Full text of Economic Trends (Federal Reserve Bank of Cleveland) : Economic Trends - March 2005

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

1
•

•

The Economy in Perspective

FRB Cleveland • March 2005

Attention: Deficit Disorder…The vexed question of
the nation’s deficits, both actual and projected, has
aroused a cacophony of opinions. Despite the tumult, however, there is an element of arithmetic
that must be respected.
From The Budget and Economic Outlook: Fiscal
Years 2006 to 2015, published by the Congressional
Budget Office, January 2005:
“In the decades beyond CBO’s projection period,
the aging of the baby-boom generation, combined
with rising health care costs, will cause a historic
shift in the United States’ fiscal situation. Over the
next 30 years, the number of people age 65 or older
will double, while the number of adults under age
65 will increase by less than 15 percent. Moreover,
health care costs are likely to continue to grow
faster than the economy. (Between 1960 and 2001,
the average annual growth rate of national health
expenditures exceeded the growth rate of GDP by
2.5 percentage points.)
Driven by rising health care costs, spending for
Medicare and Medicaid is increasing faster than can
be explained by the growth of enrollment and general inflation alone. If excess cost growth continued
to average 2.5 percentage points in the future, federal spending for Medicare and Medicaid would rise
from 4.2 percent of GDP today to about 11.5 percent
of GDP in 2030…The Medicare trustees assume that
excess cost growth will decline to 1 percentage
point, on average; however, even at that rate, federal
spending for Medicare and Medicaid would double
to 8.4 percent of GDP by 2030.
Outlays for Social Security as a share of GDP are
projected to grow by more than 40 percent in the
next three decades under current law: from about
4.2 percent of GDP to more than 6 percent. Such
costs are likely to creep up gradually thereafter. By
contrast, federal revenues credited to Social Security
are expected to remain close to their current level—
around 5 percent of GDP-—over that period.
Together, the growing resource demands of
Social Security, Medicare, and Medicaid will exert
pressure on the budget that economic growth
alone is unlikely to alleviate. Consequently, policymakers face choices that involve reducing the

growth of federal spending, increasing taxation,
boosting federal borrowing, or some combination
of those approaches.”
Federal Reserve Board Chairman Alan Greenspan
testified at the March 2 Committee Hearing of the
U.S. House of Representatives Budget Committee.
In response to a congressman’s inquiry about the
options available for reducing the nation’s dependence on foreign capital inflows, he replied that we
have very limited choices. We are now borrowing the
equivalent of almost 6 percent of our GDP annually,
and we use it, essentially, to finance domestic investment. To curtail, at least in part, the amount
of investment that is being made in the United
States, we would have to either curtail domestic
investment—a course he does not favor—or
increase domestic savings.
Curtailing domestic investment would require us
to slow the pace of housing construction or the
amount of plant and equipment that we rely on to
enhance our productivity. If we do not want to slow
domestic investment, there is only one alternative,
and that is to increase domestic savings. How? By
bringing the federal budget closer to balance, either
through a higher rate of household saving or
through increased saving by corporations. That’s it.
So our choices are limited.
Chairman Greenspan remarked that today’s limited possibilities for financing the current account
deficit reminded him of the time in 1983 when he
was chairman of the Social Security Commission. At
their first meeting, he recalled, the commission
members contemplated their options for shoring
up the dwindling Social Security trust fund. They
recognized right away that they could either raise
taxes, lower benefits, or advert to general revenues.
But, Chairman Greenspan recalled, for several
meetings the commission resisted acknowledging
the simple, but powerful, arithmetic of the situation
until they finally exhausted themselves and concluded that there was no alternative to action.
The Chairman’s experience foretells what we
know to be true: These deficit-inducing issues will be
resolved—somehow. Let us work for good solutions.

2
•

•

Inflation and Prices
12-month percent change
4.25 CPI AND CORE CPI

January Price Statistics

4.00

Percent change, last:
a
a
a
1 mo. 3 mo. 12 mo. 5 yr.

2004
avg.

3.75
3.50
CPI

Consumer prices

3.25

All items

0.6

1.3

3.0

2.5

3.4

Less food
and energy

2.4

2.0

2.3

2.1

2.2

Medianb

3.2

2.2

2.4

2.8

2.3

3.00
2.75
2.50
2.25

Producer prices

2.00

Finished goods

3.2

Less food and
energy

2.7

4.2

2.4

4.4

1.75
CPI excluding
food and energy

1.50

9.7

4.8

2.7

1.2

2.2

1.25
1.00
1995 1996

1997

1998

1999

2000

2001

12-month percent change
4.25 CORE CPI AND TRIMMED-MEAN MEASURES

12-month percent change
3.50 PCE AND CORE PCE PRICE INDEX

4.00

3.25

3.75

3.00

3.50

2003

2004

2005

2.75

Median CPI b

3.25

2002

PCE
2.50

3.00

2.25

2.75
2.00
2.50
1.75
2.25
1.50

2.00
1.75

1.25
CPI, 16% trimmed mean b

1.00

1.50

PCE excluding food and energy

CPI excluding food and energy

0.75

1.25

0.50

1.00
1995 1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

1995 1996

1997

1998

1999

2000

2001

2002

2003

2004 2005

FRB Cleveland • March 2005

a. Annualized.
b. Calculated by the Federal Reserve Bank of Cleveland.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; U.S. Department of Commerce, Bureau of Economic Analysis; and Federal Reserve Bank
of Cleveland.

The Consumer Price Index (CPI) rose
at an annualized rate of 0.6% in January after remaining unchanged in December; the core CPI, which excludes
the volatile food and energy prices,
rose at a 2.4% annualized rate. The
median CPI, which attempts to control for volatile monthly price changes
by considering the center of the
monthly price-change distribution,
increased at a brisk 3.2% annualized
rate, its second-largest advance in the
past year.
Longer-term inflation patterns indicate that although the retail price

measures inched upward in January,
inflation seems to be relatively stable.
Although inflation, as measured by
the core CPI, has trended upward
over the past year, its 12-month
growth rate of 2.3% was about 0.6
percentage point below the average
rate during the previous economic
expansion. The 12-month growth
rates of the median and 16% trimmedmean CPI were 2.4% and 2.3%, respectively. Patterns in the Personal Consumption Expenditure (PCE) Price
Index and the core PCE Price Index,
which measure an alternative consumer market basket, largely mirror

the CPI price measures. The core PCE
has fluctuated between 1.4% and 1.6%
for the past 12 months.
In its semiannual Monetary Policy
Report to the Congress, the Board of
Governors of the Federal Reserve System reported recent projections by
the Federal Open Market Committee.
They showed inflation rising slightly:
The central tendency of the group’s
projection for the core PCE Price
Index in 2005 and 2006 is between
1
3
1 /2% and 1 /4% on a fourth-quarter
over fourth-quarter basis. The February projections for 2005 are lower
(continued on next page)

