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http://clevelandfed.org/research/trends
March 1997
Best available copy
The Economy in Perspective
Laboi-ijzg I I I Z L ~a~fulse
~ ,
it~~pt.e.s.sioi?
.. . If inflation
is, as &lilton Friecl~na~l
once saicl, always anel
every\vliere a monetary phenomenon. why clo
so Inany Feel-watchers scan the labor ~narlietfor
clues to f ~ ~ t u inflation?
re
Why clo they thinli that
the unemployment rate, the employment
gro\?;tl~rate, or \mge changes foreshaclow inflation movements?
Two reasons come to mind: Some pronli~lent
economists say it is so, and history provicles LIS
wit11 certain exalllples where it appears to be
true. Nevertheless, it would he a ~nistalieto thirllc
that labor marliet conditions cause inflation; accepting this idea u~lcriticallycoulct create serious
misunclerstanclings about rnonetary policy.
In a simple textlmoI< economy with a stable
money-clemancl f~lnction,the monetary authority has the straightforwarcl job of supplying a
quantity of money that matches the amount clenlanclecl at the prevailing price level. Supplying
too much or too little will eventually raise or
lower the price level.
What happens if procluctivity improves? For
the sirnplifiecl economy as a whole, Illore output can 11e procluced with the sarne amount of
lancl, labor, ancl capital; as a result, the stanckircl
of living rises. When the real value of output espanels, nominal spencling i~lcreasesat a constant
price level. To accomplish this result, the rnonetary authority nus st elllarge the money supply to
accomlllodate a greater value of transactions. In
other worcls, noninflationasy growth requires an
expancling money supply.
The relative prices of various goods. services,
ancl other necessities of production will change
cluring the transition to the new equilibrium.
Labor ~narliets'response depends on the nature
ancl magnitude of the initial impetus for change.
For example: \vith technical progress? real
wages may rise for some skills ancl in some regions, ancl clecline else\\-here. Wage changes
may affect peoples' inclination to look for johs
and their success at finding them. Another possibility is that \i~orlterstake some of the procluctivity gain in the for111 o f more leisure time
(\vhicl~coulcl show up as an increase in parttime employment).
Suppose an inno\iatio~~
expancls aggregate
supply, malting people Lvealthier in real tenns.
I heir nominal clemancl for goods :lnd services
increases, and the monetary :iuthority expands
the money supply in an effo11to steacly the price
level. Next: suppose the money supply increases
lnore than necessary, but people clon't realize it.
They notice only that their nominal incorne ancl
wealth are improving. As aggregate delllane1 outstrips supply, ~llarketsfor productive factors like
raw conlnlociities, latld, ancl labor event~lallyhecome tight enough for most prices and wages to
7
3
rise persiste11tly. This is the conclition we call inflation. which, in the short run, exhibits a n e e ti1.e correlatioll with unemployment.
N o ~ vconsider the connection lxtween labor
~narketsand lnorletary policy. The textI~ool<
economy features a natural rate of unemployment, which exists in ecluilil~riumbeca~lseof
labor markets' structural characteristics. Inflation
holds steady at the natural sate: but rises or falls
as actual unemployme~lt is drive11 Ixlo\v or
above the natural rate by sustained shifts in aggregate demancl relative to aggregate supply.
There neecl be nothing special about the labor
~narlietin this example. I11 principle, natural
rates of inclustrial capacity utilization, real estate
vacancy, inventory stocks. anel cleliverp lead
ti~nesexist along with the natural rate of unemd tight
ployment. Inflation is no Inore c a ~ ~ s eby
labor nlarkets than by shortages of office space
or railroacl boxcars.
As a practical matter, inflation forecasters have
exa~nineda wicle variety of leacling inclicators at
clifferent times. Even a partial list \\~ouldincluck
gold prices. capacity utilization rates, the exchange value of the U.S. clollar, money growth,
help-wantecl advertising, ~ ~ n e m p l o y ~ ninsurent
ance claims, inclustrial commodity prices, asset
prices, surveys of inflz~tionespectations, and
long boncl prices. None of these varial-~leshas
proven an infallible 1e:tding inclicator, because
their unclerlying demancl ancl supply functions
have not been stable. Time anel a a i n . indicators
that forillerlp seemed useful hul to hold up.
Labor marliet variables are no escept~on.
The Federal Open Marltet Co~nrnittee
(FOMC) has been employing a federal funds
rate operating procedure, provicling whatever
rnoney growth the economy m-ants at the intended funds rate. If the FOMC felt confident
that money dellland was stable, it coulcl rely
more on money growth rates in assessing
when-and how much-it should change its
intended funds rate to control inflation. Instead,
the FOMC recently has relied Inore heavily on
nonmonetary attributes of economic activity to
guide its actions.
Fecleral Reserve Chairman Alan Greenspan
told Congress last month that there are some
signs the M2 monetary aggregate may be
reestablishing a stable relationship with nominal
spencling, in which case the FONIC would be
willing to regard it Inore seriously. Such a clevelopment woulcl be \\;elcome on tnio counts.
Having a reliable inclicator of future inflation is
clesirable in its own right. Moreover, since monetary policy cloes ~ o seeli
t to restrain either employnlent or real wage increases, it woulcl be
helpful to replace rhetoric that unfortunately
creates the contrary impression.
L,
http://clevelandfed.org/research/trends
March 1997
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Monetary Policy
Percent
5 65
IMPLIED YIELDS ON FEDERAL FUNDS FUTURES
Percent, weekly averages
6.5
I
RESERVE MARKET RATES
Percent
I
Percent
20
SPREADS BETWEEN TREASURY SECURITIES
AND THE EFFECTIVE FEDERAL FUNDS RATE
9
8
7
6
5
4
3
2
1990
1991
1992
1993
1994
1995
1996
1997
Jan
March
May
July
1996
Sepl
Nov
Jan
March
1997
SOURCES: Board of Governors of the Federal Reserve System: and the Chicago Board of Trade
Mention rnonetary policy. 11ncl the
first thing that Inany people thinli of
is the f e c l e ~ 1-i~ncls
~l
Kite. Th~ls.to the
extent tlxit the I>ehavior of the funcls
rate is tri~lysynonymous Lvith monetary policy. the news from the l:itest
meeting of the Fecleral Open Marltet Committee (FObIC) is no news:
Subsecluent to that meeting, the
feder;il funcls rate has remained in
the j- 1 /.i% neighborhood \\~\;hereit
h-.I$.. -sicle
,. led since Jzinuary 1996.
It is clear that marliet obselvers
clo not espect this stability to persist
indefinitely. Implied yielcls o n fecl-
er;~]fclncls f~ttures,~vhichreflect espcct:itions of future polic)., suggest
that in\.estors are anticipating higher
sates as the year proceeds. Although
s ~ l c hespect>ttionshave in the past
provecl lar from infallible-the
Iligher sates espectecl to ~naterialize
cluring 1996 never dicl-the Ixlief
that a Kite hilie is imminent 1 ~ 1uns
clouI>teclly t~olsterecl hp Chairlnan
Greensp;in'srecent rerllincler that
the "1;OivIC in Fact has signaleel a
state of heightened alert for possil~le
policy tightening since last J ~ d yin its
policy clirectives."
