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http://clevelandfed.org/research/trends March 1996 Best available copy The Economy in Perspective lirxing nzntters ... I was far too busy to travel, so I had to settle for a \.lcleo conference with 111y olcl friencl Ancire. He and I net years ~tgo,when the future-:~ncl its possibilities-see~~~eclendless. Politics meant nothing to either of us then, but it has now become another strand ill the rope that bincls us together. Andre is Millister of Finance in Nedlaw, a country of mythical wealth and e~lchantmenton the other side of the globe. I have never been there. hut his descriptions over the years have bee11 so vivicl that I feel I coulci traverse that fab~ilousnation blindfolded. No time for reminiscing toclay, however. I have just signed on as campaign manager for Webster Paige, a presidential aspirant in 111y own lancl, who will announce his candidacy in a few weeks. Anelre's insights would be invaluable, especially in fashioni11g Paige's economic policy $ositions. Accordi~lgto my prei.',IOLIS conversations with Anelre, Necllaw's economic policies enjoy widespread popular support. I explained 111yprec1ic;lment to Anelre, who quickly s\vallo\ved the last vestiges of his lunch, shoveel the plates aside, and clearecl his throat. ,'Listen up," he saicl. "The first thing you have to scluare away is your tax policy. People want to know what you are going to do for the~n." "\Ve're way ahead of you, Andre," I chucklecl. "Although it appears to tax upper-income earners at progressively higher rates, our system is nearly proportional l~ecauseof all the cleductions taxpayers claim. By instituting a llat tax, we can eli~ninatethe distortions causeel by the current system; we just don't Iinow what tax rate to set. Another canclidate clai~nsthat a 15% flat rate tax, with no deductions, coulcl yield as rr~uchrevenue as o u r current system. He says people will generate enough extra income to make up for the lower rate. What clo you thi~lk?" A11dr6 reclined patiently in the high-backed chair hehincl his clesk. "In Necllaw," he saicl, "We have a 10% flat tax rate, provide a seven-year depreciation for new home purchases, anel give tax credits for each pet owned." I was speechless. Surely there was sorne logic to this tax system, but it was not obvious. Seeing my bewilclerment, Andrk seemed quite pleased with himself. Then he hunched f o ~ ~ v a rand d became serious. "You have two choices," he said. "You can begin with the facts and go where they take you, or you can begin \?.it11 the voters and g o where they want to be talien. Nedla~vianswant a government that unclerstands them. Don't forget the old proverb: 'He who takes high road falls off bridge.' "Neclla~v,"he continued, "was founded in the year 1010, so Nedlawians regarcl the number 10 as having m)~.sticalproperties. The 10Yo tax r:tte has heen wildly popular. Home ownership is eve~yone'sdream, and slnce the averdge Nedlanrl:t11 stays In a home for seven years, we have <> a clepreciation scheclule to match the citizens' preferences. This aspect of our tax code is a n obvious success. Houses have become so desirable that their prices just keep escalating. What a terrific investment! Enco~iragingpeople to lieep pets promotes the kind of values that we fiivor. since pet owners are a peacef~il,~lurt~iring lot. Taking care of their animals keeps people off the streets at night, if you know what I mean." He gave me a wink. "I3ut Anclrk," I protestecl, "in my country that sort of housing allom~ancewould cause people to huilcl houses lilie crazy. diverting funds from sorely needecl new ecluipment and businesses. Our productivity growth trend has been slowing as it is!" "Our neighboring countries provicle all the businesses and jot7s Nedlawians need; why shoulct we put up with the pollution and congestion?" Andrk srnugly foldecf his arms across his chest. "Besides," he intoned, "the pet credit has engendered a horse-breeding industry. Necllawians can cluite cheaply gallop off to work!" "Incredible." I exclaimed, striking 11iy forehead with :In open palm. I was finally beginning to see the inner workings of n'ecllaw's wealth machine. No woncler Andre was regarded as a genius. Yet somellow I could not make all the pieces fit. "Andrk," I ventureel, "Can you balance your budget with this taxation system?" "Darn close," he crowecl. "Privatization, that's the answer!" "Of course," I shouted. This time I slapped rny foreheact with both palms. "You just unk,acl all those pork barrel programs. If people want services, let them pay for them clirectly!" “\Veil, there is some of that," Andre mused. "But we don't want Necllawians to go without certain necessities. We simply passed laws requiring that people and colnpanies purchase these socially justified goods anel services in specified cluantities f r o ~ nthe private sector. Once we elid that, we coulcl recluce government spending. Take Nedlaw's retirement program, for example. For their own good, our citizens have to contribute to a operated retirement plan. All we do is malie sure the plan is being operated safely, which we acco~llplishby requiring it to invest exclusively in official obligations of our government. People n o n ~recognize that it makes sense to have some Necllaw debt generatecl evely year." If I closed rlly eyes, I could see Webster Paige making those "V" signs with his upstretctlecl artlls on election night. Ply hancls f~lriously scril>l>lednotes, but my mincl drifted to Nedlaw's motto, ernblazoned on the banner hanging hehind Anclrk's clesk: "Nedlaw - Where the sun never sets on a good idea!" L e r n e * c c http://clevelandfed.org/research/trends March 1996 Best available copy e Monetary Policy B~llionsof dollars 420 CURRENCY 1 B~ll~ons of dollars 72 TOTAL RESERVES 56 - 52 -10%' 48 Billions of dollars l ' ~ ' l " " l l ' i l ~ i ' i ' l l l l l l l ~ r l l l