3
•

•

Inflation and Prices (cont.)
Annual percent change
3.0 CORE PCE PRICE INDEX AND BLUE CHIP PANEL OF
ECONOMISTS’ CORE PCE PRICE INDEX FORECASTS

Four-quarter percent change
2.8 CORE PCE PRICE INDEX AND FOMC MEMBERS’ CORE
PCE PRICE INDEX PROJECTIONS a
2.6

2.5
Actual
Consensus forecast

2.4
Core PCE

Lowest 10 b

2.0

2.2

Highest 10 c

Upper
range
2.0
Central
tendency

1.5

1.8
1.0

1.6
Lower
range

1.4

0.5
1.2
0

1.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

4-quarter percent change
6 PRODUCTIVITY AND UNIT LABOR COST

12-month percent change
18 BROAD DOLLAR INDEX AND NONPETROLEUM
16 IMPORT PRICES

Broad Dollar Index

12
4
10
8

Output per hour
2

–2
0
–4

Unit labor cost

–6

–1

Nonpetroleum import price index

–8
–2
1995 1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

–10
1995 1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

FRB Cleveland • March 2005

a. Projections by the Board of Governors of the Federal Reserve System and Reserve Bank presidents.
b. Average of lowest 10 forecasts.
c. Average of highest 10 forecasts.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; U.S. Department of Commerce, Bureau of Economic Analysis; Board of Governors of the
Federal Reserve System, “Foreign Exchange Rates,” Federal Reserve Statistical Releases H.10 and Monetary Report to the Congress; and Blue Chip Economic
Indicators, January 10, 2005.

than last July’s, in which members
3
anticipated a rise of 1 /4% to 2% in
core-PCE-measured prices. Private
forecasters expect those prices to
register in the upper range of the
FOMC members’ projections: Consensus estimates by the Blue Chip
panel of economists show prices rising 2.0% in 2005 and 2.1% in 2006.
In presenting the Monetary Policy
Report to the Congress, Chairman
Greenspan noted that the inflation
outlook would be shaped by productivity developments, changes in the
exchange value of the dollar, and oil

prices. He observed that “…the implications for inflation will be influenced
by the extent and persistence of any
slowdown in productivity. A lower rate
of productivity growth in the context
of relatively stable increases in average
hourly compensation has led to
slightly more rapid growth in unit
labor costs… To date, with profit margins already high, competitive pressures have tended to limit the extent
to which cost pressures have been reflected in higher prices.” Whether inflation actually rises, however, “...will
depend on the degree of utilization

of resources and how monetary policymakers respond.”
Inflationary pressure could also
arise from further dollar depreciation, which makes imports relatively
more expensive in dollar terms.
Chairman Greenspan warned that
“the recent somewhat quickened
pace of U.S. import prices suggests
that profit margins of exporters to
the United States have contracted to
the point where the foreign shippers
may exhibit only limited tolerance
for additional reductions in margins
should the dollar decline further.”

4
•

•

Monetary Policy
Percent
8 RESERVE MARKET RATES

Percent
3.75 IMPLIED YIELDS ON FEDERAL FUNDS FUTURES

3.50

Effective federal funds rate a

February 18, 2005

3.25

February 3, 2005 c
3.00

5
Intended federal funds rate b

December 15, 2004 c

2.75

2.50
Discount rate b

Discount rate b
2

2.25

2.00

November 11, 2004 c

1.75

0
2000

2001

2002

2003

2004

2005

Percent, daily
100 IMPLIED PROBABILITIES OF ALTERNATIVE TARGET FEDERAL
FUNDS RATES (MARCH FOMC MEETING) d
90

Nov.

Jan.

Mar.

May

2004

Actual 2004

2.75%

Sept.

Nov.

Economic Projections for 2005 (percent)

80
70

July
2005

Federal Reserve governors
and Reserve Bank presidents
Range
Central tendency

Nominal GDPe

6.2

5.00–6.00

5.50–5.75

Real GDPe,f

3.7

3.50–4.00

3.75–4.00

PCE price index
excluding food
and energye

1.6

1.50–2.00

1.50–1.75

Civilian unemployment
5.4
rateg

5.00–5.50

5.25

50
40
2.50%
30
20

3.00%

10
0
12/22 12/28 01/03 01/09 01/15 01/21 01/27 02/02 02/08 02/14 02/20
2004
2005

FRB Cleveland • March 2005

a. Weekly average of daily figures.
b. Daily observations.
c. One day after the FOMC meeting.
d. Probabilities are calculated using trading-day closing prices from options on April 2005 federal funds futures that trade on the Chicago Board of Trade.
e. Change, fourth quarter to fourth quarter.
f. Chain weighted.
g. Average level, fourth quarter.
SOURCES: Board of Governors of the Federal Reserve System, Monetary Policy Report to the Congress and “Selected Interest Rates,” Federal Reserve
Statistical Releases, H.15; Chicago Board of Trade; and Bloomberg Financial Information Services.

On February 2, the Federal Open Market Committee (FOMC) raised the
intended federal funds rate 25 basis
points (bp) to 2.5%, the sixth such
increase since the current round of
tightening began in late June 2004.
The FOMC’s press release stated that
“even after this action, the stance
of monetary policy remains accommodative.” It noted that “labor market conditions continue to improve
gradually” and pointed to a containment of longer-term inflation expectations. The FOMC has said that

accommodation can continue to be
removed at a “measured pace.”
Market participants seem to agree.
Implied yields are consistent with 25
bp increases in the funds rate at the
March, May, and June meetings. Since
the FOMC’s February 1–2 meeting,
participants in the options market
have placed higher probabilities on a
25 bp increase at the March meeting.
The implied probability of a 25 bp
hike now exceeds 92%.
On February 16, the Fed released its
semiannual Monetary Policy Report to

the Congress, which presents economic projections by the Board of
Governors and Reserve Bank presidents. The central tendency of the
projections for real GDP growth for
2005 is 3.75%–4.00%. The core PCE
Chain-Type Price Index is expected to
grow at an annual rate of 1.50–1.75%,
and the fourth quarter unemployment
rate is projected at 5.25%.
How reliable might these projections be, in themselves and relative
to private forecasters? A scatter plot
of perfect projections versus actual
(continued on next page)

5
•

•

Monetary Policy (cont.)
Projected fourth-quarter average, percent
12 UNEMPLOYMENT RATE, ACTUAL AND
PROJECTED 12 MONTHS AHEAD a
11