It he;irs noting that the ;~l>sence
of
fecle~ilfilncls rate change cloes not
neccss;irily imply a constant monetary policy. A growing gap I,et\v\;een
marliet rates ancl the f~lndsrate is
liliely to reqrlire changes in the
g ~ ) \ v t hsate of l~anlireserves S C L ~ pliecl by the Feel, \vhich in turn irnplies 21 cllange in the gro~vtlirates of
rhe l>roacler me2isures of money. N o
compelling sign of any s ~ l c hgap h:is
developecl. hilt it is \\~orth\\~hile
to
rcmeml~erthat monetary policy is
c~ltimatelya h o ~ the
~ t r:ite at -which
21
fcollli~l~le
011
d ~~e~~tpqgeJ
http://clevelandfed.org/research/trends
March 1997
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Monetary Policy (cont.)
Bill~onsoi dollars
B~llionsoi dollars
4,050
250
THE M2 AGGREGATE
THE M3 AGGREGATE
6%.
..
2%
4 650
4250
-
l ' l l " ' l l l l ' l l l l ' l l l l l " l l J ' r l ~ l l l l r l
1995
1996
1997
Billions oi dollars
B~llionsoi dollars
510
1995
1996
1997
a. Growth rates are percentage rates calculated on a fourth-quarter over fourth-quarter basis.
NOTE: All data are seasonally adjusted. Last plot is estimated for February 1997. For the monetary base, dotted lines represent growth ranges and are for
reference only. All other dotted lines are FOMC-determined provisional ranges.
SOURCE: Board of Governors of the Federal R e s e ~ eSystem.
the rlione). suppl). csp~unds. not
;iI,oc~t :I n:lrro\\. intcrl3anlc interest
Kite (the fecie~11fut~cls r:~te) thxt
monc.t:tr!. ~ ~ t ~ t h o r i t iemplo).
es
to
~lronitorInone). gron.th.
Tlie FOh'iC ch~~is's
semiannc~alreport lo Cor~gress.t~\.picallyreferreel
lo as tlic I I~~mphre)~-I-l;~\\~liins
tesiiinon).. still reflects the kict that mone t x y polic!- is al,o~~t
mane!.. ;\s part
o f his report of I:cl,rc~:ir). 26. Chairm;in Greenspan notecl that "at its
Fel>ri~:irymccting, tlte FOhpIC reaffismecl the pro\.isional ranges set last
Jc~lyfor irloilcy :uncl clc1)t gro\vth tllis
)-ear: I to 5 percent for h12. 2 to (3
counts. mane!. ~uarketm ~ ~ t ufuncls,
;~l
:111d s o on-are
relatively far repercent for M3. ancl 3 to 7 percent
for the clel,t of clomestic nonfinanmoved 1.1-omclirect control 1,y the
cia1 sectors."
111onetar)-:luthority.
:2lthoi1gh the l-I~~n~phrey-H~~v\-liins One measure of money more clitr;~tlition of reporting monitoring
I-ectly clncler the infl~~encc
of monemngcs Sor these l~road1nonet:u-y :lgtai-1- ~ x ~ l i cisy the monetary Ixtse,
gregatcs continues, it is colnnronly
\\-l~ichconsists of currency held hy
recognizeel that the role of these
the pul~lic171~1s
I~mlireser\-es. Mowrnonc). mc:tsures in the ongoill:,. ope1.e~.even this measlire can be
e ~ l t i o n so f monet:iry policy has clip ~ ~ l ~ l e m a '['he
t i c . prime contributor
minishecl over time. At least part o f
to [lase gro~vtilin recent years 11:~s
l ~ e e ncLlrl.ency gro\vth. zinc1 it is unthe prol>lem ;Irises from the klct th:li
ii1ciisLlres lilie M2-n.hich i~nclc~cles c,le:~sh o u . ~ n ~ of
~ cthis
h is attrilmts i ~ c hl>anli li;lI>ilities 21s sa\-ings zit(cotlti~~ricd
o t ~tlentt p ~ ~ g c )
http://clevelandfed.org/research/trends
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Monetary Policy (cont.)
B~ll~ons
oi dollars
440
Bill~onsof dollars
CURRENCY
Currency growth
1991-96a
10%.
..'5%
340
' l ' l l l " t l l ' l ' " l " ' l t " l ' i l l l ' " l ' "
1995
1996
1997
Bill~onsof dollars
Billions of dollars
1,325
2.5
THE MI AGGREGATE
MI grovith, 1991-9€ia
2.0
1.5
1.o
1,075 -
-5%
. . . . . . . . . .0%.
'. ..
0.5
'.. -5%
1,025 " l l ' t l ' l " ' l ' l ' ~ l ' l " " " ~ " " " ' l r '
1995
1996
1997
0.0
1980
1982
1984
1986
1988
1990
1992
1994
1996
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 except depository institutions' excess reserves at Federal Reserve Banks. Last plots are estimated for February 1997.
Dotted lines represent growth ranges and are for reference only.
SOURCE: Board of Governors of the Federal Reserve System.
:tble to clo~nesticrather than foreign
:lccumulation. In fact, totd reserves
h:tve contin~~eci
to shrink at a lapicl
pace. Althoi~ghstabilizing of late,
negative reser-\.e groywth h:ts shown
through to a leveling off in the narrow money 1ne:tsure MI.(&I1 consists primarily o f currency ancl
chuckal,le tleposits.)
The I,eha\4or of reserves and ,441
over the p:ist se\.eral years h;ts generally been ;tttrilx~tedto the development ot' sweep ~tccounts,\\?11ich
allow Imnks to minimize resenre po-
sitions by short-term "sweeping" of
clelmsits from accounts that recluire
reserves into those that clo not. Incleecl. after acljusting for sweep actillities, the negttive trends seen in the
nonaclj~~sted
clata elisappear.
Still, this provides little sol:~ce
given the recognition that reserves
are the proximate lever of monetaly
policy. I)evelopnients that have all o ~ v e dbanlis to minimize their res e n e positions have raisecl concerns
; t l > o ~ the
~ t Fecl's ability to control
monetar-y gro~vth,prompting sonle
to suggest 1egisl;ltion that ~woulcl
boost the reserves held by I~anlis.
However, certain theories suggest
that excess reserves, rather than
total reserves, are the critical deterlllinants of money growth ancl
monetary control. I-Iere the news
may I,e less threatening: Ilespite
substantial changes in the fin:tnci:tl
111arliets. there is little inclication that
excess reserve levels are changing
c1rarn:ltically.
http://clevelandfed.org/research/trends
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Interest Rates
Percent, weeklv, averaoes
"
Percent,weekly averages
YIELD CURVESa
9.5[CAPITAL MARKET RATES
Percent, oaily numbers
1
TREASURY INFLATION-PROTECTION SECURITIES
Corporate Issues of Inflation-Indexed Bonds
J.P. Morgan & Company
Salomon Incorporated
Toyota Motor Credit Corporation
Tennessee Valley Authority
Federal Home Loan Bank System
Student Loan Marketing Association
Federal Farm Credit Banks &
Funding Corporation
a. All 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.
d. 10-year Treasury bond constant-maturity yield minus the yield quote for the Treasury Inflation-Protection Securities found in Bloomberg information service.