l l ~ ' l ~ 1994 1995 1996 Billions of dollars a. Growth rates are percentage rates calculated on a fourth-quarter over fourth-quarter basis. b. Adjusted for sweep accounts. NOTE: All data are seasonally adjusted. Last plot is estimated for February 1996. Dotted lines represent growth ranges and are for reference only. SOURCE: Board of Governors of the Federal Reserve Svstem. All o f the n:trro\v rme:tsclres of nilone). fell Izlst month. Currency cleclinecl zit ;I 2.5% m e . total reserves plunged 1j./t(W1.the monetary base (which measures currency in tile hands o f the pul>lic pins reserves ancl currency held hy I~anks)was clown 1.Or!0. :tnd M1 (which incltlcles l>otli currency and checltable deposits) clroppetl 3.9%).In January. currency incrcasecl 1.3% ancl the monetary base \xl:ls up :t me;iger 0.4%, while M I :tncl total reserves kll 3.C)'x~ and 15.7%, respectively. One factor that is depressing both tot:tl reser\.es ancl M1 is the emergence of sweep accounts, which 1)anlis have initiated over the past fen. ye:lrs in order to economize on their reserves. These arrangements .'s\veel~"excess household checkable cleposits. which are resen/:tblc, into money rnarket cleposit accounts. \vliich :Ire not. Analysts ha\re estimateel that absent these sweep accounts. total reserves WOLIICI have esp;tnclecl 1.3%)over the past calenc1:lr year, iristeacl of the s11;trp it.9% clecline tliztt w;ts actually posted. M1 woulcl have g1.on.n 1.5% over the s:ume periocl. inste;lcl o f Ellling 1.8(Wj. k t , e\,en ~vllenthe emergence of it, sweeps is taken into ; ~ c c o ~ ~ rtile narrow :tggregates ha\.e all continuecl to she\\. anemic gron-th over the past year. This hzts p~lzzleclsorllc obse~vers,since the Federal Reserve has steadily clecre:~seclthe Si~nclsrate target horn 0.0% I: year ago to 5.25%~ today. ?'llese :tpparent "ez~sings" sho~11cIh;tve C : L L I S C ~c ~ ~ ~ i cgro\vth ker in the narrow aggreg:ltes. (cot?tir~llcd 0 1 1 11extpc[~q~) http://clevelandfed.org/research/trends March 1996 Best available copy Monetary Policy (cont.) Percent 9 Percent 9 RESERVE MARKET RATES 8 7 6 5 4 3 - .. 3 21111111111111111111111111111111111111111 1990 1991 1992 1993 1994 1995 Percent 2 1990 1991 1992 1993 1994 1995 Percent Feb March April May Conlract month June July a. Quoted from the secondary market on a yield basis. b. Predicted rates are federal funds futures. SOURCES: Board of Governors of the Federal Reserve System; and Chicago Board of Trade. However, it lllrty be :I ~nistalteto characterize the Fed's actions as an overt easing in IllOnetilrY policy. Cuts in the fedenil funds rate for the most part follo.cvecl redc~ctions in other stlost-term interest rates. The 3-month T-l~illyield has fallen from 5.9% :I year ago to just under 5% today. Similarly, the (,-month T-bill yield has tlropped from 6.3(!40to ~ ~ 1 s t under 5%. There is eviclence th:lt the market is expecting further decline in the federal functs rate. The average fecl funds futures rate over the past month suggests that market participants foresee that the funds rate will be tracling at 5.1% by May. The anticipated decline, however. has become less pronounced follo~ving Chairman Greenspan's Hun~phreyHawkins testimony on February 20. FOLISclays earlier, the market hacl been expecting the fed funcls rate to be tracling at 4.74% by July-50 1,asis points lower than its current target. After the Chairman appeared 13efore Congress, that figure was revised to 4.97%. Monetary policy has always been clifficc~ltto ir-nplement. For guiclance, the preamble to the Federal Resenfe Act states that one of the Fed's goals is "to furnish an elastic currency." An elastic currency is one that can be expmdecl or contractecl cluickly. This elasticity n~anifestsitself across seasonal cycles. For instance, during the December holiday season and in the spring-when GDP growth is at its peali-money gro\\.th also reziches its highest point, limiting (con[inzled on next page) http://clevelandfed.org/research/trends March 1996 Best available copy Monetary Policy (coat.) Monetary base, percent change 35 REAL GDP AND MONETARY BASE: SEASONAL CYCLES, 1983-1993a8b m The Impact of Real GDP's Components s (Percent contributionto change in real GDP) Business cyclesd (average) Nondurables and services 16 28 Durables 18 22 Business fixed investment 35 26 Change in inventories 39 14 Government spending 4 20 -1 4 -6 Net exports -6 -4 -2 0 2 Real GDP, percent changeC 4 Seasonal cyc~es~-~ (median) 6 Deviat~onfrom trend, percent a. 1983 to 1993 data are calculated as an annualized quarterly change. b. Not seasonally adjusted. c. Real GDP is def~nedas nominal GDP deflated by the CPI. d. Seasonally adjusted. e. The trend GDP is defined using a Hodrlck-Prescott filter. The trend federal funds rate is defined as its average from 1960 to 1995. SOURCES: Board of Governors of the Federal Reserve System; U.S. Department of Commerce, Bureau of Economic Analysis; U.S. Department of Labor. Bureau of Labor Statistics; and Robert Barro, Macroeconorn;cs, fourth edition, New York: John Wiley & Sons Inc.. 1993. season:d v:iriation in interest rates. Why is there general agreement that interest-late \:ariation S ~ O L I I C I be held const;int itcross the seasons. I x ~ tnot ;ICSOSS the business cycle? This clc~estionis especially p~izzling because evidence suggests that the se;tsonal ancl I ~ ~ ~ s i n ecycles ss are cluite simil:tr. For example, the fi-action ol'tlle change in GDP stemming frorn cl~:tngesin d~~rable-goocls consiirnption, 1,~lsiness fixecl investment, ancl net exports is ;thout he same for 120th cycles. The m:~jordifference c:tn be found in the hehavior of inventories, which sho~lld come as n o surprise given tlxtt firins c;ln predict se;~sonalcycles. Even if one grants that the sources of shocks for the t\vo cycles are cliffcrent, recent econonlic research implies that it is still important for monetary