Percent change, fourth quarter to fourth quarter
10 REAL GDP GROWTH, ACTUAL AND
b
9 PROJECTED 12 MONTHS AHEAD
8

7
Real GDP

45º line

6
5

4
7

2
1

Actual unemployment, 12 months prior

Monetary Policy Report

Range of projections

Philadelphia Survey of Professional Forecasters

–1

–2
3

8
6
9
7
Actual fourth quarter average, percent

Percent change, fourth quarter to fourth quarter
14 INFLATION, ACTUAL AND PROJECTED 12 MONTHS AHEAD c
13

1979

1983

1987

1991

1995

1999

2003

Percent, weekly average
6.0 YIELD CURVE d
5.5
November 12, 2004 e

12
5.0

June 25, 2004

4.5

February 18, 2005

Range of projections

4.0

December 17, 2004 e

3.5

7
3.0

Inflation

2.5

2.0

February 4, 2005 e

3
1.5
2
1.0

1
0

0.5
1979

1983

1987

1991

1995

1999

2003

10
Years to maturity

FRB Cleveland • March 2005

a. The Monetary Policy Report projection is the midpoint of the range. The Survey of Professional Forecasters projection is the median response.
b. Projected and real GDP are both GNP prior to 1992.
c. From 1979 to 1989, inflation and projected inflation are plotted as the implicit GDP deflator; from 1990 to 1999, they are plotted in terms of the CPI; from
2000 to 2001, they are plotted in terms of the PCE Chain-type Price Index; and from 2002 to 2004 as the core PCE Chain-type Price Index.
d. All yields are from constant-maturity series. Average for the week ending on the date shown.
e. The first weekly average available after the FOMC meeting.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; U.S. Department of Labor, Bureau of Labor Statistics; Board of Governors of the
Federal Reserve System, Monetary Policy Report to the Congress; Board of Governors of the Federal Reserve System, “Selected Interest Rates,” Federal
Reserve Statistical Releases, H.15; and Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters.

values would lie along a 45-degree
line. Here, we compare the Monetary
Policy Report’s accuracy in projecting
unemployment with that of private
forecasters and with a naïve forecast
that simply predicts a future value
equal to the current one. At times,
these values miss the actual unemployment rate by one or more percentage
points. We can gauge their overall performance by calculating mean absolute
errors. Over a 12-month horizon, the
mean absolute error of professional
forecasts of the unemployment rate

is 0.52% versus the Federal Reserve’s
0.38%. Both are more accurate than
the naïve forecast’s mean absolute
error of 0.69%.
In recent years, Fed projections of
real GDP growth (fourth quarter to
fourth quarter) have tracked actual
real GDP growth quite well, but the
timing of its upturns and downturns
has always been difficult to project.
And for prolonged periods, the projections over- or understate real GDP
growth considerably. The inflation projections, (0.85% mean absolute error)

fared better than projections of real
GDP growth.
Since the FOMC began tightening
in June 2004, the yield curve has flattened significantly. In returning policy
to a more neutral stance since then,
the FOMC has increased the target
federal funds rate by a cumulative
150 bp. Yields on three-month Treasury bills have essentially followed
suit. At the curve’s long end, however,
the yield on 10-year Treasury bonds
has fallen nearly 50 bp.

6
•

•

Money and Financial Markets
Percent
Percent
3.00 INTENDED FEDERAL FUNDS RATE AND TREASURY YIELDS 5.000
4.875

2.75

10-year Treasury note

2.50

Yield spread: 10-year Treasury note minus 10-year TIPS a

4.750

Three-month Treasury bill

2.25

Percent
3.00 10-YEAR REAL INTEREST RATE AND
TIPS-BASED INFLATION EXPECTATIONS

4.625

2.00

4.500

1.75

4.375

1.50

4.250

1.25

4.125

1.00

4.000

2.50

2.25

2.00
10-year TIPS a
1.75

Intended federal funds rate
0.75

3.875

0.50

3.750

1.50

3.625

0.25
May

July

Sept.
2004

Nov.

Jan.

Mar.

1.25
May

July

2005

Sept.
2004

Nov.

Jan.

Mar.
2005

Index, daily
1,225 S&P 500 PRICE INDEX

Percent
4.25 YIELD SPREAD: HIGH-YIELD BONDS
MINUS 10-YEAR TREASURY NOTE b

1,200

4.00

3.75

1,175

3.50
1,150
3.25
1,125
3.00
1,100
2.75
1,075

2.50

1,050

2.25

May

July

Sept.
2004

Nov.

Jan.

Mar.

May

July

2005

Sept.
2004

Nov.

Jan.

Mar.
2005

FRB Cleveland • March 2005

a. Treasury inflation-protected securities.
b. Merrill Lynch High-Yield Master II Index minus the yield on the 10-year Treasury note.
SOURCES: Board of Governors of the Federal Reserve System, “Selected Interest Rates,” Federal Reserve Statistical Releases, H.15 and Bloomberg Financial
Information Services.

In his February 16 testimony before
Congress, Federal Reserve Chairman
Greenspan discussed these yield curve
movements. Changes at the long end
of the nominal yield curve can be attributed to one or both of two causes:
changes in real rates and changes in inflation expectations. Treasury inflationprotected securities (TIPS), which provide one measure of a real interest
rate, indicate that long-term real interest rates have fallen about 50 bp since
June. Since the real rate’s decline
matches that of the nominal rate, TIPS
imply that long-term inflation expectations are generally flat.

Some analysts argue that this decline reflects market participants’
view of slower economic growth in
the future, possibly a consequence of
rising energy prices. But, as Chairman
Greenspan observed, this “does not
mesh seamlessly with the rise in stock
prices and the narrowing of credit
spreads observed over the same interval.” Others suggest that the yield
curve’s flattening reflects lower longterm inflation expectations. This appears contrary to the information
from TIPS yields.
Technical factors, such as heavy purchases of Treasury securities by foreign

central banks, may have contributed to
the puzzling drop in long-term yields.
However, the Chairman remarked that
accounting for the decline in longterm rates by technical factors affecting only U.S. markets may be missing
the point “because yields and risk
spreads have narrowed globally.” Certainly, the cause of the decline in longterm rates remains unclear.
With strong consumer spending
in 2004, the personal saving rate fell
1
to /2% in 2004:IIIQ. More recently,
the personal rate has increased and
now stands at 1.3%. Strong growth in
(continued on next page)