SOURCES: Board of Governors of the Federal Reserve System; Bloomberg information service; and The Wall Street Journal, various issues.
Since last month, tlie yield cur7-e has
flattenccl sliglitly. \vith very little
m o ~ ~ e m c except
nt
at the long end.
?'he .?-year. 3-mol~thspreacl stancls
at 96 Ixlsis points ( l , . ~ . );IIICI
,
the 10year, 3-111ont11 spre:~clis at 131 I2.p..
both al,ove their long-term mean.
Since the heginning of last year.
however, the curve has 1,ecome noticeald). steeper. At the long encl,
30-yexr mtes ha\.e risen nearly a
point. \vIiile at the short encl, the 2year, 3-month spre:~clh:ls changecl
from a slight inversion of -2 l,.p. to a
Inore norrn:~l +SL. Tile longer-term
capitzll marliet rates continue to
tmck cllatlges in the 30-year ?'reasilly I~onclclosely.
Cert;~irllythe most exciting recent
cle~.elopmentin the boncl ~narkethas
heen the introciuctior~ of 'ke;~susy
Inflation-I'rotection Securities. or
TIPS. l'he principal and coupon payments o n these 10-year honcls rise
(or Lall) with chmges ill the Consumer l'rice Index. I3esides potenti;llly ofrering lo\ver horro\\~.ingcosts
to the Treasury and long-term inflation protection to investors. TIPS are
p~rticul~~r-1)intriguing becai~scthey
nay provicle a direct measure of real
interest rates ancl a I~etterestimate o f
espectecl inflation.
I'utting aside licli~iditydifferences.
the interaction between inflation
ancl real interest rates, and the risk
pre~niumxssociatecl with inflation
uncert:linty, one can get a measure
of expecteel inflation hy subtl.acting
the real interest rate ohservecl from
TIPS' from the nominal 10-year rate
o n Treasury boncls. 111 ternis ol
protecting investors, one desirecl
result of the introcluction of TIPS
has ~111-eaclyocci~rrecl-the private
sector has I~egunto issi~einflationinclexed I~oncls.
I
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Inflation and Prices
I
Percent of forecasts
DISTRIBUTION OF FEBRUARY BLUE CHIP CPI FORECASTS~
(
January Price Statistics
Annualized percent
change, last:
I mo. 6 mo. 5 yr.
Year avg.
1995 1996
Consumer Prices
All ~tems
1.5
2.9
2.9
2.5
3.3
Less food
and energy
1.4
2.3 2.9
3.0
2.5
Medlana
3.1
2.5
2.9
3.4
2.7
Finished goods -3.5
2.8
1.7
2.2
2.9
Less food
and energy
0.0
0.4
1.4
2.6
0.6
Commodity futures
-4.6
pricesb
-3.5
2.8
5.4 -0.7
Producer Prices
Annualized percent change
12-month percent change
TRENDS IN THE CPI
1
Diffusion index, net percent rising
"1
PURCHASING MANAGERS' PRICE SURVEY
I
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. Forecast of the Blue Chip panel of economists.
d. Upper and lower bounds for CPI inflation path as implied by the central tendency growth ranges issued by the FOMC and nonvoting Reserve Bank presidents.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; Federal Reserve Bank of Cleveland; the Commodity Reseatch Bureau; National Association of
Purchasing Management: and Blue Chip Economic Indicators, February 10, 1997.
Substanrial clcclines in a hanclf~llo f
cxtegories contril~utedto milcl increases in the m:ijor price incleses in
J:tnuar>.. fillling fi)ocl prices xncl airline kwes. along ~ \ . i r l i slon-er energ).
p i c e g:kins, I~elpeclliolcl the Consumer I'rice Incles (CI'I) to a seasonally :~cljustccl21nn~l;llmte of' l.S(Xi.
Sharp cleclines in foocl prices also
helpecl pilsh the I)rocl~~cer
I'rice
Incfes (t'f'l) clo\vn.
The 1'1'1 l o r finisliccl goocls
pc)stecl its first clo\vrlticli since Octo1)cr-1904, tillling j.i(!/i~
fix rlie nionth.
~ s c l ~ ~ c ltlie
i n g1-olatilehocl ancl eu-
ergy coml7c)nents, however. the I-'I'I
\vas unchanged :tncl tlie CI'I rose a
mere I .,4o.i). \vith 1,oth indeses following a tnoclerating trencl for more
than a yeas. i%onetlieless, the median CI'I's increase of 3.1?4 suggests
that. at least at the retail le\.el. uncler-lying price pressures h:lve remainecl stal)le.
Jieports from pt~rchasing rnanagers liitlt tIlilt tile CIOWII~LISII in pro~ COLISS~.
ducer prices has also S L I its
In Ja11~1;u-y.
tlie National Association
ol' I'~1rc1iasingi\Iatl:~gerrient'sindes
rose to its highest level since JLII).
1995. Still. more than 80%)of those
s~lrveyeclreporteel no change or :I
clecre:lse in supplier prices.
More that1 75?4of the economists
p:~rticipatingin the latest 131~1e
Chip
sLls\.ey see CPI-me:~s~~recl
inflation
rising in the 2.8'Xi to 3.2X1range in
1997. For 1998. the clistril~ution
chk~ngesonl!. sliglltly. \vith nearly
6O'H/il of the responclents preclicring
that the incles n-ill remain within :t
few tenths o f a percentage point o f
its five-year a\.erage (2.9%).
fcoriti?~~ccx/
o ~~?e.vtf~ccgc)
?
Inflation and Prices (cont.)
Percent
12-month oercent chanae
1 2 month percenl change
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1 COMPENSATION GROWTH AND UNEMPLOYMENT
Percent
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; and Board of Governors of the Federal Reserve System
The l3lue Chip consensus forecast
v:tries little from that of the Fecleral
O p e n hlarliet Com~nittee(170MC).