policy to filmish :In elxstic currency across bi~siness cycles. Since households may be unwilling or 11n:tble to adjust their sav- ing l>el~aviorcluickly, this nominal sluggishness prevents cash from flowing to the banking sector cluring expansions. This suggests that money should 13e increasecl cluring exp;u~sioiis in orcler to s ~ ~ p p l y neccled reselves to the banking sector. ~ . h i c hwoc~ltlin turn minimize l>i~siness cycle \:ari:ttions in nominal interest rates. Although such a policy woultl 1e:lcI to short-term variations in infl:~tion, in the long term, inf1:ttion \voulcl he constr:iined by e e e B e http://clevelandfed.org/research/trends March 1996 Best available copy e hterest Rakes Percent, weekly averages Percent. weekiv averaaes 9.5 ICAPITAL MARKET RATES Percent I Monthly chanqe in 30-year Treasury yield, basis ~ o ~ n t s 130-YEARTREASURY Y I E L D A N D F E D E R A L F U N D S R A T E I Monlhly change in federal funds rate, basis points a. Three-month, six-month, and one-year instruments are quoted from the secondary market on a yield basis; all other instruments are constant-maturity series. b. Estimate of the yield on a recently offered. A-rated utility bond with a maturity of 30 years and call protection of five years. c. Bond Buyer Index, general obligation, 20 years to maturity, mixed quality. SOURCE: Board of Governors of the Federal Reserve System. Long-term interest rates have increased in the past tnontli. 1e;~ling to a steepening in the Tre:ts~~ry yielcl curve. 11 slight clrop in short-term rates also contri1,utecl to the rise. I'opular esplan:~tionsfor this cle\',elopment vary. Some contencl it reflects a stronger economy. while others fear rising inflation-\vhether ticcl to monetary policy or to the espressions of presiclential hopefills. In any case, the cievelopment shows that hond ~narketsincorporate ex- pectations nhout future economic activity and inflation. When considering the influence of monetary policy on long-term interest sates, one should ex:ull~inethe historical relationship between the kclel-al S~lndsrate (the Fecleral lieserve's short-term target rate) ;met the 30-year Treasury bond rate (t1.aelitionally ttlought to be a I>ell\vether of inflation). In 1993, the fecleral filnds r:tte held steady but the long rate fell, narrowing the spread I x tween the two from 450 to 300 basis points. The spre:lcl continuecl to shrink through most of 1994 as 110th rates rose, hut as the year came to a n end. long sates heacleci clown once agilin. Since 1)ecember 1995, sates have diverged, ancl the sprcacl has more tllan cloubled. In short, the Treasury yield spreacl can l>e affected by influences eserted at either end. A plot of nlonthly ch:tnges in 130th the federal f~lncls sate and the 30-year Treasu~yrate illustmtes a \veal< connection at best. http://clevelandfed.org/research/trends March 1996 Best available copy Inflation and Prices Dollars per lroy ounce 480 January Price Statistics Annualized percent change, last: 1 mo. 12 mo. 5 yr. 460 1995 average 440 Consumer Prices All items 4.8 2.7 2.8 2.6 420 Less food and energy Mediana 3.7 4.3 3.0 3.4 3.2 3.1 3.0 3.4 400 3.8 2.3 1.2 2.1 -0.8 2.2 1.8 2.5 Producer Prices Finished goods Less food and energy 380 360 340 Commodity futures pricesb -5.2 3.5 2.2 5.4 320 1988 Index 100 12-month percent change 8 90 6 80 4 70 2 60 0 50 -2 40 -4 30 1988 1989 1990 1991 1992 1993 1994 1995 1996 1989 1990 1991 1992 1993 1994 1995 1996 12-monlh percent change 6.5 -6 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. Handy and Harman base price, New York. d. Mean expected 12-month change in consumer prices as measured by the University of Michigan's Survey of Consumers. SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; the Federal Reserve Bank of Cleveland; the Commodity Research Bureau; Board of Governors of the Federal Reserve System; the National Assoc~ationof Purchasing Management; Metals Week; and the Un~versityof Michigan. The (:I'I mxcle an ~lnezpectedj~ump in Janual-y (.k.S[!/ii at an annualizecl rate). follon-ing a string of \-cry motler:tte increases leacling l>acli to mici-1995. A l t h o ~ ~ genergy h items iiccountecl lor a share of J:tn~l:~ry's cost-of-li\.ing risc, the core inflation measclres-the CI'I escl~ldingfoot1 nncl energ) goocls :inel the median CPI-also rose sh:~rply, I,y 3.7(!4) ancl 4.30/0, rcspecti\~ely. 7'he monthly price cl:tta :trc estsernely \.olatile. ancl it is unlikely that the J:lnilaiy retail price increase rrlarlis the Ixginning of a l~igherinflationary trencl. Still. the recent price jump has certainly clampenecl ho[7es that inflation \vas o n the v-erge ol' nloving to a s~11)st:lnti;illy lo\ver tl~ljecto17;. 'rile I)eh:l\,ior of the leacling inflation inclic~ktorshiis been less ominous :tncl is generally s~~ggesti\.e of continuing low inflation. Gold psiccs. ~vhichwere rising at year's enrl :uid crossecl the $400 per ounce thresholtl e:lrly this year. h:tve w r y recently I3egun to moclemte once again. bloreover, :IS inc1ustri;~lprocl~lctiongro\vth slowed last year. so clicl the cost pressures noteci by purchasing managers. In h c t . the net psoportion of ~x~rchasing nlan:tgers reporting pric? increases set st recent lo\v in J:tnuary. dropping p;tst this gro~lp'sprevious lo\v inflation re~~cling clilring the 1990-91 recession. Intel-preting the infl:ition:ir); espect:ltions of houscholcls is more cliffic~llt. l,i~t these psojections have generally I x e n more f:i\.or.ahle recently than they \vcre c:ulier in the expansion. The inflation projections of policyn~altcrs\\.ere presenteel 11y Fedcr-al lieser\.e Ch:lir111an Greenspan in his se1niann~l:il report to Congress in I'el~rc~:lry. The centr2tlf c o t z l i t ~ l i f ~011 c / ~e.x-Ip6ge) http://clevelandfed.org/research/trends March 1996 Best available copy Inflation and Prices (cont.) 12-month percent change 3 8 ] IN THE ~ CPI~ Four-ouarter oercent chanae ~ ~ ~ I ~ Percentage po~nts Percentage points Feb 1961Dec 1969 8 Nov 1970- Mar 1975- July 1980- Nov 1982Nov 1973 Jan 1980 July 1981 July 1990 Mar 1991Dec 1995 IINFLATION CHANGE DURING RECESSIONS~ O ~ C1969Nov 1970 Nov 1973Mar 1975 Jan 1980July 1980 July 1981Nov 1982 I Juiy 1990Mar 1991 a. Calculated by the Federal Reserve Bank of Cleveland. b. 