7
•

•

Money and Financial Markets (cont.)
Ratio
8 HOUSEHOLD FINANCIAL POSITION

Percent of income
15

Percent of average loan balances
13 DELINQUENCY RATES
12
11

Commercial real estate loans
10
9

Personal saving rate
9

8
7
Residential real estate loans

6
Credit cards

5
Wealth-to-income ratio a

Commercial and industrial loans

3
2

1980

1985

1990

1995

2000

2005

12-month percent change
4.0 HOUSEHOLD INFLATION EXPECTATIONS b

1
1991

1994

1997

2000

2003

Index, 1985=100
155 CONSUMER ATTITUDES

Index, 1966:IQ=100
115

3.5
Five to 10 years ahead

135

2.5

105

Consumer sentiment, University of Michigan c

3.0

115

2.0

1.5

1.0
75

One year ahead

Consumer confidence, Conference Board

0.5
0
1998

1999

2000

2001

2002

2003

2004

2005

55
2000

65
2001

2002

2003

2004

2005

FRB Cleveland • March 2005

a. Wealth is defined as household net worth; income is defined as personal disposable income. Data are not seasonally adjusted.
b. Median expected inflation as measured by the University of Michigan’s Survey of Consumers.
c. Data are not seasonally adjusted.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; Board of Governors of the Federal Reserve System, “Charge-Off and Delinquency
Rates on Loans and Leases at Commercial Banks” and “Flow of Funds Accounts of the United States,” Federal Reserve Statistical Releases, Z.1; University of
Michigan; and the Conference Board.

equity prices and home prices led to
a sharp increase in the wealth-toincome ratio during 2003, which supported consumer spending. Although
equity prices moderated in 2004, continued increases in home prices led to
further rises in the wealth-to-income
ratio last year.
Despite an estimated increase in
total household debt of 9.75% in
2004, fueled mainly by increases in
home mortgage debt, delinquency
rates on residential real estate loans
and credit cards continue to drift

down. Low interest rates and gains in
disposable income contributed to
households’ ability to repay debt.
Even with rapid growth in commercial real estate loans in 2004, delinquency rates on commercial loans
fell because of firms’ strong earnings
and strengthened cash positions.
Household survey data are consistent with the FOMC’s view that
longer-term inflation expectations remain well contained. Although shortterm expectations varied markedly in
response to headlines about energy

prices in 2004, longer-term inflation
expectations remained relatively
steady at around 2.8%. In February
the Conference Board’s Index of
Consumer Confidence fell slightly,
erasing part of January’s gain, and
the University of Michigan’s Consumer Sentiment Index registered a
similar decline. Respondents’ views
of their current economic situation
remained stable, but their expectations about their future personal
finances deteriorated.

8
•

•

Japan’s Economy
Percentage points
7 CONTRIBUTIONS TO REAL GDP GROWTH

Japan’s Real GDP Growth and Selected
Components

Annualized quarterly percent change
2003
2004
IIIQ IVQ
IQ IIQ IIIQ IVQ

GDP

2.0

5.7

5.8 –0.8 –1.1 –0.5

Consumption

0.5

4.7

3.1

Net exports
Government
Private inventory

Private residential investment
Private nonresidential investment
Household consumption

Real GDP,
chain linked

Real GDP, fixed base year

0.3 –0.8 –1.3

3
Residential investment

9.2

–4.1

4.6

3.3

3.5

Nonresidential investment 1.7

21.1

–8.4 16.1

1.6

1.7

2.8

Government
consumption and
investment

–0.4

–2.6

11.9 –13.3 –0.6

1.1

Exports

14.4

22.6

20.2 14.8

5.1

Imports

9.6

8.1

2
1

14.3

2.6

8.1 10.1 13.0

0
–1
–2
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 IQ

Percent
Annual percent change
5
6.0 UNEMPLOYMENT AND TOTAL HOURS GROWTH

Japanese Trade
1999

IIQ IIIQ IVQ
2004 a

2000

Share of Japanese exports (percent)b
U.S.
31.0
30.0
China
5.6
6.3
Association of Southeast
Asian Nations plus newly
industrialized Asian
countries
30.7
33.9
European Union
(15 countries)
17.8
16.4
Other
15.2
17.1
Share of Japanese imports (percent)b
U.S.
21.7
19.1
China
13.8
14.5
Association of Southeast
Asian Nations plus newly
industrialized Asian
countries
13.8
12.3
European Union
(15 countries)
9.9
13.0
Other
25.9
28.0
Growth rate
Exports
–7.1
8.0
Imports
–5.2
10.8

2001

2002

2003

2004

5.5

30.4
7.7

28.8
9.6

24.9
12.2

22.7
13.0

5.0

4
3
Unemployment rate

4.5

4.0

3.5

3.0

–1

31.5

32.4

33.3

34.1

16.0
14.9

14.7
13.4

15.3
14.4

15.0
14.4

18.3
16.6

17.4
18.3

15.6
19.7

14.3
20.4

12.8

13.0

12.8

12.6

12.7
27.7

21.1
27.4

13.4
28.2

13.4
29.6

2.0

–3

–4.9
3.0

6.2
0.0

5.5
3.0

12.5
11.5

1.5

–4

2.5

–2

Hours

–5

1.0
1990

1992

1994

1996

1998

2000

2002

2004

FRB Cleveland • March 2005

a. Four-quarter percent change.
b. 2004 data through the first three quarters.
SOURCES: International Monetary Fund, Direction of Trade Statistics Yearbook, 2004; Organisation for Economic Co-operation and Development, Monthly
Statistics of International Trade, January 2005, and Productivity Database; and Government of Japan’s Economic and Social Research Institute, Cabinet
Office, Statistics Bureau, and Ministry of Internal Affairs and Communication.

In the fourth quarter of 2004, Japan’s
real GDP fell at an annualized rate of
0.5%. Following the downward revisions to second- and third-quarter
growth rates, 2004:IVQ was the third
straight quarter in which real GDP
contracted. Nevertheless, the real
GDP growth rate of 2.6% for 2004
was the highest since 1996, mainly
because of large quarterly growth rates
in 2003:IVQ and 2004:IQ.
Net exports have been among the
major contributors to Japan’s real
growth in recent years, and the overall
trade increase has contributed to the

economy’s expansion. China’s share
of Japan’s total trade is now nearly
equal to that of the U.S. In recent
years, the former has been growing
and the latter shrinking. Japan’s increased exposure to China has made
some analysts fear that a slowdown in
China’s growth could adversely affect
Japan’s economy.
Unlike the U.S., Japan’s consumer
spending has not been a key source of
economic growth in the past decade,
mainly because real compensation
per worker has been decreasing. That
is, nominal compensation has been

falling faster than prices. Employers
have been able to reduce their real
labor costs by shifting from regular to
nonregular workers (part-time employees, workers on short-term contracts, and workers employed by temp
agencies). Although the total number
of workers has not changed much
since 1997, total hours worked have
been trending downward.
Japan has experienced persistent
deflation over the past decade. As a
countermeasure, the Bank of Japan
switched in March 2001 from targeting
(continued on next page)