In his serni:lnni~alreport t o Congress
in Fehruar).. Feclelxl Reserve Cliairman Alxn Greenspan notecl that the
central tenclency of policy~naliers'
1997 inflation projecrions is 2.75% to
3.0%. The Cl1airm:ln suggested that
the unusu:~lly goocl inflation ourcome in 1996 :uncl the cspcctation of
contini~eclrestmint in 1997 "...owe in
large part to some tcmpol.ar).i factors.
of ~1nceri:linlonge\.ity." Specifically,
h e noteel that o or lie^ con~pensation
costs 1i;lve Ixen helcl clon.111,y savings o n emplo).ee hcncfits res~llting
frorn consiclerable, hut perhaps ternment sate fell helow; aboilt 6%. Ixlge
IX"':LIY recluctions in health care
and price gr*)\vth tenclecl t o pick up.
prices. Over the last two years. the
In light of this historical relationEmployment Cost Index (ECI) for
~ r s~~hcl~lecl
inflation
ship. o ~ current
l~enefitshas been tracking one f ~ l l l in the k'nce of high capacity utilizapercentage point below the ECI for
tion ancl Ion. unemployment lllay
\\.ages ancl salaries, after trending
seem surprising. Greenspan suggests
s~~t>stantially
above the rate of \\-age
that the " ... atypial restraint on comgro\vth for nearly eight years.
pensation incre:~ses...appe2trs to h e
More importa~lt,the Chairnl:~~
admainly tlie consecluence of greater
clressecl the apparent hrealiclo\\.n of
\ ~ o r l i e rinseci~rity." But he warns
:inel rethe link between inflatio~~
r:lther than
that this is a "...tempora~y
the
source ~lti~iz;~tiot~-r)artic~1;~1.1~~
a lasting phenomenon, hecause
use o f labor. During the 1960s ancl
there is a linlit to the \.slue of addi1970s, capacity utilization sates of
tional job sec~lritypeople ;Ire ~\'.illing
more than 80% typicall). correto exc1i:lnge for lesser increases in
slx)r~cIeclto 2111 acceleration in the
living stanclarcts."
CI1l. Similarly, when the c~nemploy-
http://clevelandfed.org/research/trends
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Economic Activity
Percent change irom corresponding month of previous year
REAL PERSONAL INCOME AND SPENDING TRENDSa
Real GDP and Components, 1 9 9 6 : l ~ ~ ~
(Preliminary estimate)
change,
billions
of 1992 5
Real GDP
Consumer spending
Durables
Nondurables
Services
Business fixed
investment
Equipment
Structures
Residential investment
Government spending
National defense
Net exports
Exports
Imports
Change in business
inventories
Percent change, last:
Four
Quarter
quarters
66.0
39.8
6.2
5.2
28.1
3.9
3.4
4.1
1.5
4.3
3.2
2.7
5.2
1.7
2.7
10.4
-1.2
10.9
-0.2
-1.3
-5.7
37.4
46.4
9.0
5.4
-0.8
25.2
-0.3
-0.4
-7.0
24.8
3.8
9.5
9.7
8.9
4.2
2.0
0.1
7.4
8.4
-18.1
Ratio
-
1 Real personal
consumption expend~tures
- Real disposable
personal Income
4
-
Perceni change ironi corresponding month oi previous year
lndxt
140
l2 -RETAIL SALES AND CONSUMER AVITUDES
10
-
130
a. Cha~n-we~ghted
data in bill~onsof 1992 dollars.
b. 1985 = 100 for consumer confidence; February 1966 = 100 for consumer sentiment.
c. Data since March 1996 are estimated by deflating nominal retail sales by the Consumer Pr~ceIndex for commodities.
NOTE: All data are seasonally adjusted except for consumer sentiment.
SOURCES: U.S. Department of Commerce, Bureau of the Census and Bureau of Econom~cAnalys~s;U.S. Department of Labor, Bureau of Labor Statistics;
The Conference Board; and the University of Michigan.
'The I \ Cornrileice I)ep,~~tment
reccnrl\ Ion erecl i t \ e\tim,tte of
Io~lltll-c~~l'll
te1 le'L1 (;l>fl g1 o\\ 111
from -1 7 ° i ~to 3 9('o Stlll. tlie econom)
encl-of-\ e,~r 1 x 1 to^ rn'ince
remalnccl \\ell .tlx)\e the t l i ~ r c l cl~i:ut e ~ 2 l 0 i i [>.ice
Sm,ill 11u\ine\5 in\ entor iec. ~ c countccl lo1 nloit of [lie clo\\ n\\ .~icl
rc\ lslo~i.\11gge\t111g
t11,it ihe ecoI101113 m,L\ t>c 1 ~ t t c . 1 porieel f o ~
grou th in t lie coriilng 11io11tlist h,ln
ollgi1l~lll\ tlloilgllt lk\[>lle \11l'LIl
don n\\ Lucl,~cl~u\tnient\
c\polt\ .uncl
pesx)i~:~l
cons~i~nption
espcnclit~~res
continueel to posl sul>slantialgains
1:ist cluartes. The rise in csposts.
ho\\-c\-er-.clicl not preverlt the tr;icie
cleficit 1;)s 1996 from seac,hing :in
eigllt->-e;~s
I~igll.
I~usincsses:icldecl S 16.6 1,illion to
tl~eirin\-cntories in 1996:I\~(J.co111p:ir~l\\-it11 S.3-i.5 1,illiou in the pre1.ious clu;~tcr.(L2clvanceestiln;itcs ["it
the f o i ~ r i l i - c ~ u ; ~
in\-entol-!ta
~~cciiriiulation at $3 1.9 I~illion. I<ecentl!seleasecl clxta for I)eccml>er sl~o\\tli:it o\-cr:ill in\.eniosics rcni:tin lo\\-
re1,1l1\c to \,~le\ 7he in\ entol\ -to~,itiolo1 ~ n ~ ~ n i i f ~ i c tll,~\
~ili~~g
Iwen ho\ erlng I,elo\\ 1 ioci In lccenr
month\ ie,~chrng i t \ lo\\est polnt
th14 c l e ~ ~ ~ ci\tl ethe \\ Iiolc\,~lcle\ cl.
tile 1'1t1o lid\ L ~ ~ t ~ ~ ~LI C~ Cl Il I' fcil1~rlg
,
o\ el the coi~r
\e of the p.t\t \ e,Lr /\Itho~igh r et,lli In\ entor re\ io\e
\ll'll [>I\
I l l 1~ece111l>e1
(lLilgcl\ 11ei,lLl\e of ,iuto\) tile\ .Ire not out of
1111e \\ It11 \‘lit'\
I lie l'ltest 1 3 1 ~ 1C~h ~ p5 ~ 1 rel
r
of
econolilr\t\ preclicls re,il econorii~c
~ ~ o / ? l / / l lO/I
/ c ~llcJY/
~ l go)
go)
http://clevelandfed.org/research/trends
March 1997
Best available copy
Economic Activity (cont.)
Percent chanoe from corresoondino ouarter oi orevlous vear
Percent change from correspond~ngquarter of prevlous year
12
Average quarterly percent change
10
8
6
4
2
0
-2
-4
-8
-6
-4
-2
0
2
Quarters from trough
4
6
8
a Shaded areas indicate recessions
b Dates are busmess cycle troughs
c Defined as period from bus~nesscycle trough to peak
NOTE All data are In chain-weighted 1992 dollars
SOURCE U S Department of Commerce Bureau of Econom~cAnalysis
growth o f ;~plxosim;~tel).
L?O in each
c1u:trter of 1997. A strong consumer
sector figures prorninentl). in the
forecast. Real clisposal>le personal
).
income gre\v 3:-kr%/;,in J a n ~ ~ a r(year
over year), xvhile consumes o ~ ~ t l a y s
jumped 3.2'%1.Retail sales in constant
clollars rose a health)- 5.7'%/;,.