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. As of July, the stated range (fourth-quarter to fourth-quarter percent change) was 3.125 to 3.375 for 1995 and 2.875 to 3.25 for 1996. In February, the range for 1996 was revised to 2.75 to 3.0. c. Shaded bars indicate recessions. d. Change In the 12-month inflation trend, as measured by the CPi less food and energy items. SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; the Federal Reserve Bank of Cleveland; and Board of Governors of the Federal Reserve System. O - g - -d - il tendency CPI projection 115; Illembcrs of' the Fetleral Open Ivlarliet Committee ancl nonvoting Fecleral Reser\.e 13anl; presidents Lvas 2.75% to 3.OiX1 fix 1996. This is nearly half :I percentage point lower than the group's inflation projection for last year, 11ut just sligl~tly al,ove the actual L.OO/i) CIII rise. Chairman Greensp:un notetl that 1995 was the fifth consecuti\-e year ~vitha CI'I increase t~elo\v3"0, il1iistr:lting that "an extended periocl of gro~\.th\\.ith low inflation is possil~le."However, h e also cautioned that price stability has yet to IIe achievecl. He s~iggesteda strategy for attaining price st;tbility, wherel~ypolicym:tliers restlain inflation cli~ringeconon~ic exp;tnsions to permit a graci~lalratcheting clown of inflation over the course of successive t2iisiness cycles. I'resu~~l;tbly. progress to~v:1rcl price stability is 11lac1e cli~ring cont~tctionsin business activity. Indeecl, one dramatic clown~\~arcl "acljustment" in inflatio~loccilrreci d ~ i r ing the 1981-82 recession. when the trencl in the core CPI fell 6 percentage points from business cycle peak to t~oitgll.hl~reover.i l l ~ m n eo f the recent espansions h:ts the inflation higher at the trend Ixen sc~t~stanti;tlly ~ w a l ithan it ~ v a sat the lxeviot~s t r o ~ ~ gIth .is si1rprisi11g,thoi~gh,when vien~etlstrictly from a I~i~sincss cycle perspecti\.e. that in only one expansion oL' the past 35 years (1961-69) \Y;LS the inflation trend much higher :kt the end of the expansion than it was ; ~ tthe Ixginning. In two secessions (1969-70 anti 1973-75). the inflation tsencl :tctclally rose significantlc. l>etn.een the business cycle peak and its si11,secluent tro~lgh 9 9 . . e . http://clevelandfed.org/research/trends March 1996 Best available copy 9 Economic Activig Real GDP and Components, 1 9 9 5 : l ~ ~ ~ (Advanceestimate, ~.a.a.r.~) change, Percentchange, last: billions Four of 1992 $ Quarter quarters 15.5 0.9 1.4 Real GDP Consumer spending 9.3 0.8 1.9 1.9 Durables 1.5 1.O Nondurables -5.1 -1.4 0.8 Services 12.5 1.9 2.5 Business fixed lnvestrnent 11.O 6.3 7.5 Equipment 9.0 6.9 8.1 Structures 2.1 4.7 6.0 Residential investment 2.9 4.5 -1.9 Government spending -1 1.9 -3.7 -1.2 National defense -9.7 -1 1.6 -6.5 Net exports 20.2 Exports 20.5 10.9 6.5 Imports 0.3 0.1 4.3 Change in business inventories -12.8 Percent change from corresponding month of previous year 7 Percent change 4 [ ANNUAL GDP GROWTHC I Index, 1987 = 1.OO 6 5 4 3 2 1 0 -1 1990 1991 1992 1993 1994 1995 1996 a. Chain-weighted data in 1992 dollars. b. Seasonally adjusted annual rate. c. 1996 and 1997 estimates are from Blue Chip Economic Ind~cators,February 10, 1996. SOURCES: U.S. Department of Commerce. Bureau of Economic Analysis; Board of Governors of the Federal Reserve System: and Blue C h ~ pEconomic Ind~cators. Real GIIP grew O.9(!41in 1995:IVQ. jcct seal economic growth of apsubstanti:1ll\. off the pace set in psoxilnately 2% for this year :inel 1995:IIIQ. The fourth cluartcs Lvitnest. Altho~lgh some economists nessecl a slo\ving in consumer liavc \\.arnecl of a possible secesspencling. \\.it11 p ~ ~ r c h a s eofs 11011sion, none of the U ~ L LCl?@ L ' responcluntl~les:ictually falling. U~~sincsses clents clicl so. A 2% r:ite of expansion ran clo\vn inventories. ancl feder:ll is consistent with some estirnlltes of pc~rchasescontinilcd to clecline. Exthe economy's potential-a sustainport gron.th accelesatecl, while imalAe ixte of growth at full resource pc~rts\\.ere ne:lrly flslt. utiliz;ttion. Nevertheless, 2?41 is 'I'he econotny esp:~nclecl2.1% for v U.S. gro\vth clearly I ~ e l o ~historical ;111 of 1995. Economists s u ~ ~ e y for ed norms. Over the past 25 years, real Nllie Ob@ Iic.ot/c)t~~i~ I I I ( ~ ~ C LproL / ~ I S growth has averaged 2.7%. Over longer time Iwmes. a 3.206growtl~ Kite has psev:liled. Cons~lrnel-spentling fell in Janciaq., reflecting weather-related clistostions in the clata. I'ersonal income rose slightly. largel). o n the strength of transler paylnents. On a yearover-ye:~r l ~ ~ ~ s1ion.ever. is, real person:tl inconie inc~rc;lsecl2.5041 in Jan~ 1 s t ~ ) ;'L . rate consistent nith moclerate seal econoniic gro\vth. (corrtirzlic~dor7 ~ / e x / p n g c l http://clevelandfed.org/research/trends March 1996 Best available copy Economic ActiviQ (cont.) Blll~onsof current dollars 215 RETAIL SALES AND CONSUMER CONFIDENCE Percent change from correspond~ngmonth of previous year 15 [MANUFACTURING ORDERS Ratlo 25 Index 1985 = 100 120 Mill~onsof units, s a.a.r.a 1.8 1.6 1.4 1.2 1.0 0.8 0.6 1990 1991 1992 1993 1994 1995 1996 a. Seasonally adjusted annual rate. SOURCES: U.S. Department of Commerce. Bureau of the Census; and The Conference Board Incleses o f overall consumer conficlencc aclvanced sh;lrply in Fel~ruary, reversing Jan~lary'ssteep decline. Large swings in this series are common. Retail sales (nominal) fell 0.3% in Janilary, I x i t ret:til s~tlesesclucling auto~nobilesrc.rn:~ineclflat. Sales of cars :tncl light tr~lcksrose 5.6% in Fel~r~laly after January's clecline. Over the p;tst year. the Rig Three antomakers gained marliet share relati\.e to imports. 