9
•

•

Japan’s Economy (cont.)
Percent of total workers
30 NONREGULAR WORKERS AND WAGES

Annual percent change
4

12-month percent change
Percentage points
2.0 INFLATION AND YEAR-AHEAD INFLATION EXPECTATIONS
40
1.5

1.0

0.5

Real wage growth, all workers a

20
CPI excluding fresh food

–2

–0.5

–1.0

–1.5

Nonregular workers
18

–4

Respondents expecting higher prices minus those expecting lower prices

–2.0

0
–5

–2.5
15
1991

–6
1993

1995

1997

1999

2001

–3.0

2003

–10
1999

12-month percent change
Monetary policy target
40
40 MONETARY POLICY AND MONEY GROWTH
Current account balances (¥ trillions)
35
35

2000

2001

2002

2003

2004

12-month percent change
–1.0

LOAN GROWTH AND NONPERFORMING LOANS

–1.5

2005

Percent of total loans
9.0

Nonperforming loans, major banks

–2.0

8.0

–2.5

7.5

–3.0

7.0

–3.5

6.5

–4.0

6.0

–4.5

5.5

30
Monetary base

0
–5

M2 plus certificates of deposit

Target overnight
unsecured call rate

–10
1999

–5
–10

2000

2001

2002

2003

2004

2005

–5.0
–5.5

Loans and discounts outstanding,
domestically licensed banks

–6.0

an overnight unsecured call rate to a
program of “quantitative easing,” in
which current account balances held
at the central bank are targeted. The
Bank of Japan supplies these balances,
currently targeted at 30¥–35¥ trillion,
primarily by purchasing government
bonds. In 2003, the Bank announced
that it would continue its program of
quantitative easing at least until core
inflation (measured by the 12-month
change in consumer prices excluding
fresh food) rises to 0% or higher and
its Policy Board forecasts a positive

5.0
4.5
4.0

3/99 9/99 3/00 9/00 3/01 9/01 3/02 9/02 3/03 9/03 3/04 9/04

a. Growth in compensation per employee in the business sector minus annual percent change in consumer prices. Data for 2004 are from an OECD forecast.
SOURCES: Organisation for Economic Co-operation and Development, OECD Economic Outlook no. 76, annex tables and OECD Economic Surveys–Japan,
January 2005; Bank of Japan, Results of the Opinion Survey on the General Public’s Mindset and Behavior; Japan’s Financial Services Agency; and Bloomberg
Financial Information Services.
.

FRB Cleveland • March 2005

8.5

inflation rate for the year ahead. The
rate of price inflation has now reached
nearly 0%, and survey measures of
consumer inflation expectations have
been increasing as well.
The monetary base grew significantly as the Bank ratcheted up current account balances. However, no
similar increase occurred in one of
the major monetary aggregates (M2
plus certificates of deposit). Moreover, loan growth has remained negative since the program’s inception,
although it recently has been moving

closer to 0%. The problems within
Japan’s banking sector have been well
documented. A positive development
for banking is that the goal of halving
the nonperforming loan ratio at
major banks from 8.4% in March 2002
to 4.2% in March 2005 seems achievable. Japan hopes to improve the efficiency of its economy further by a
phased-in privatization (2007–17) of
Japanese Post, the largest financial
institution in the world with assets
totaling 80% of Japan’s GDP.

10
•

•

Economic Activity
Percentage points
4
CONTRIBUTION TO PERCENT CHANGE IN REAL GDP c

a,b

Real GDP and Components, 2004:IVQ
(Preliminary estimate)

Annualized
percent change
Current
Four
quarter
quarters

Change,
billions
of 2000 $

Real GDP
102.3
Personal consumption 78.4
Durables
8.7
Nondurables
32.8
Services
36.9
Business fixed
investment
41.4
Equipment
42.9
Structures
0.8
Residential investment
3.0
Government spending
5.7
National defense
–0.4
Net exports
–40.2
Exports
6.7
Imports
46.9
Change in business
inventories
16.5

3.8
4.2
3.1
6.1
3.4

3.9
3.7
5.4
4.4
3.1

14.0
18.0
1.3
2.1
1.2
–0.3
__
2.4
11.4

10.8
14.4
–0.2
1.7
1.7
5.5
__
5.7
9.8

Last four quarters

Personal
consumption

2004:IIIQ
2004:IVQ

Exports

Residential
investment
0

Government
spending

Business fixed
investment

–1

Change in
inventories
Imports

–2

Index, 1997=100
122 INDUSTRIAL PRODUCTION

Annualized quarterly percent change
5.0 REAL GDP AND BLUE CHIP FORECAST c

120

4.5

Final estimate
Preliminary estimate
Blue Chip forecast d

118

4.0

Manufacturing e

30-year average
116
3.5
114
3.0
112

All industries
2.5

110

108

2.0
IVQ
2003

IIQ

IIIQ
2004

IVQ

IIQ

IIIQ
2005

IVQ

1/00

1/01

1/02

1/03

1/04

1/05

FRB Cleveland • March 2005

a. Chain-weighted data in billions of 2000 dollars.
b. Components of real GDP need not add to the total because the total and all components are deflated using independent chain-weighted price indexes.
c. Data are seasonally adjusted and annualized.
d. Blue Chip panel of economists.
e. Uses the NAICS definition of manufacturing.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; U.S. Department of Labor, Bureau of Labor Statistics; Board of Governors of the
Federal Reserve System; National Bureau of Economic Research; and Blue Chip Economic Indicators, February 10, 2004.

The U.S. Commerce Department’s
preliminary estimate of real GDP
growth in 2004:IVQ is 3.8%, substantially higher than the advance estimate
of 3.1%. This brought 2004:IVQ
growth within 0.2 percentage point
(pp) of 2004:IIIQ growth of 4.0% and
only 0.1 pp below the 2004 average.
Just three subcomponents were
revised downward in the preliminary
estimate: durables consumption,
services consumption, and national
defense spending. The largest upward
revision was to exports ($17.8 billion).

From 2004:IIIQ to 2004:IVQ, the contribution to real GDP from change in
private inventories increased 1.6 pp.
However, this increase was partly
offset by decreases from personal consumption (0.7 pp) and net exports
(1.4 pp).
With the preliminary estimate’s
upward revision to GDP, 2004:IVQ
growth remained above its 30-year
average of 3.2%. It also surpassed the
Blue Chip forecasters’ February estimate for both the current quarter
and all of 2005.