:I spencling pattern that is consistent \~.ith
strong consumer conficlcnce re:ldirlgs in recent months. Incleecl, tlie
Conference 13o:u.tl's consumer conlitlcnce inclex pealieel at 118.7 in Jan-
its highest level since the summer of 1989. Although the incles
clipped slightly in Febt-uary, tlie Liniversity of Michigan's incles of consumer sentiment rose to 99.7.
As the current expansion he~tcls
into its seventh yeas, some ot~ser\.ers
have askecl \\~hetherits longevity implies anything ahout its sustaina1,ilit).. Econoniists have n o stanclarcl for
a r,y~icalexpansion. Cor~iparisons
n.ith recent business cycles inclicate
that the current upswing is by n o
means the longest. The 1982-90 esLiar);,
p:~nsion lasteel approximatel!itey 92
months, almost one year longer than
OLIS p e s e n t esl,erience, ancl the
1961-69 episocle lasted 106 mo~lths.
Some h211.eattrilxitecl the duration
ol' the current expansion to its relatively slo\v pace-2.4%1 (avel-age annuxl n t e ) since 1991:IQ. The aver:lge gro~vthmte from 196 1 to 1969
n ~ twice
s
21s large. A l t h o ~ ~ gsuch
h
compi~risonsare natural, they provide little e\.iclence fol. preclicting the
nest clo\\.ntc~rn.
http://clevelandfed.org/research/trends
March 1997
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US.Productivity Growth
I
Output per hour
95 SERVICE-SECTORPRODUCTIVITY~
Annual Productivity Growth
(Percent)
Outputside
productivitya
Incomeside
productivityb
Oulput per hour
34 -OUTPUT-SIDE PRODUCTIVITY~
32
-
30
-
28
-
Output per hour
33
INCOME-SIDE PRODUCTIVITY~
32
-
31
-
29 30
28
* * * l l t , l l l t [ r * * l , * * I I I I I f i v I : r l I t
1965 1969 1973 1977 1981 1985 1989 1993 1997
-
22
1965
1969
1973
1977
1981
1985
1989
1993
1997
a. Output-side productivity is measured as GDP in chain-weighted 1992 dollars divided by man-hours in non-agricultural establishments.
b. Income-side productivity is measured as gross domestic income in chain-weighted 1992 dollars divided by man-hours in non-agricultural establishments.
c. Service-sector productivity is measured as GDP for all services in chain-weighted 1992 dollars divided by man-hours in non-agricultural service establishments.
SOURCE: DRIIMcGraw-Hill.
Between 1965 ancl 197.1. l1.S. annilal
producti\iity gro\vth (measclrecl ;IS
o u t p i ~ tper hour \vorliecl) ;~ve~.agecl
'1.5%). This is in sharp contlxst to the
0.72%)Ixte recorclecl since 1973. In
the 1:ist fi1.e years. psocluctivity
growth has slippeel even fi~r~ller.
:iveraging an anemic 0.17(%1.
Tlie import:lnce of proclucti\.ity
gro\vth in cletermining :I country's
lolig-run stanclartl of liiing is ilnclenial)le. Given the most recent nclmbers, it \vo~11eI
talie the L.S. twice as
long to cloi~bleits st:ui~clarclo f li\.ing
thzin it \\~oulclhave prior to 107.1.
I'roclucti\.ity growth is not uni-
for~nacross the economy. ITores:umple. accorcling to official estimates.
procl~ctivityin the service sectos has
fallen at a 1.5% avenge annclal sate
since 1973. Many econo~nistscloi111t
this elmmatic decline. l~owcver,
q~lestioningthe quality of the clata
instead. O~ltputin the service sectos
is notoriously harcl to measure. For
instance, one conlponent of service
consilmption is education. Is one
c1:1ssroo111hour toclay the s:lme :is it
\\-:is 30 years ago, given the acl\,ent
of computers in the schools? Ancl
hoxv- cloes one measure aclv;il~cesin
ineclic:il tech~lology?
Such data prol~lemsnot only esist,
l ~ u are
t prol,ably worsening. I3y clefinition. GDIJ, :and hence proclucti\;ity,
shoulcl be the same t\.hether measurecl by the value of goocls ancl sel-riices prod~~ceci
or by the v a l ~ ~ofe the
inputs usecl in proclucing these
goocls. I3eca~lseof data prot,le~ns.
these o ~ i t p ~ ~2nd
t - income-sick
prodi~ctivity~neiisi~res
ah\-ays cliffersomen.hat. Since 1992. however, the
measurement prol~lemshave \vossenecl, with incane-side productivity
growth esceecling 0.5%-nearly
O..io/i, higher thr~n the tl-:iclition;il
outpilt-sick measure.
.
.
.
O
0
.
http://clevelandfed.org/research/trends
March 1997
Best available copy
(D
Labor Markets
Change thousands oi workers"
600
Labor Market Conditionsa
Average monthly change
(thousands of employees)
1996
1997
Year IVQ Dec. Jan.
Feb.
Payroll employment 216 224 231 247 339
Goods-producing
16
33 37
33 109
Manufactur~ng
-8
10
8
16
-2
Construction
25
24 29
15 109
Service-producing 199 191 194 214 230
Services
100
86 85 136
80
Retail trade
50
76 74
-2
49
Government
15
2 27
26
46
Household employ. 232 202 21 1 725 -150
Average for period
Civilian unemploy.
rate (%)
Mfg. workweek
(hours)
-200
1991 1992 1993 1994 1995 1996 1997
to daie
5.4
5.3
5.3
5.4
5.3
41.5 41.8 42.0
41.7
41.9
IVQ Dec Jan. Feb.
1996
1997
Percent
Perceni
Weeks
11
I MEDIAN DURATION OF UNEMPLOYMENT^^^
I
a. Seasonally adjusted.
b. Production and nonsupervisory workers.
c. Vertical line indicates break in data series due to survey redesign.
SOURCE: U.S. Department of Labor, Bureau of Labor Statistics.
U.S. lahor marliets continueel to reflect a healthy economy in Fel>rilaiy
a s nonfarm payroll employment
expanclecl 1,)- 339.000-the largest
gait1 since May. Althc~t~gli
much
of' this gro\\-th ste~ninecl Srom
a p i c l t ~ ~of
p 250.000 jotx in the
service-producing sector. ernployment in the goocls-procli~cingsector
macle a stronz shorving as \yell.
O n e of the primary factors clriving F e l > r ~ ~ a r y:idv:ince
's
n.as milcl
weather conclitions, which resultecl
in a h ~ l g esurge in the constrc~ction
intlustry. In fact. n.itli 10C).000 new
jobs aclclecl. this \\.as the inclustry's
hest performa~icein a year. bl:in~~hct~lrillg I ) ~ ~ ~ T o I I sfell slightly
(-2,000) follo\iing four consecutive
~ n o n t h sof positive reports. Gains in
the service-proclucing sector were
Ixtoyecl by the retail tracle incl~~stry,
\vhich aclded 49,000 m;orl<ers to its
p:iyrolls. Department store employment experienced an unseasonal>ly
high increase (57,000) as fewer
\vorkers \\;ere laic1 off last month
tlun normal.