'The ni~:tnuhcturing slowclo~vn continued in Jan~iary,with inelustrial 1xc)cIuction Lalling 0.6%. Ind~tstrial ~xociuctionhas re~liaineclessentially flat since e:trly 1995. As the year progresseci, analysts became concerned about the builclup of inventories. paiticul:trly at the man~ifacturingand \vl~olesalelevels. Man~~facturers. retailers, and \vliolesalers have been trimming escess stocks, anti their it~ventory-to-sales ratios have recently declinecl. It is not clear that f ~ ~ r t h ec~its r in manufacti~rers'ancl wholesalers' inventories are irnmi- nent. The p~irchasing managers' iilcles rose in Fel~r~iaiy after five months of tlecline. I I L I ~ remains :tt a level that implies :I slowdown in ind~lstrialperformance. F:lctoiy orclers increaseel O.j(%, in Janual-y. ~vittithe g:lins htirly broad-basecl ;tcross clural>le ancl nondur:lble components. On a year-over-year Ixtsis, however, orders rernain cve;tIc. Orcler lxiclclogs rose sharply in J;tnua~y. http://clevelandfed.org/research/trends March 1996 Best available copy Percent 1 Real Gross Domestic Product " GDP GROWTH, 10-YEAR MOVING AVERAGE I Percent 30 DISTRIBUTION OF GNP GROWTH, 1870-1994 I (Percent change, annual rate) GDP 1987 GDP 1992a 1948-1 959 3.7 n.a. 1960-1 969 4.1 4.6 1970-1 979 2.9 3.2 1980-1 989 2.5 2.8 1990-1 995 2.3 1.8 1948-1 995 3.2 n.a. 1961-1 995 3.2 3.2 Peak to peakb 2.8 1.3 Percent, decade average I GNP GROWTH I7 Balke & Gordon esttrnates I I Annual GNP growth, percent a. Chain-weighted. GDP series begins in 1960. b. Average growth as measured from business cycle peak to business cycle peak. c. Data end in 1994. SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; and Nathan S. Balke and Robert J. Gordon. "The Estimation of Prewar Gross National Product: Methodology and New Evidence," Journal of Political Economy, vol. 97, no. 1 (February 1995), pp. 38-92, Econoniic gron.th esliihits 1 ~ 1 t ha cyclic:~l pattern and ;I long-term trencl. O\-er 21 generation. small changes in tlie trend rate of' ocitpiit growth c:tn have irn~x)rt;~iit implications for the stanclarcl of living. Consecli~ently, economists \vorry as 11i~ic1i;thoi~tthe trelicl rate of o ~ i t p ~ i t grou,tll :IS :tl,o~it the h~tsinesscycle. 13~1ringthe 1070s and tlie lC)XOs, trencl economic growth appe:tred to slow, ancl cliiestions hztve emergecl ahoiit \vh:tt constitutes :t sustain:tble long-tern1 gro\vth Kite. O n e nieasure relates potential o i ~ t p ~to i t the fill1 use o f tlie economy's major inputs (labor :tncl capital), allo~vingtechnologic11 progress to filter thro~ighprociuctivity growth. Most of the results of this measure suggest that :I siistai~lablerate of output growth is roughly 2.OVw2.50/0. Ayesage pe;ll<-to-peak groxvth often 11lv)sies for a potential gro\vth mexsuse. 1-lowever. measures of potential seein ~tniforr~ily lo\v relative to actu:tl long-term rates of CDI' (or GNI)) gro\vth. When nieasi~redover long periods-from 1869, 1947, o r 1960-the economy's growth I:tte avenges 3,2(%). Economists attri1)ttte long-term growth primarily to increases in eniployment and eclucational attainment. csp:~nsionof the procluctive c:tpit:tI stock, and improvenients in technology. Another it1ipo1.t:tnt klctor is the expansion of niarltets. which promotes resource :~llocationthro~igh sp~ializzttion:Inel encoLtlages technological transfers across nations. http://clevelandfed.org/research/trends March 1996 Best available copy Tax Reform I Benefits of Mortgage Interest Deductions Home Ownership and Wealth by Family Income 1 Annual family income Less than $10,000 $10,000 to $24,999 $25,000 to $49,999 $50,000 to $99,999 $100,000 and over Tax returns Percent owning family residence Percent of wealth attributable to housing 38.8 90.3 54.2 68.5 $30 to $39 68.8 52.0 84.2 40.5 87.6 17.0 I I Annual faintly income (in thousands) Percent with Tax Percent Percent mortgage saving of total item~zed deductions (m~ll~ons) tax saving 21.0 16.0 $40 to $49 34.2 28.1 $3,270 5.6 $50 to $74 55.7 48.1 $11,005 18.9 $75 to $99 79.0 71.5 $12,253 21.0 $700 to $199 89.7 77.8 $16,359 28.0 $200 and over 93.7 82.5 $12.624 21.6 $1,919 3.3 Percent, not seasonally adjusted Thousands of 1982 dollars, s.a.a ia a. Seasonally adjusted annual rate. SOURCES: U.S. Department of Commerce. Bureau of the Census; U.S. Department of Housing and Urban Development: Board of Governors of the Federal Reserve System; 1992 Survey of Consumer Finances; and U.S. Congress, Joint Committee on Taxation. Iiecent c:llls tor simp1it)iing the U.S. tax code have sp:lrlced heateci clebate a1,out the relative merits of cons~~mption-l~asecl taxes and fl:lt tax rates. A particular concern in those de1,ntes is removal of the ~ n o r t p g eintel-est deciuction, xvhich many Sear \\-ill clepress housing prices. Home ownership rises with income. Al~nost40% of fanlilies making less than S10,000;I year own their own honles. cornpareel to 84% of those earning Inore than S50.000. I-Ioxvever. ne;lrly all the n.ealt11 of fnrnilies earning less than $30,000is in their homes, while housing accounts f,r only 40% of the wealth o f klrl~iliesearning over $50,000. Very few falllilies in the lower income categories benefit from the interest cleduction, beca~lse few itemize on their incollle tax retilrns. For Families who d o itemize. h o ~ v e \ w , the overall effect o n Ivealth 21lso clepencis on how the tax revision ~tffectsprices of both housing : ~ n dnonlioi~singassets. Since hoclsing as a fraction of wealth cleclines lvith income. a flat tax system \vo~llcl offset wealth losses to the extent that it c:iuses the value of other :ISsets to rise. F~lrther.the large clecrease in 11larginal income tax rxtes in 1981 did not clepress housing prices, cont1:11-).to what might have heen expected. Normal fli~ctuations in the