In October 2004, the Industrial Production Index topped its June 2000
peak and has continued to rise since
then. Currently, it is 1.3 pp above its
June 2000 peak. Manufacturing production, defined by the NAICS code,
has been even stronger and now is
2.1 pp above its previous peak.
As manufacturing production has
rebounded, its labor productivity
growth has been quite strong. After
slowing to a near-zero average around
the end of 2000 and the beginning of
2001, labor productivity growth has
(continued on next page)

11
•

•

Economic Activity (cont.)
Annualized quarterly percent change
Monthly change, thousands of workers
14 MANUFACTURING PRODUCTIVITY AND EMPLOYMENT
150

Percent of capacity
84 CAPACITY UTILIZATION

100

–50

–100

–150

–200

–250

68
1/00

Manufacturing output per hour a

Manufacturing employment

0
–2
1/00

1/01

1/02

1/03

1/04

1/05

Nondurable goods

Manufacturing

Durable goods

1/01

1/02

1/03

1/04

Billions of dollars
450 MANUFACTURING ORDERS AND INVENTORY/SALES RATIO

Ratio
1.46

Annualized rate, billions of dollars
120 MANUFACTURING CORPORATE PROFITS a,c

400

1.43

100

1/05

Manufacturing inventory/sales ratio b
350

1.40
80

300

1.37
All new
manufacturing orders

60
1.34

250

New orders, durable goods

200

1.31
20
1.28

150
New orders, nonndurable goods
100
50
1/00

1/01

1/02

1/03

1/04

1/05

1.25

1.22

–20
1/01

1/02

1/03

1/04

1/05

FRB Cleveland • March 2005

NOTE: All data are seasonally adjusted and use the NAICS definition of manufacturing.
a. Annualized rate.
b. Chained 2000 dollars.
c. Corporate profits before tax with inventory valuation adjustment.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; U.S. Department of Labor, Bureau of Labor Statistics; and Board of Governors of the
Federal Reserve System.

averaged about 6%. Given the rapid
labor productivity growth relative to
output growth, employers shed a lot
of manufacturing jobs over the last
five years. Manufacturing employment for January 2004 stands 3 million below that of January 2000. Only
in the last year did employment levels firm somewhat.
Manufacturing capacity utilization,
a measure of how intensively capital
is used, followed a pattern like that of
employment through early 2003;
however, it has continued to increase
over the past year while employment

has leveled off. At 77.4, overall capacity utilization in manufacturing remains significantly below its previous
peak of 81.4 in May 2000. This is because durable goods utilization remains far below its previous peak,
whereas nondurable goods utilization has rebounded almost to its previous peak in May 2001.
A positive indicator for future manufacturing activity is that growth in new
orders has been robust for both
durable and nondurable goods. Inventory-to-sales ratios declined quickly
from the 2001 recession’s highs before

stabilizing in 2002. The ratio plummeted in 2003, hitting a record low of
1.23 in March 2004 and stabilizing near
this level.
Finally, after plunging in the first
three quarters of 2001, manufacturing’s corporate profits have rebounded
fairly steadily since 2001:IVQ. Although growing profits and increasing orders, capacity utilization, and
productivity bode well for manufacturing firms and their shareholders
over the next few quarters, significant
employment growth in this sector
appears unlikely.

12
•

•

Labor Markets
Change, thousands of workers
400 AVERAGE MONTHLY NONFARM EMPLOYMENT CHANGE

Labor Market Conditions

350

Average monthly change
(thousands of employees, NAICS)

Previous estimate
Revised

300
250

Payroll employment

200

Goods producing
Construction
Manufacturing
Durable goods
Nondurable goods

150
100

2002
–45

2003
8

–124
–1
–123
–88
–35

–76
–7
–67
–48
–19

–42
10
–51
–32
–19

29
23
3
9
–6

55
30
20
23
–3

–25
–24
8
–63
–37
50
46

30
–10
6
–17
2
40
21

50
–5
7
22
12
30
–4

154
13
12
45
16
33
22

207
30
12
81
30
18
33

Service providing
Retail trade
Financial activitiesa
PBSb
Temporary help svcs.
Education & health svcs.
Government

50
0
–50
–100

2004
183

Feb.
2005
262

2001
–148

Average for period (percent)
Civilian unemployment
rate

–150

4.8

5.8

6.0

5.5

5.4

–200
2001 2002 2003 2004

IIQ

IIIQ IVQ
2004

Dec.

Jan. Feb.
2005

Percent
65.0 LABOR MARKET INDICATORS

Percent
6.5

Employment-to-population ratio
64.5

6.0

64.0

5.5

Percent
85 LABOR FORCE PARTICIPATION
80
Male
75

70
63.5

Total

5.0
65

63.0

Female

4.5
60

62.5

4.0
Civilian unemployment rate

62.0
1995 1996

3.5
1997

1998

1999

2000

2001

2002

2003

2004

2005

50
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

FRB Cleveland • March 2005

NOTE: All data are seasonally adjusted
a. Financial activities include the finance, insurance, and real estate sector and the rental and leasing sector.
b. Professional and business services include professional, scientific, and technical services, management of companies and enterprises, administrative and
support, and waste management and remediation services.
c. Percent of total nonfarm industries with increased employment over one month (or 12 months) plus half of those with unchanged employment.
SOURCE: U.S. Department of Labor, Bureau of Labor Statistics.

Nonfarm payroll employment grew by
262,000 jobs in February 2005, exceeding the 183,000 average monthly gain
in 2004. At 132.8 million, nonfarm payroll employment surpassed the February 2001 peak by about 300,000 jobs.
Nearly 80% of the month’s job
growth was in service-providing industries, where it was generally broadbased. Professional and business services posted the largest gain (81,000),
of which over one-third came from
temporary help services. Job growth
also occurred in health care (23,000),
retail (30,000), and food services
(27,000). Goods-producing industries

grew by 55,000 jobs in February;
however, the sector continues to be
2.7 million jobs below the July 2000
peak of 24.7 million. Construction
employment, which added an average of 23,000 per month in 2004, grew
by 30,000 in February, after showing
no January growth because of severe
weather. After declining for five
months, manufacturing jobs increased
by 20,000 in February, which the Bureau of Labor Statistics attributed
partly to the return of 10,800 auto
workers from temporary layoffs.
The unemployment rate, which
dropped to 5.2% in January after

fluctuating between 5.4% and 5.5%
since July 2004, returned to 5.4%.
The employment-to-population ratio,
which has fluctuated between 62.2%
and 62.4% for a year, inched down 0.1
percentage point to 62.3% in February.
The overall labor force participation
rate held steady at 65.8% but has been
trending slightly downward for the
past couple of years. Men’s labor force
participation was up 0.1 percentage
point from its historic low of 73% in
January. Women’s participation, which
has risen substantially over the long
term, has declined slightly over the
past four years.