The February unemployment
rxte also pc)intecl to strengtli in the
nation's lahor marltets. falling
O.l(X).to 5.3%. The eniployrnent-to-
pol3ul:ition r-atio sho\vecl little
change from Janrl;lry (63.60/i, to
63.5(X1).
hiean\vhile. the meclian clclration
of unemployment. n.hich has lollo\vecl a slight clo\vn\\.arcl trencl over
the current husiiiess e s p n s i o n . continueel its more recent uptick. 7'he
meclian ~ ~ n e m p l o y m e nspell
t
rose
from 7.7 weelis in Jan~12u-yto 8.4
\\.eelis last month. This means that
h~ilfof all jobless persons \vait more
than eight \\-eelis hefore fincling
\\-orl\--a rel:itively long periocl by
historiczil st:incl:ircls.
http://clevelandfed.org/research/trends
March 1997
Best available copy
Cost-oflivingAdjustments
Percent
INFLATION AND SHARE OF U S. WORKERS
WlTH COLA COVERAGE
Percent
SHARE OF U.S. WORKERS WITH COLA COVERAGE,
1
Percent change
16
Percent
'I
COMPONENTS OF WAGE RATE CHANGES IN ALL MAJOR
U.S COLLECTIVE BARGAINING AGREEMENTS
I
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; and The Bureau of National Affairs, Inc., Collective Bargaining Negotiations and Contracts,
vol. 24, no. 1338 (September 12, 1996).
Cost-or-li\.ing adjustments (COLAS)
are contract cl:~~ises
that esplicitly tie
wages anel benefits to the inflation
rate. They arlange for :kiitomatic
(often cluzlrierly) \vage increases that
depencl on the rise in a specific
price indes (generally the Consumer
Price Incles for ~ i r l ~ a\\-n'I ge earners,
COLAs ai-e lairly
or CPI-\V). I3eca~1se
simple provisions to write, they
might seem :I relatively costless way
to actjust for infl;~tion.
'I'he clata suggest othcr.\vise,
COLA pro\-isions \Yere incluclecl in ;I
sn~allfraction of the mxjor U.S. c-01-
lective bargaining agreements n'ritten cl~lringthe 1960s, when inflation
\\.as lo~v.1)uring the double-cligit inSlation of the 1970s, the share o f
\vorlters \vith COLA coverage rose
clrarn:~tically.If COLAs were costless.
one w o ~ ~ expect
ld
them to be incorp o u t e d in I:ll,or agreements inclefinitely. However, once inflation rates
slo\vecl ancl it was clear that they
\voulcl remain low, nlost collecti\-e
I)arg:~iningagreements n o longer incl~idedCOLA provisions.
C~~rrently,
the share of 1J.S.n w k ess covered by COLAs is at :I recorcl
lo\\-. \\-it11 these acljustments malting
LIPa tiny frxction o f the wage rate
changes res~klting from collective
harg:kining Ligreements. COLA coverage has clsoppecl in all incl~istries,incl~~cling
~n:~nufactiising.\\;\;here such
pro\,isions h;lve historically playecl :I
large role. Even where present, current COLA cl:~uses only partially insure against inflation. A 10% incre:kse in the CI'I-\V \\.ill illean a
wage acljustment of less than 40
cents per h o ~ in
~ rthe ~ 1 smajority
t
of
I ..S.
lal~or:kgrecments.
I
http://clevelandfed.org/research/trends
March 1997
Best available copy
The Eastern Kentucky Economy
Percent of labor force seasonally adjusted
1
l 4 UNEMPLOYMENT RATE
I
/ KENTUCKY EMPLOYMENT BY INDUSTRY, 1996a
Unemployment Rate by Metropolitan Areae
(Percent of labor force)
December
1996
December
1995
Cincinnati
3.7
4.0
Clarksvilie-Hopkinsville
3.5
3.6
Evansville-Henderson
3.6
4.3
Lexington
2.3
2.4
Louisville
4.0
4.0
Owensboro
4.6
4.9
a. Non-agricultural data; government share is calculated from non-seasonally adjusted data.
b. Transportation and public utilities.
c. Finance, insurance, and real estate.
d. Non-seasonally adjusted preliminary data. U.S. non-seasonally adjusted unemployment rate was 5.0% in December 1996
e. Data are not seasonally adjusted.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; and Kentucky Department of Employment Serv~ces.
The ~ o u r t l lFecle~llIieserve Ilistrict
inclucles the eastern half o f Iientucky, ~vl1ic.h.hecause of its co:11
supplies, has closer econo~nicties
to the ind~tstrialeconomics of I'itts1>urgli ant1 Cleveland than to the
Inore agricult~~r'al
\vestern c o ~ ~ n t i e s .
As in the other Fourth Ilistrict states.
ctnemployment in I<entucliy pealied
cluring the e:irly 1980s. n.hen the
manuk~cturinggseciol- n.ent through
a n extenclecl restr~tcturing.The jot>-
less rate fell I~elowthe national averxge in 1992. and has generally
stayecl there.
Altho~lgh Ketltucky's economic
~ x o s p e c t s l ~ a vi~liprovecl
e
in the last
Sew years, Illally counties in the
eastern part of the state co~itinueto
experience high unemployment
rates. This is particularly true o f the
I - L I I . ~ co~lnties.
~
which have been hit
I,y joh losses in the textile ancl coal
mining industries in recent ).ears.
Iientucliy's metropolitan areas. 1,);
co11tl.a~~.
have very lo\\. ~lnernployment rates 21nd tight lal~ormarliets.
Co\-inaton. part o f the Cincinnati
metropo1ii:ln area, has experienced
some of the strongest gro\i;th in the
region, while Lexington. home to
the University o f Iientucliy ancl the
l'oyot:~Georgeto\vti itssembly pl:uii,
has consistently m:~int;li~iecla low
jol,less sate.
(cotzlirzrred otz tle.~tpugc)
The Eastern Kentucky Economy (cont.)
http://clevelandfed.org/research/trends
March 1997
Best available copy
Number of mines
I
3'000 ACTIVE MINES IN EASTERN KENTUCKY a
BY COUNTY, 1996
M~llionsof tons
1 COAL PRODUCTION
I
M~llionsor tons
1 200
a. Includes temporarily idie mines.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; Ohio Bureau of Employment Services; Pennsylvania Department of Labor and Industry;
Kentucky Department of Employment Services; West Virginia Bureau of Employment Programs; Kentucky Coal Marketing and Export Council; Kentucky Coal
Association; and Kentucky Depariment of Mines & Minerals.