housing marliet may s\v;unp changes brought on 17). such revisions in the tax cocle. http://clevelandfed.org/research/trends March 1996 Best available copy Labor Markets Change, thousands of workersa IAVERAGE MONTHLY NONFARM EMPLOYMENT GROVVTH I I Labor Market Conditions Average monthly change (thousandsof employees) 1995 IVQ Year 144 142 -5 6 -14 -5 I1 12 149 136 Services 93 67 Business services 26 19 Retail trade 19 27 Payroll employment Goods-produc~ng Manufacturing Construction Serv~ce-producing Eatin and drinking esta%lishments 8 7 1996 Dec. Jan. Feb. 145 39 35 2 106 63 34 -8 -188 -59 -75 17 -129 -44 -31 -60 705 153 26 121 552 287 126 166 17 -36 62 Average for period Civilian unemployment rate (%) 5.6 Nonfarm workweek (hours) Mf .workweek (fours]b Perceni Percent 10 66 5.6 5.6 5.8 5.5 34.5 34.4 34.3 33.7 34.5 41.6 41.4 41.2 39.9 41.6 Duration of Unemployment (Seasonally adjusted) Percent of total unemployed persons 27 weeks Less than Sweeks St014 weeks 15to26 weeks and longer 38.3 37.2 37.1 36.4 30.3 31.8 32.0 32.5 14.3 13.7 14.2 14.5 17.1 17.2 16.7 16.6 36.8 37.8 31.9 30.9 14.8 15.3 16.5 16.0 1995 September October November December 1996 January February a. Seasonally adjusted. b. Productionand nonsupervisoryworkers. c. Vertical line indicates break in data series due to survey redesign. SOURCE: U.S. Department of Labor, Bureau of Labor Statistics. has employrncnt slio\vn such wide month-to-niontli s\\,ings as in the first two riionths of 1096. Following Jancrary's revisecl clecline of 188.000. nonklrni pa).solls soarecl 13). 705.000 in Fehruar-)---the largest rnonthly gain since Septemlxr 1983, when they rose 1.1 million. Factoring in the 1)ecember figure Ixings net jot, aciditions to :In a\,cr:lge rate of 220,000 per niontli for the past tllree months. C;oocls-protlucing employment rose 153.000. dcre mostly to 3 weather-related rebound in constr~rction,although ~nanuhcturing clicl post a srnall gain (26,000). The ses\.ice-prod~~cing sector showed a net incre;ise of 552,000 johs, partly as a rescrlt of snapbacks in inclustries wherc employment levels liaci been depressed by January's inclement \\eather. Almost all of the 166.000worker gain posted by ret:iil tr:tde occurr-ecl in inclustries where employment clianges have been relatively flat (or even negative)-rest;lclrants, bars, and department stores. The narrow services category tilrnecl asoclncl last month, gaining 287.000 johs. about half of them concentsated in business services. Tlie February unemployment rate pointed to strength in the 1,J I or Iiiarkets, k~llingto 5.5% from 5.8% in Jan~l:lry.'rhe share of long-temi joblessness (the proportion of people unemployecl for 27 ~ v e e k sor rnore) hzis cleclined in recent months. Half ol' :ill johless persons currently k ~ c e an crnemployment spell of eight \veeks or less, which is relatively short by historical stantlarcls. http://clevelandfed.org/research/trends March 1996 Best available copy West German Demographics and Social Security Percent Percent /LABOR FORCE PARTICIPATION OF MEN I Age group Percent Percent Age group a. 1990 data. b. 1987 data. SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; U.S. Department of the Treasury; Office of Management and Budget; U.S. Department of Commerce, Bureau of Econom~cAnalysis and Bureau of the Census; Organisation for Economic Co-operation and Development; United Nations Statistical Yearbook, New York, 1995; and Wolfgang Franz, Arbeftsmarkt-Okonomik. Heidelberg: Springer-Verlag. 1991. Many U.S. policym;lkers arc worried about the effect of c1i:lnging cle~liographicson the Social Seccirity system. f3eca~isethe n~irn1,er of elclerly Americ:lns is increasing relative to the nunld>er of working-age people who c:ln support them, either benefits must decrease or the Social Security tax IIILIS~increase if the system is to remain solvent. 130th of these options are politically LI~~C)~LI~;IS. The problems in Germany are e similar. Ixit they seem to l ~ accelerating at a faster rate. Bec:~~lseits pop~llationis older than that o f the lJ.S., Germany already has proportionately more elderly citizens to s~lpport.F ~ ~ r t h ebecause r, German t~irthrates are s o low, the alreacly high proportion of elderly will continue to increase and will remain :ibove that of the U.S. well into the next half century. The social security system is Inore gwnerocis in Germany than in the IJ.S. Indeed, private pension progmms represent a s~ilallportion of Germans' savings because the put>lic pension is s o generous. Moreover, fill1 benefits start at age 61. Co~nlxisedto Americans. Germru~i Inen and \\/omen leave the labor force at a much earlier age, greatly increasing the ratio of retirees to the \vorliing population. Also, I>ecac~se Germ~lnyhas not experiencecl the degree of labor force participation among married hvomen that the U.S. has harl in recent ye:trs, there are relatively fewer \vorkers to tax. S o his, the German people have optecf to I<eep their current system. 7'his system comes at a price: Germans pay nearly L: third of their 1~il1or conipensation to kind it. 0 . 0 . http://clevelandfed.org/research/trends March 1996 Best available copy 0 Regional Conditions Percent Dollars per hour .