclrl\. to 2.2 1,); 2025. Such rt s1l:trp sn.ing in t h e prolx~rtion of woslters to I>enefici:lries \vill clc\.astate a 1 ~ 1 y :is-you-go systern in \vhich \\,orl\-css' contrihi~tionsare im~necliately ancl ciirectly tr-ansferrecl to retirees as I3enefits. \ W e n 1L.e ha\re felves \\.orkers per beneficiary, \\ie n;ill neccl either a tax incre:tse o r :I Iletlefit cut to Ixeserve the solvency of pay-as~ O L I - gSoci:11 o Seci~rity.With 3.3 \vorliers per betleficiary. a payroll t a s rate of 12.4% procl~lcesenoiigh antl~lalre\.enue to repl;~cc41% of annual eastlings with retirement benefits. If the ratio falls to 2.2. a 12.-i% t a s rate woulcl replace only 27.3'Ki of annr~alearnings. Maintaining the replacerlietlt rate :It 41'Ki \ v o ~ ~ require ld a payroll tax [.ate of IS.(,%-1.5 times the present rate. Lncler current r~iles,the replacement rate is already projecteel to clecline for all income g r o i ~ p s For . incliviclu;lls with avezlge earnings. it nil1 f~tllfrom 4496 toclay to ~ ~ l , o u t 37'Kl 11,); 2025. Thus. to preserve benefit le\iels ~lnclerthe pay-as-youg o strirctc~reof Social Secirrity. pr~yroll tas mtes must g~tcii~:tll?. rise to allout 16.7?411hy that \.ear. I':~yroll tax rates n-0~11cl11:lve to increase 2.2 percentage points now to maintain the system's long-term sol\.ency. 8 8 1 9 , e http://clevelandfed.org/research/trends June 1997 Best available copy -s Social Securiy -A Solution I Cutoff Ages under Proposed Plana Rate of return on private capital Benefit discount rate 5% 6% 7% I 8% Percent of Contribution Invested in Private Capital MIarketsb Rate of return on private capital 5% Benefit discount rate 6% 7% Age Percent 30 80 26 70 22 60 34 18 1993 90 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 50 2011 a Maximum age for sh~ftingworkers to the proposed plan b Indicates the percent of contribut~onsof those sh~ftedthat can be Invested In prlvate cap~talmarkets c Shows the contribution rate and tax rate necessary to fulfill the current system's lhab~l~ties SOURCE David Altig and Jagadeesh Gokhale, "Social Security Prlvatlzatlon One Proposal," The Cato Project on Soc~alSecur~tyPrlvatlzat~on,SSP No 9, Washington, D C , May 29,1997 Iiaising Lases anel cutting IIenefits are politicall). i~npopi~l;uoptions fix restoring solvency to the Soci~tlSecurity system. 'l':is hil<esI\-oillcl increase clisincentives to \\-orli ancl save. I3enefit cuts n.oulcl I3e ~infnir t o tho4e \\ 110 Il'i\ e \\ 01 I\ecI c ~ ~ i e l saveel \\-it11 rile espectation of reciirrent Ie\.els of l~enel'its. .cciving L here is, ho\\-e\~er,a tl~ircl option that \voulcl retain the IIcnefits of retirees ancl older- \\.orl;ers. ancl impose no higher kises o n ).oung arid future gcne~.:itioris. It \voiilcl :ilso make Social Sccurit)- sustain;ihle :tncl provicle the present le\.el of Ixnefits to ).oung :tnci I~tiire\\.o~li- - ers. 'This plali invol\.es gr;icli~~tlly ino r ~ t p ~gro\\.th. it I3cczitrse it \vo~ild \.esting current contributions in psipreser\.e tile henerits of the elclerly \.;tte czipit:il marliets. \\-itIiolit increasirrg the tas l~circlcn Assuming reasonable privzite ~nztr- o n the !.c)ung. it sho~ilclhe politiket rrites of return (8%) anel henefit call)- feasilIle. i\.Ioseo\~~er. hecause eliscount szites (6961, c:~lc~~lations it \\-oulcl generate greater retire4uggest th:it n orl~els 32 '~ncl ment IncoIne f o ~\ oung ancl future shift to a 11rivatizeci younger co~~lcl generations. it \\-oulcl I)e economisystem. Of their total coiitril~utions, cally sustaina1,le. The \\-inelow of .'ti,[Yl/cl coulcl I)e depositeel in privately opportr~nitj.for s ~ ~ ca hreform is rnanagecl ztccounts. The remaincler nzirro\\., ho\ve\-el-. \V;iiting even ;I co~ilclIIe ciseel to pay off the old sysfen. ye~trsto implement it \vo~rlclretern's liabilities-benefit o1,ligations c1~1ir.e lo\\-ering the c~~toSf age ancl to those olcler than 32. increasing the share of yoi~ngpeoIhis ~-eSi)rln \voulcl gmclu:ill!; elirnple's contril~~~tions neecletl to p:~y off the current systern's lialIilities to in:ite the current system's n.ork ancl sa\.ing clisincentives :me1 irnpro\.e olclcr generrtrions. ? , http://clevelandfed.org/research/trends June 1997 Best available copy Small Business