Altho~tgllthe mining incl~~str).
employs only 21 small fraction o f the
total Fourth Ilistrict u.orliforce, it
plays :Lsignific:unt role in m:my si11;11
coitnties, particc~l:~rly
those of e:lstern l<entucliy. Cox1 mining procluction has risen slo\vly for clecaclcs in
t
the eastern I<entiicli). fielcls, 1 ~ 1employrllent in the ir~cl~rstryis just
slightly more than Ii:tlf its 1W9
level. 'This reflects pr-ocluclivity increases that span most ol' the co;~l
mining inclustry, both surface ancl
~tnclergroi~ncl,
as well as a shift to\varcl more surf:~ce mining in the
eastern I<entucky counties. The ;I\;er:ge coal miller in the state's
Fourth Ilistrict areas proclucecl 3.28
tons of coal per hour in 1994. up
from 2.2 tons in 1977.
Preliminary reports inclicate tll;~t
employment losses in Kentucliy's
mining inclilstry rnay finally be halting. Electric utilities are the prirn:lry
consLlmers of the eastern coitnties'
coal, so the current effort to cleregulate these inclustries (clirectecl to~varclopening local powrer distril~utors to competition in power
prod~tction)will also irnpact the coal
rnining inclclstry. If coal-burning
po\\;er plants continue to be positioned as the lo~vest-costproviders
in the region, mining rnay he ripe
for filrtlier gro\\~th 21s po\ver is
shippecl outsicle the :ma to replace
higl~er-costsoitrces usecl else\vhere.
http://clevelandfed.org/research/trends
March 1997
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Banking Consolidation and Small Business Lending
Percent oi all banks
Percenl oi C&l loans
60
80
<O 05
0.05-025
0 25-10
I C & l LOANS BY BANK SIZE
0.05-025
>I
0
Asseis, bllllons oi dollars
I
0 25-10
Assels, billions oi dollars
Percent of C&l loans
Percent
Rn
15
I C & l LOANSITOTALADJUSTED ASSETS, BY LOAN SIZEa
Loans , millions 01 dollars
Loans, millions 01 dollars
a. Total adjusted assets equals total assets plus reserves allocated against transfer risk and loan and lease losses
SOURCE: Board of Governors of the Federal Reserve System, Call Report RC-C, part II.
f-listoric;~lly.banks in the 17,s.have
been suhject to ~nyriaclrestr.ictions
on their geographic espansion. At
the beginning of the cent~iry,most
states :~llo\vedb:~nlis to ha\.e only
o n e office. In time. multi-office
hanlts \\;ere permitteel. lxoviclecl
that the offices n w e locatecl \I-ithin
the institutio~l'shome st:lte.
In the first llalf o f the 1950s.
banks :lttemptecl to esp;lncl [heir :ictivities across state lines by cleveloping I>anli holding companies
(HMCs) with hanks located in various states. 111 1956, the Ilouglas
Amendnlent to the Bank Holcling
Company Act put a stop to this initiative Ily recluiring BHCs to obtain
:uithorization from the hoslle state of
an institution it wanted to accl~~ire.
k i t that time, states clid not allow outof-state-banks to acquire 1oc:~lfirms.
By 1984, these restrictions had
pushed the number of banlts to a
post-Ilepression high of ;11>out
14,500. Subsequent regulatory
changes lil>errrlizecl restrictions on
hunching ~lnclmergers. As a result,
the nuruber of hanks fell to approsimately 9.500 hy the end of 1996. 13etween J L I I 1994
~ ~ ancl June 1996
alone, the n u m l ~ e rof feelerally insureel U.S. commercial I>anlis decreased by more than 1.000, as small
institutions rnergecl with larger ones.
Consoliclation may affect the banliing inclustry's performance Ixcausc
hanks of clifferent size have clifferent
(contit~zle~l
ooli t?e.~t
p~~gej
0
.
0
8
e
e
http://clevelandfed.org/research/trends
March 1997
Best available copy
0
Banking Consolidation and Small Business Lending (coat.)
Percent
Percent
80
80
60
GO
40
40
20
20
0
c0.05
0.05-0.25
0.25-10
>I 0
0
<0.05
Assets. bill~onsof dollars
Percent
Percent
80
0.05-025
0.25-10
>I0
Assets, billions of dollars
80
CO 05
0.05-025
0.25-10
IC&l L O A N S OF M O R E T H A N $1 M I L L I O N B Y B A N K S I Z E I
>I 0
Assets, billions of dollars
0.05-0.25
0.25-10
>I0
Assets, billions of dollars
SOURCE: Board of Governors of the Federal R e s e ~ System.
e
Call Report RC-C, part II.
ways of operating. In the past, larger
commercial IIanlts. \vhich n1:ulie
lnost of the commercial ancl incli~strial (C&I) lo:u~~s
in the 1i.S.. have clevotecl a lower share of their assets to
small I~ilsinesslencling than 11:tve
s~n:iller1,anlis. This has ca~~secl
some
concern ;tl,out the possi1)le ilnpact
of consolicl:ution on the av:til:ul,ility
o f funcling to s~nallI~iusinesses.'I'he
reason is that consolicl>ttionis eliminating m m y small firms' tt.:uclition:ul
suppliers of creclit-usilall); sm:ull.
inclepenclcnt 17anlcs-I,y tGu~1sIkrri~1g
their assets to larger organizations.
Whether the funding avai1al)le to
small firms shrinlts depends cruci~tllyon whether hanks' lencling
propensiities remain the same after
consoliclation.
[Inti1 recently, research o n bztnliing consolielation's effect on s111;ull
firm creclit w\ias hampered by :I lack
o f appropriate ckata. This changecl in
June 1993, ~ v h e nCall Reports (statements of I~anlis'condition ancl income) l ~ e p nto include information
o n small l~usinessloans.
Ax-:lil:tl,le cl21ta confirm tl~atthe
largest b:unlis (those with assets
al,ove $10 I~illion) are not major
lenclers to small fir111s. 111 1994, for
example, this g r o ~ ~o fpclepositories
macle less than 20% of C&I loans
I)elow S100.000. By contrast, they
m;uclc more than 60% of the loans
:ll>o\.e $1 million. Bet\veen 199.4
ancl 1996. the n ~ l m h e rof hanks in
this class increasetl, as clicl their
share of C&I 1o:tns of all sizes. Note,
lio~.cver,that the greatest increase
(co~rtilzl/c>cl
otz rzex/lp~/gc>)
http://clevelandfed.org/research/trends
March 1997
Best available copy
Banking Consolidation and Small Business Lending (cont.)
Percent
Percent
15
15
12
12
9
9
6
6
3
3
0
<O 1
01-025
0
0 25-1
<0 1
Loans, millions ol dollars
Percenl
Percent
15
12
12
9
9
6
6
3
3
<0 1
0.1-0.25
0 25-1
0 25-1
Loans, millions of dollars
15
0
01-025
0
<O.l
Loans, millions oi dollars
0.1-0.25
0.25-1
Loans, millions oi dollars
a. Total assets of less than $50 million.
b. Total assets between $50 million and $250 million.
c. Total assets between $250 million and $10 billion.
d. Total assets of more than $10 billion.
SOURCE: Board of Governors of the Federal R e s e ~ e
System, Call Report RC-C, part 11.
occurred in their s1i;lre of loans
Ixlon; S100.000.