- Percent I AVERAGE HOURLY EARNINGS IN MANUFACTURING I NOTE: All data are seasonally adjusted. SOURCE: U.S. Department of Labor, Bureau of Labor Statistics Recent lxhor rnarket trencls in Ohio, Kentucky, ancl I'ennsylvani:~ seein to reflect the slo\\.ing in n:ltional econoriiic activity, b ~ the ~ tregional picture-like the national one-is rnisetl and difficult to interpret. In Kentucky. employment continues t o expancl briskly. Ohio's employment, \vliich slowed in 1995, has picked lip somewh:~t in recent months. while Pennsylv;~ni;t's reliuins t>elow year-ago levels. Slower growth in Ohio and I'ennsylvania, Ito.rvever, has not contribntecl to an obvious rise i r i i~ne~nployrnent rates. The current jobless rates in Ohio. Kentucky. and Pennsylvania-4.9% 4.5%. and 5.7%;respectively-are all lolv relative to historical a\rerages. Further, many of the seasonal v;lriations thLt caused wide swings in the rates see111 states' i~nernploy~nent greatly attenuated. Pennsylvania's ~~nernployment is now higher than l>otli Ohio's and Kentucky's, 3 situation that reverses trends prior to the 1990 recession. Hourly earnings in manilhct~lring provide little eviclence of a sustainecl slowclown. Ohio's nominal earnings growth fl:~ttened over tlie l:lst two years, but the level remains high compareci to the other two states. Some unsettling news comes from m:lnufacturing employrnent, which has fallen in all three states. While this generally follows a longer-term pattern, it is a trend that appeared to have run its course by mid-1994. In Ohio and Kentucky, ~nanufacturing as a share of total employrnent actually increased cluring early 1995. 0 0 0 8 8 8 http://clevelandfed.org/research/trends March 1996 Best available copy 8 Foreign-Owned Ohio Firms I CITIZENSHIP OF FOREIGN-OWNED OHIO COMPANIES' CEOs 1 Percent of companies 90 0 0 1-25 26-50 51-75 76-100 Percent 01 employees union~zed SOURCES: Milton Wolf. "A Profile of Direct Foreign Investment in Ohio: A Nonparametric Stat~sticalApproach," Case Western Reserve University, Ph.D. thesis, May 1993; and U.S. Department of Commerce, Bureau of the Census. O n e conseclrlence of the l1.S. current-accc~untdeficit sincc 1982 has heen an increase of foreignowned finns operating in this country. \i 1991 survey of :lho~it 200 foreign-owned Ohio comp;tnies offers some interesting fricts. Fir'st, the parent company is cluite likely to b e Japanese, a reflection of the large influx of J:~panese in\.estment into the li.5. cluring the 1980s. t s almost haif of all Japan a c c o ~ ~ nfor foreign companies operating in O h i o , n.hile sei.eral European nations make u p the rest. T h e klct that a local c o ~ n p ~ i nisy o\vneci abroad does not necessarily rne;ln that control of the opesation p:~ssse overseas. In nearly half of the cases, the Ohio CEO is an American. Althoilgh the Japanese tencl to retain [nore control, there are n o Srviss or 1)utcIi CEOs, despite the large extent of the Ohio investment relative to the p21.ent country's GNP. What are the companies' characteristics? For the most part, they are nonunion. In Ohio's private-sector labor force as a whole, union memhership \\,as 21% in 1989. but the \.:tst majority of foreign companies reported a smaller percentage. This is s~lrprising,hecailse the same survey reportecl that leu. union ;tcti\.ity lvas not a major reason for 1oc;lting the company in Ohio. Foreigno.i\:necl companies in Ohio export :(bout the same share of their o c ~ t p ~ ~ t : ~ sclo Ohio companies as a whole. Indeeci, much of the export is hetween Ohio :lnd tlie conipany's home country. It is clear that foreign investment offers a method I>y which the foreign company's goods can b e solcl in America. l ~ it tmay ;tlso pro\,icle a rneans I>y which goocls rn:tcie in Ohio are sold in the p:~~ent co~npany'scountr);. http://clevelandfed.org/research/trends March 1996 Best available copy Banking Conditions Percent of total assets Percent Percent a. Data are for FDIC-insuredcommercial banks. b. 1995 data are for the first three quarters of the year and are annualized. c. Data are for domestically chartered commercial banks in the U.S. d. Iticludes interbank loans, cash assets, and all other assets. SOURCES: Standard & Poor's Corporation; Federal Deposit Insurance Corporation; Board of Governors of the Federal Reserve System; and Bank Rate Monito,: The rnarket return on bank stocks grew a t a breakneck pace in 1995. with t h e Stancl:lrd K I~oor'sbank: composite inclex increasing a whopping 52.5?(%for the year; in comparison, the o\;erall SKI' 500 cornposite index rose .?4.86%.Several st:~nclarcl commercial-lxink performance inclicators also pitint a picture of a healthy financial sector. Average return on assets ancl Livesage return on equity both rernain strong, \vhile preliminasy clata incli- cate that the ratio of net charge-offs to loans fell 10% from 1994. Bank assets continued to expanel at a healthy pace, if somewhat more slowly than last year. This strong performance has come in spite of generally declining interest rates anci a fallirlg net interest margin. Following sharp incre:lses thro~tghoilt 1994, rates on 30-year mortgages ancl home ecluity lines of creclit both decreasecl steadily tt~roughout1995. The prirne rate has also fallen 75 basis points from its Fel~ntary1995 high of 9%. As is typical, creclit carcl rates have rern;tinecl relatively steaciy. These lower r:ites have contributecl to strong loan growth, with net loans ancl leases expanding 12.3% hetween the thircl quarters of 1994 ancl 1995. As a result, the composition of bank assets has recently shifted toward loans ancl ancl leases ancl away frorl~sec~~rities other assets. o 0 o e http://clevelandfed.org/research/trends March 1996 Best available copy e Housing Ijinance Share of ail mortgages, percent Percentage po~nts 130 70 IADJUSTABLE MORTGAGE RATES B~llionsof dollars Index, March 16,1990=1 loo (MORTGAGE ORIGINATION BY TYPE OF LENDER 1 18 16 14 12 10 8 6 4 2 " M A M J J A S O N O J F M A M J J A S 1994 1995 0 1990 1991 1992 1993 1994 1995 1996 a. The 15-year f~xed-ratemortgage index begins in September 1991. SOURCES: U.S. Department of the Treasury, Office of Thriff Supervision; U.S. Department of Housing and Urban Development; and Mortgage Bankers Association of America. -2 - 3 5 -J Despite the recent jump in 30-year basis fixed rnortgage r-ates-45 points cluring the last half of February (not shown in chart)-housing finance activity has clemonstrated strong growth over tile last year. Ind e e d , the recent 12tc jumps have generally heen viewed as a shortterm