13
•

•

Labor Force Participation
Percentage points
5 CHANGE IN LABOR FORCE PARTICIPATION RATE BY AGE

Percentage points
2.0 CHANGE IN LABOR FORCE PARTICIPATION RATE BY GENDER

4
1.5
July 1990–May 1994
March 2001–January 2005

1.0

July 1990–May 1994

March 2001–January 2005

2
1

0.5

Total

Men

Ages 25–54

0
Older than 55

0
–1
–0.5

–1.0

–2
–3
Women
–4

–1.5

–5
Ages 16–24

–6

–2.0

Reasons Why People Did Not Work or Look for Work (percent distribution)
1991

1992

Women aged 25–54
Ill or disabled
Retired
Home responsibilities
Going to school
Could not find work
Other

12.6
1.3
77.2
4.6
1.9
2.4

14.0
1.3
75.8
4.6
2.3
2.0

Total aged 16–24
Ill or disabled
Retired
Home responsibilities
Going to school
Could not find work
Other

2.9
0.1
15.7
74.5
2.5
4.2

3.2
0.1
16.2
74.0
2.9
3.6

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002 2003

16.5
2.1
71.6
7.2
0.9
1.7

17.7
2.5
69.7
7.0
0.9
2.2

19.2
2.2
69.9
6.0
0.6
2.1

19.5
3.2
68.8
5.2
1.0
2.3

21.3
3.2
67.6
5.5
0.7
1.6

20.9
3.3
67.6
5.6
0.6
2.0

20.2
3.0
68.6
5.9
0.4
1.9

21.1
4.4
67.7
4.9
0.6
1.4

21.9
4.5
66.3
4.9
0.6
1.8

21.3
5.1
65.3
5.4
0.6
1.8

21.9
4.5
65.3
5.9
1.0
1.4

4.2
0.4
16.5
73.4
1.9
3.6

4.8
0.5
16.8
72.4
1.7
3.9

4.2
0.4
15.5
73.7
2.2
4.0

3.9
0.4
13.9
75.5
1.9
4.4

4.4
0.3
12.6
76.9
1.9
3.9

4.1
0.5
11.4
78.3
1.3
4.4

3.8
0.7
12.3
77.4
1.8
4.0

3.9
0.3
12.8
77.7
1.6
3.7

3.8
0.6
13.2
77.5
1.5
3.5

3.6
0.8
11.3
79.2
2.0
3.1

4.0
0.7
11.6
78.8
1.8
3.2

FRB Cleveland • March 2005

Source: U.S. Department of Labor, Bureau of Labor Statistics.

In the 46 months between the March
2001 business cycle peak and January
2005, the labor force participation
rate fell from 67.2% to 65.8%. After
the 1990 recession, however, the rate
slightly exceeded prerecession levels
(66.6%) within 46 months of the
peak. Comparing these recessions
shows that the decline in participation since 2001 can be attributed
primarily to people aged 16 to 24 and
to women.
From March 2001 to January 2005,
women’s participation fell 1 percentage point; after the 1990 recession, it

rose 1.4 percentage points within the
same length of time. The share of
women not participating in the labor
force because of illness or disability
increased dramatically from 12.6% in
1991 to 21.9% in 2003. Although this
occurred well before the 2001 recession, it may partly explain the sustained decline in women’s participation. Indeed, experiences in several
European countries suggest that people who leave the labor force because
of illness or disability may be less
likely than others to return. Greater
difficulty finding jobs also limited
women’s participation.

Participation among people aged
16 to 24 is down 5.1 percentage
points from March 2001; after the
1990 recession, it fell less than 1 percentage point. The difference probably reflects the delayed entry into the
labor force associated with more
time pursuing an education.
Unlike their younger counterparts,
people older than 55 increased their
participation more than 3 percentage
points after March 2001, possibly
because of lower stock prices and
changes in Social Security regulations.

14
•

•

Employment in the Fourth District
Percent
8.5 UNEMPLOYMENT RATES a,b

UNEMPLOYMENT RATES, DECEMBER 2004 a

8.0

U.S. average = 5.4%

7.5
7.0
6.5
6.0
U.S.
5.5
Below U.S. average
5.0

About the same as U.S. average
(5.1%–5.7%)

Fourth District
4.5

Above U.S. average
More than double U.S. average

4.0
3.5
1990

1993

1996

1999

2002

2005

Payroll Employment
12-month percent change, December 2004
Total nonfarm
Goods-producing
Manufacturing
Natural resources, mining,
and construction
Service-providing
Trade, transportation, and
utilities
Information
Financial activities
Professional and business
services
Education and health
services
Leisure and hospitality
Other services
Government

Cleveland
–0.3
–0.2
–0.2

Columbus
0.0
–0.3
0.3

Cincinnati
0.7
–2.3
–1.6

Dayton
–0.5
–2.0
–1.6

Toledo
–1.5
–1.6
–3.6

Wheeling
0.3
–1.1
–2.0

Pittsburgh
0.9
1.4
–0.7

Lexington
1.5
2.6
1.5

–0.2
–0.3

–1.2
0.1

–4.2
1.3

–3.9
–0.1

5.9
–1.5

0.0
0.5

5.1
0.8

5.7
1.2

–1.4
–1.9
0.4

–2.2
–3.4
1.6

1.8
2.6
0.7

–3.5
3.5
0.0

–3.5
4.3
1.6

0.0
0.0
0.0

1.0
–3.7
0.9

0.4
0.0
0.0

0.2

2.0

1.4

–0.4

–2.2

2.2

2.0

–0.7

2.1
–0.8
–2.3
–1.1

1.6
0.1
–1.1
0.3

1.3
5.7
0.0
–2.4

3.0
2.2
–4.2
0.1

1.1
–2.8
0.0
–2.0

–3.0
1.4
3.6
2.9

1.8
0.9
0.9
–1.9

2.0
8.4
2.8
–0.9

FRB Cleveland • March 2005

a. Seasonally adjusted.
b. Shaded areas represent periods of recession.
SOURCE: U.S. Department of Labor, Bureau of Labor Statistics.

The Fourth District’s unemployment
rate fell a sizeable 0.4 percentage point
to 5.8% in December. This decline
seems to have been driven largely
by a reduction in the estimated size
of the labor force; estimated employment actually fell slightly during
the month. Similarly, while the U.S.
unemployment rate held steady at
5.4% in December, its 0.2 percentage
point decline to 5.2% in January
resulted more from a decrease in
the labor force than an increase
in employment.