The clata also confirm that as the
size of a bank increases, tlie proportion of its acljustecl assets clevotecl to srnall C&I loans tends to
slirinli. The smallest I,anlts (tliose
with assets of less than $50 million) clevote approximately (,(HI of
their ;lcljustecl assets to C&I loans
of less than $100.000. but or~ly
0.2% to loans above $1 million.
The largest IIanlis llave esactly the
opposite pattern. The fraction of
their assets devoted to those two
lerlclirlg classes is about 0.5% and
10%, respectively.
Iiesearch o n consolidation's imp ; ~ on
t SIWII business lendirlg is still
in its early stages. So far, the results
have heen i~lconclusiveon certain
issues. For example, the evidence is
~ilisedo n whether mergers restrict
lending to sliiall businesses: 'The irnpact appears to depend on the size
of the lxlnlts involvecl in the consolielation. It does appear, however, that
lilergers ancl acquisitions involving
sm:lll Ixtnlis tenel to boost small
1)usiness lencling.
liesearch on consolidation's itnpact 011 the overall availability of
funcling to snlall I~usinessesis even
more limitecl. The reason is that very
little inform:ttion exists about s~iiall
firms' alternatilre sources of funcling,
which can include other financial
;ul;~ngements(such as creclit carcls,
residenti:ll mortgage loans, ancl :tilto
loans) ancl nonbank sources (SLICII
21s finance comp;inies, tracling p:lrtners, ancl venture c;lpitalists).
http://clevelandfed.org/research/trends
March 1997
Best available copy
The CurrentAccount and the US. illollar
lnoe/ t.iaf:b 1973 = 100
1E0
Perceni 01 GDP
06
04
110
02
120
00
100
-0 2
80
-0 4
60
-0 6
'0
-0 8
20
-1 0
1973
0
1974
1975
1976
1977
1978
1979
1980
Blll~onsoi U S dollars
40
U.S. BALANCE OF PAYMENTS
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Bill~onsoi U.S. dollars
120
OFFICIAL CAPITAL F L O W S ~
1
I
20
a. Trade in goods and services.
b. Quarterly average of monthly data.
c. Private capital flows have signs reversed and include the statistical discrepancy as unrecorded capital flows. Positive values represent a capital outflow.
d. Positive values represent a capital inflow.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; and Board of Governors of the Federal Reserve System.
Ol~serl-~~tions
that the cloll:tr is o \ w valuecl imply that its current level is
c~nsust:~inableancl tliat its recent
pat11 is inconsistent with a gro\ving
U.S. cc~rrentaccount (tracle) cleficit.
Since micl-199-3, the real (inf1:ttionacljustecl) clo1l;tr has appreciatecl
10%, while the tlxcle cleficit has
wiclenecl 11y $6 I~illion.A~Iucllof this
:tppreciation reflects cloll;~rmoverrlents against the Jap:ulese yen. Unfortun:ttely, the r e l ~ ~ t i o n s l ~beip
tween the clollar :untl the tl-:~clc
cleficit is neither as cle:u. nor as un-
aml>ignous as lllany pil~ldits\VOLIICI
have us I~elieve.
A country running a tlxcle cleficit
is al)sorbing-thro~~gl~its consilmp[ion ancl in\.estment-more of the
worlcl's resources than it is proclucing. Such .:t country is also spencling
heyonel its c ~ ~ r r e income
nt
ancl must
I~orror\.from al,roacl to finance rhztt
cxlxncliture. l'his economic k ~ c tof
life gilar:ultees that a net infl~)\\.of
foreign capital will always es:~ctly
m;ttch ;I current account cleficit in a
n:~tion's1~al:mceof payments.
iZ country may incur a current acc o ~ ~ cleficit
nt
t h r o ~ ~ gvarious
h
routes,
tach with clifferent implications for
its eschange rate. If, for example.
clornestic clemand initially incre;tses.
i ~ ~ l p o rwill
t s expanel. the clomestic
cLirrency \\/ill clepreciate, ancl the
t ~ ~ ccleficit
le
will gro\\r. Ilomestic interest ~.atesrnay also rise to attract
inflow of fixthe co~tnterl~al:tnci~~g
cign capital. This stanclarcl view
holcls that the dol1:lr depreciates
\\.hen tlle IJ.S. tracle cleficit \vielens.
fcor~tir/lredor2 rie.~tp~rgc)
http://clevelandfed.org/research/trends
March 1997
Best available copy
The CurrentAccount and the US. Dollar (cont.)
Billions of U.S dollars
400
Percent change from correspondingquarter 01 previous year
Q
Yen per U S dollar
160
Marks per U.S.dollar
1.85
EXCHANGE RATES
Un~ts
6
INTEREST RATE DIFFERENTIALS
4
-
10-year US -Germany
-8
1991
I
I
I
I
I
L
1992
1993
1994
1995
1996
1997
a. Direct investment recorded at market value.
b. The real exchange rate is calculated using consumer prices for Germany, Japan, and the U.S. The base period is November 1991.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; U.S. Department of Labor; Bank of Japan; Statistics Bureau of the Japanese Prime
Minister's Office; Statistisches Bundesamt; Deutsche Bundesbank; and Board of Governors of the Federal Reserve System.
Alternatively, suppose that improvccl
investrilent opportcinities attract a n
inflow of k~reignc;~pital.'She do~nestic currency rnay appreci;ite.
making clomestic goocls more espensiLre relatiw to foreign goods
a n d striliitlg tlie 1,al:unce t~et\veenincreasecl capital inflmvs and a larger
tr;lcle cleficit. This seconcl case connects a clollar appreci:ition to :I U.S.
trade cleficit.
Which scenario Ixst clescri1,es the
U.S. position is uncle~ir,I > i i t 01-er the
recent l~iisinessespansion, real cconornic gron.th ancl interest r:itc clif-
ferentials have favored an i~lflo\vof
foreign capital. Nevertheless. :ln espanding inflow of foreign offici:il
capital-not private capital-has financed our current account cleficits
since 1994. Conceivably. Lvithout
this i~ltlux.Ive might have ot,servecl
some :ilternative configurations of
higher interest rates ancl lo~verclol1;ir eschange rates.
In any case, as a current :kccount
cleficit persists, the worlcl accumillates cl;~imson the f i ~ t i ~outpiit
re
of
tlie cleficit country. Eventually. :is
happened to the U.S. in the late
1980s. that country I~ecomes a
cle1,tor. If dehts pile up, creclitors
may hesitate to accluire :icldition:ll
cleht unless the risk premium also
increases. At this point. either higher
interest ~xtes.currency clepreci;ition,
or some coml,ination of the two will
l ~ e c o m enecessary to attract aclclitional foreign savings. '['he dollar's
exc1l:unge r:ite Inay clepencl Inore on
our accumi~lateclstocli of intern:ltion:il clel,ts than on oiir cilrrent
t ~ i t l etleficits. l x ~ tlie
t point at Lvllich
oils cle1,ts t~ecotneprol~len~~atic
is clifficult to predict.
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