correction, anel 111(1st analysts expect rates to continue their downward trencl cluring the next several months. Overall, long-term mortg a g e rates fell 200 lxlsis points between December 1994 anel I>eceni- her 1995, wliile one-year :tcljustable sates (ARMS) clropped 49 basis points over the same periocl. With these lower rates, tilostgage originations increased during the second and third quarters of 1995, reaching levels not seen since the last refinancing boom ended in April 1994. Not surprisingly, the vast nlajority of these originations were refinancings; the volume of conventional home purchases has been less affected by recent rate movements. With this increased emphasis on refinancings, mortgage compa- nies have seen their market share increase to the level of early 1994. Continued lo\v 30-year mortgage rates, as well as the narrower spread lxtween fixecl ancl adjustable rates, have sp~irrecinlost borrowers to select fixeel-rate mortgages (74%o f the market in December 1995). Unless fixed mortgage rates rise clr-amatically or, alternatively, ARM rates drop low enough to widen the fixedhdjustable rate spread consicierably. this trend should continue in the near future. http://clevelandfed.org/research/trends March 1996 Best available copy International Developments Percent 14 1960 1965 1970 1975 1980 1985 1990 1995 Percent a. Unemployment rates are as reported by the originating country. b. All data labeled Germany refer to western Germany. c. Trends are computed using the Hodrick-Prescott fllter. d. Employment, labor force, and population data have been adjusted by the BLS to approximate U.S. definitions more closely. SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; and Data Resources International. Since 1Y6O Ino\t Furope,in coiinin 17opillation size and in 1;ihor-force t~zes unemplok Inent I hd\ e p~irticipationrates. Rising ~lnenlploy~ ~ p ~ ~ ,\\h~le ircl lJ S ment cites niay reflect lo\ver erntrended ~te~tclrl) trne~nplo)nient h ~ shou s 11\ irtu,tll) plo).incnt levels with a rel:tti\~ely no trcncl Incre~tseA~er'tgc1995 (insteacly lal,or-fi~rcesize. Alternatively. eniplopment r,ttes In F1'1nce Gerhigher unemployment rates may reflect a lal,or force enlarged hy inm'tny, .tnd tlie I' I< n e i e 6 to 10 perccnt'ige points h~glierthin 1960 cre:ises in the pop~rlation or in r'ltes, w h ~ l etile 1995 jol)le\s r'ite in 1:ibor-force lxirticipation rates. If inthe 1 S \\ '15 toughl) cclir,tl to the creases in employment levels do not 1960 r'tte keep "11 with gro\vth in the 1:ibor IJnemplo\ment r'itcs .lie .~ffectccl force. irncmployment will rise. not only 1,) cli,mge\ In the e m p l o -~ I3eforc loolcing at the clata, then. ment I a e l I ~ i r t.tl\o I>\ f l i ~ c t u ~ ~ t l o n sone ~niglitexpect to find t1i:lt coun- tries xvitli rel:iti\.ely large increases ~r~e in popill3tion or I : ~ i > ~ r - f pal-ticip:~tion rates wotilcl ha1.e experienced growing ine employment. In Fact, just the opposite is true of the four coiintries esamined here. Over the 1960 to 1994 period. both the lal>or-force participation rate :ind the total popul;ition grew subs tan ti all^. more in tlie U.S. than in France, Germany, or the U.K., resulting in an 88% isicre:~se in the U.S. I;il,or force. In comp:u-ison, the l;ibor ( c o r i l i ~11ed i o ~ znt'.x/page) . . . a . 0 http://clevelandfed.org/research/trends March 1996 Best available copy 0 International Developments (cont.) Millions of workers Millions of workers I4O 140 LABOR FORCE^ e,w"<"#+@ 120 - /*/ - //* 100 - Yd 100 Stales /%Wed 80 - 120 EMPLOYMENTa 80 /*" -4" ###-, 60 - 40 Un~tedK~ngdom 20 - -I". -" -- Germanyb _ Me-- , "*"a ~ 40 - 20 - ' 1975 ~ " 1980 ~ ~ 1985 ~ l 1990 " * 1995 ~ ' ~ 0 1 Germanyb +-=*""- "", ," , e - I France l 1 1~1 1960 l i1 1 ~1 l ' 1 1 ~ 1 1 1 ~l 1 ~ 1 1 1~l I "I l l ' l l l l l l l I l l 1965 Percent Percent 64 LABOR-FORCE PARTlClPATlON RATEa 66 64 - &"w-ss~>&-aa-e France 0 ' " ' l ' ~ 1960 1965 1970 60 EMPLOYMENT-TO-POPULATION RATIOa 62 - 54 - 50 - - 1960 1965 1970 1975 1980 1985 1990 1995 48 l 1960 ' l ' ~ ' * l ~ ~ l l " g l ~ ' r l l l ' l l " l ' l l 1965 1970 1975 1980 1985 1990 1995 a. Employment, labor force, and population data have been adjusted by the BLS to approximate U.S. definitions more closely b. All data labeled Germany refer to western Germany. SOURCES: U.S. Department of Labor, Bureau of Labor Stat~stlcs;and Data Resources International. f'orces of Fnnce, Germany. and the 1J.K. greu. I>y35%. 15(Yo, ancl 17'W~.respectively. Yet the 1j.S. \vas the only countv \vitlloi~ta not:il,le increase in its uncmployrnent rate over the periocl, reflecting sul>stantially larger employment-level increases than in coi~ntries. the three E~~rope:ln The trend in Ia1)or mzkrl;et participation sates has clifferetl greatly :Lrnong these co~~ntries. G.S. participation sates have climhed steadily since the e:irll, 1 9 6 0 ~increasing ~ I3y rnore than 7 percentzlge points from 1960 through 1994. In contrast, participation rates in Germany ancl France ctecli~ledover this periocl. falling by roughly 5 percentage points ancl 3 percentage points. respectively, \vhile the IJ.I<. p:lrticipation sate has increased by less thxn 1 percentage point. The trend in employment-top o p ~ ~ l ~ l t iratios o n has also varied. Germany, France, and the U.K. h:ive secn their employrnent-topopulation ratios fall by 8. 10. ancl -i percentage points, respectively. In comparison, the 1J.S. posted :ln increase of roughly 6 percentage points horn 1960 to 1994. Attempts to explain the lack of employment growth in Ellrope have largely focused on the regi~latory environment. Iiesearch suggests that la11or ~narlietreg~~lations like legislatecl severance p:iyments, plant closing legislzition, and advance notice requirements may play a liey role in expklining many Europe:~n countries' elisappointing employment gro\xrth.
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