Lending Billions of dollars IAMOUNT OF LOANS OUTSTANDING^ Midwest Southeast Gillisns of dollars Millions o i loan contracts 4.0 West Southwest 200 1OUTSTANDING LOANS^ Central Northeasl Percent I 70 LOANS AS A SHARE OF TOTAL BUSINESS LOANS^ V." <I00 100- 250~ 2 5 0 1,000 <lo0 100- 250~ 2 5 0 1,000 Midviest Southwest West Souiheast Central Northeast Total loan value, thousands of dollars a. Small business loans secured by nonfarm, nonresident~alproperties plus commercial and industrial loans to U.S. addressees. Small busmess loans are those for $1 million or less. b. Percent changes represent the year-over-year growth in small business loans outstanding. NOTE: All data are for FDIC-insured domestic commercial banks. SOURCE: Federal Financial Institutions Examination Council, Consolidated Reports of Condition and Income, June 1995 and 1996. Bet\veen June 19% iancl June 1906. small business lending gre\v a health!. 6.9(!,fo nationn.icle. t o $30 1.8 l>illion o~~tst;~ncling. I.o:~n gro\\.th ~ v a sI-OI>LIS~ in all regions ; ~ l t h o i ~ g h . as in the past. the Northeast (2.7(H.i,) laggccl some\\hat l~chinclthe rest of t h e n:ation. The rcgion's we:~lier ~>erforrnancemay p:~rti:~llyreflect I,i~siness lencling the f:ict that s~ii:~ll is :I less importzknt component of total bilsiness lencling there. Ne\-ertheless, even this small gain n.as rlotalde follo\ving the 13.9ibf~clecline year earlier. 14s in the past, the total cloll:ir i.01Lame of' sm:all l,~~siness lencling was lo\\-est in the A/licl\vest in 1006 (only S28.1 1)illion). yet such Icncling constiti~tes:[ much larger share of o\.er;ill I > ~ ~ s i n ele~ldirlg ss acti\.ity in this region (47.396) than it cloes in other p;utscof the coil~ltry.I11 cont~xst. sm:ill I>usiness lending in the Kol~hc;~st represeIlts ;I relatively minor fwction of its total hi~sinessIc~icling (26.6'5f1). e\.en though the region :I n.;is thircl largest in terms of tot:~l clollar \ - o l i ~ m eof 1o:lns in 1996 (S60.5 l>illio~~). The coml>osition of sn~;lllI>usiness Icncling hclcl rel:~ti~.el!.constant in 1996. As for~nerl).,the \.ast majority of contracts \\ere for amoilnts o f less than S 100.000 (77.096. slightl~.aI1o1.e tile 1995 figure of 76.S04,). At the same time, loans that esceeclecl S25O.OOO still accoilnteci for rnore than half of all clollars cornmitteel to srnall business lencling. http://clevelandfed.org/research/trends June 1997 Best available copy Secondary Mortgage Market Activity Perceni 70 SECONDARY MARKET ACTIVITYa B~llionsoi dollars 35 I Billions oi dollars 120 MORTGAGE ORIGINATIONS AND SECONDARY MARKET ACTIVITY Percent 8.5 MORTGAGE RATES B~ll~ons oi dollars 350 SECONDARY MARKET MORTGAGE HOLDINGS I Percent 60 I - - I I I I I I a. Purchase data include conventional and government-insured mortgages. Adjustable rate share is the percent of new conventional mortgage originations with adjustable rates. b. Represents secondary market purchases by Fannie Mae and Freddie Mac as a fraction 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 Monitor, various issues. NIortgztge osigil~:~torstenci to sell their fisecl-s:ite loans to sccondaryrn:trliet agencies, xvhile holeling acljust;ll,le-rate mortgages in their postl'olios. As a result. seconcl:lry market :~cti\.itygenesally clrops off w h e n acljust:il,lc-r:ite mortgages gain ~ x ) p ~ i l x i t > , . This p~lttern :lppeasecl to holcl tliroilgl~ 1996. Consecl~lcntl!;. although the holclings of tlie sec- ondas). m:irliet's t\vo major players-the Fecleral National ivlortgage Association (Fannie Mae) nncl the Fccleral Morne Loan Mortgage Corp o ~ l t i o n(Freclclie Mac)-contin~lecl to rise, the rate at \vhich they 1x1sc1i;lsecl loans cleclinecl sonien.hat over the past year. This pattern can also be seen in the seconclasy market's share of total mortgage originations, l ~ h i c hSell over the first part of 1996, reaching a lo\v of less than 20% of 2111 originations in July. Although 1997 clata are not yet available. one \vo~llclespect S~COII~:IS!; market activity to have pickecl u p o\.er the first fe\v months of the year. pI'ypically. consumers see rising 1uortg:lge r:ites as a sign of things to come. ;lncl attempt to locli in selati\.ely f;~vo~;lble fisecl-rate mortgages \\-hen r;ites start to climb. e . 0 0 8 0 http://clevelandfed.org/research/trends June 1997 Best available copy . The Argentine Economy Percenl change, year over year 20 REALGDP Argentine pesos per U S dollar 12 NOMINAL EXCHANGE RATE Index, 1990 = 100 150 REAL EFFECTIVE EXCHANGE W T E 1 1 a. The average inflation rate between January 1990 and June 1991 was 4,8169'0. SOURCE: Fundacion de lnvestigaciones Economicas Latinoamericanas (Foundation for Latin-American Economic Research) Econo~nists' contini~ing cle1,:tte a1,out the merits of fixccl ancl floating exchit~igerates has lecl them to compare economic cle\.elop~uents in PIesico ~u~icl Argentina. ?'he former country recentl>, :~lx~nclonecl fixecl exch:tnge u t e s ; the 1;ttter em- > . them. '~ccs In Alxil 1991. Argentina acloptecl the Con\lertil,ility I'lan to rcci~iceits four-cligit ;lnni~alinflation rate. In :tclclition to extensive fisc~tl ancl s t r ~ ~ c t u r ref'orms. al the plan solight to secure monet:Iry policy creclil)il- ity by irnposing the rigors of a currency I,o:u.cl. This requirecl Asgent in:^ to fis its peso to the cloi1:u. :~nclto mai~ltaindoll:lrs o n reserve ;tg:tinst espansions of its nlonetary 1,;lse. 'I'he system forced the nation's money grolvtli closely into line with that of the [J.S. ancl successfbll\~lowered Argentina's inflation Llte to i~ncler2?/0I'y late 1995. The w o n omy grew \;tt 2" 8%)average :in~iual clip I~et\veen1991 ancl 19%. The 1)ecemt)er 1994 collapse o f tlie Mexic:ln peso exchange-rate peg sent ripples o f uncertainty t h r o ~ ~ gthe h financial sectors of clev-eloping countries. particcilarly in So~ithAmerica. Following the l ~ a n l i SLIIIS ancl financial instit~itionfailures of 1995. Argentine economic gro\\ith fell ;tncl unemployment soarecl to 13%. Eco~lomicg r o n ~ t hirnpro\.ecl last ye;tr. t,ut i~nemploymentrem:lins :lro~~ncl 17'H).An ;tclclitional cause for concern is the recent 2ppreci;ltion of Argentina's re:tl effective peso esc1i:tnge rate. 1111 S.5?41since last Aiig~ist. http://clevelandfed.org/research/trends June 1997 Best available copy International Capital Flows Percent oi nominal GDP Percent of nom~nalGDP 05 U.S. CURRENT ACCOUNT BALANCE I I 20 U.S. NET INTERNATIONALINVESTMENT POSITION Ratio Perceni 01 nom~nalGDP 1 23 GROSS SAVINGS AND DOMESTIC INVESTMENT 1976 1980 1984 1988 1992 1996 a. The statist~caldiscrepancy is recorded as a part of gross savings. SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis. In 1982. the C.S. c~lrrentaccount 1,al;lncc shiftecl into it cleficit, \\.hich 1,); 1987 hacl I\-iclenecl to S LO7 I3illion, a n ;Imount eq~~i\-;tlent to .3.6'Wi of GI)I'. Although the cleficit has since narro\\~eclto 2.294, of GI>I', its s t i ~ l ~ l ~persistellce or~i is 1110s~' tro~11)ling to 111:tn). ohser\.ers t h m its ~ n a g n i t ~ ~ cFor l e . most of tlle last 50 years. [lie 1i.S. has m;tintairlecl a sl1l;lll CLlrre111 ;tCcOLll1t S I I ~ ~ I L I S . The necessary counterpart to :I current :iccoc~ntcieficit is ;I net capital inflo\\- of e c l ~ ~ arn:tgnit~lcle. l In running 21 current account cleficit. the I:.S. exports fin:tncial claims (securities ancl hank deposits) in eschange for its imports. 13y the Ixte 1C)SOs.Soreign claims o11 L.S. assets esceeclecl U.S. clili~nson foreign assets, impl).ing that \ve hacl 1,ecolne a clel~tornatio11. O u r intesn:ktional investment position, \vliich inclicates ~ L I clel~tor/creditor S st:~t~ls. is the sum of all past current a c c o ~ ~ n t 11al;unces plus certain adjustments for ch2lnging asset values. 111 1005. o ~ l r inter11:~tional intlel~~eclness amoilntecl to SS 16 I,illion, or 11.2'X) of GIII'. 1 1 1 ohser\.ers regarel OLIS ~ h f O l l Ci ~L I T S ~ I I:ICCOLIII~ ~ cleficit :uncl our dcl7tor status 21s inconsistent \\.ith o u r position :IS one of the \\~orlcl's\\.e:~lthiest nations. I I L I ~ such ;I juclgment ma!; IIe ~~nfounclecl. The foreign c;~pit;tl inflo\\. finances the clifference het~v-een~ L I savings S ancl in\.est~nent.In recent years. other tliings being eqc1:11,gross private clornestic in\.estment -\\.oulcl 1la1.e I ~ e c n appsosi~n;~tely 1.30t1lo\\-er in the :II)sence of foreign c:~pitalinflo\\-s.
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