The unemployment rates for counties in the western half of Fourth
District Kentucky generally are lower
than the U.S. average. In fact, the Lexington metropolitan area’s rate in December was 2.8%. Ohio’s midsection
also showed strength, particularly the
area near and west of Columbus (its
MSA’s unemployment rate was 4.4%).
Conversely, counties in the Fourth
District portion of Pennsylvania had
unemployment rates above the national average (except Allegheny,
where the rate was 4.3%).

Employment changes in the 12
months ending in December, as measured by nonfarm payrolls, were
mixed across the District’s major
metropolitan areas. The Toledo area
saw the most substantial drop, with
percentage declines about even in
goods- and service-providing employment. By contrast, Lexington
posted the strongest overall gain, and
its increases were broad-based. Lexington and Columbus were among
the few major metropolitan areas in
the District to add manufacturing
employment in 2004.

15
•

•

Kentucky Employment
Percent
10 UNEMPLOYMENT RATE a

Year-over-year percent change
6 NONFARM PAYROLL EMPLOYMENT a

Kentucky

8
U.S.
2
6
Kentucky

0
U.S.

4
–2

2
1990

–4
1992

1994

1996

1998

2000

2002

2004

1990

Percent change
15 EMPLOYMENT DURING BUSINESS CYCLES b

1992

1994

1998

1996

2000

2002

2004

THE INDUSTRIAL MAKEUP OF EMPLOYMENT, 2003
Public administration
U.S.

Other services

Kentucky average range, 1948–2001
10

Kentucky

Leisure and hospitality

Educational, health, and social services

Kentucky average, 1948–2001

Professional and business services
Finance, insurance, real estate, and rental and leasing

5
Information

Transportation and warehousing, and utilities

U.S., 2001 to present

Retail trade
Wholesale trade

Kentucky, 2001 to present

Manufacturing

–5
Construction

Agriculture, forestry, fishing and hunting, and mining
–10
0

12 15 18 21 24 27 30 33 36
Months from previous business cycle peak

39 42

Percent

FRB Cleveland • March 2005

NOTE: Employment data are seasonally adjusted.
a. Shaded areas represent periods of recession.
b. Shaded band indicates a 95% confidence interval around Kentucky’s 1948–2001 average.
SOURCES: U.S. Department of Commerce, Bureau of the Census; and U.S. Department of Labor, Bureau of Labor Statistics.

Kentucky’s labor market conditions
stand out among the Fourth District
states. Indeed, its December unemployment rate of 4.5% was the lowest
in the District and almost a full percentage point below the U.S. average;
by that measure, Kentucky outperformed the nation throughout 2004.
However, it failed to keep up with
U.S. employment growth over the
same period. Last year, employment
in Kentucky grew by 0.8%, compared
to the nation’s 1.7% increase. And
from the last business cycle peak in

March 2001, Kentucky lost 0.8% of its
employment, while the nation saw a
slight gain.
U.S. employment finally surpassed
the March 2001 business cycle peak
this January, ending the longest recovery period for employment since the
Great Depression. If Kentucky had followed its average employment gains in
past business cycle expansions, it
would have added 10% more jobs at
this point. Typically, it has reached
prerecession employment levels 22
months after the previous business

cycle peak; by December, 45 months
had passed since the peak. Indeed,
much like the U.S. as a whole, Kentucky’s economy has grown, but with
less-than-typical employment gains.
One factor affecting employment
is the economy’s industrial makeup.
Kentucky looks much like the nation
for many sectors. However, it has notably larger manufacturing, transportation and warehousing, and utilities and agricultural sectors—all
three being slow growth sectors.

(continued on next page)

16
•

•

Kentucky Employment (cont.)
Thousands of chained 2000 dollars
35 REAL PER CAPITA PERSONAL INCOME a

POVERTY RATES, 2003
U.S.
Kentucky

People 65 and older
U.S.

Female householder families

25
All families
Kentucky
20

Related children under 18

15
1990

1992

1994

1996

1998

2000

2002

2004

20
Percent

EDUCATIONAL ATTAINMENT, 2003

EDUCATIONAL ATTAINMENT, 1990

U.S.

U.S.
Graduate or professional degree

Graduate or professional degree

Kentucky

Kentucky
Bachelor’s degree

Bachelor’s degree

Associate’s degree

Some college, no degree

High school graduate b

High school graduate b
Less than high school diploma

Less than high school diploma
0

15
20
25
Percent of population c

FRB Cleveland • March 2005

NOTES: Educational attainment data for 2003 are from the American Community Survey; data for 1990 are from Census 2000.
a. Shaded areas represent periods of recession.
b. The “high school graduate” category includes people with a G.E.D. and similar equivalents.
c. Aged 25 and older.
SOURCES: U.S. Department of Commerce, Bureau of the Census and Bureau of Economic Analysis.

Although the December unemployment rate was lower in Kentucky
than in Ohio, Pennsylvania, or the
U.S., Kentucky’s per capita income
was only $27,610 in 2004:IIIQ, much
lower than in Ohio ($31,379), Pennsylvania ($33,149), or the U.S. ($32,879).
In fact, this has been the case since
1948, when the data series on states’
personal income became available.
Nevertheless, since 2001:IIQ, personal
income has been growing faster in
Kentucky than the U.S.

Lower per capita personal income
generally is associated with higher
poverty rates, and Kentucky is no
exception. Its poverty rates are 1.3 to
1.4 times higher than those of the
U.S. for many major categories.
Differences in poverty rates can be
partly explained in terms of educational attainment, with higher education levels typically associated with
better incomes. In both 1990 and in
2003, the U.S. had a more educated
population than Kentucky; in 2003, it
had 2% more citizens with a graduate

or professional degree and 6% more
with a bachelor’s degree.
However, although a gap remains,
Kentucky has made significant gains
during the last decade. Between 1990
and 2003, the share of Kentucky’s
population without a high school
diploma declined from 35% to 21%.
Moreover, the share of Kentuckians
with at least some post-secondary
education increased roughly 11 percentage points during this period,
from about 33% to 44%.

17
•

•

Business Loan Markets
Net percent
45 RESPONDENT BANKS REPORTING STRONGER DEMAND

Net percent
70 RESPONDENT BANKS TIGHTENING CREDIT STANDARDS
60

Medium and large firms
15

Small firms

–15

20
Medium and large firms
10

–30
Small firms

0
–45
–10
–60

–20
–30
1/00

7/00

1/01

7/01

1/02

7/02

1/03

7/03

1/04

7/04

–75
1/00

7/00

1/01

7/01

1/02

7/02

1/03

Billions of dollars
30 QUARTERLY CHANGE IN COMMERCIAL
AND INDUSTRIAL LOANS

Percent of loan commitments
41 UTILIZATION RATES OF COMMERCIAL
AND INDUSTRIAL LOAN COMMITMENTS

–10

–20

–30

7/03

1/04

7/04

–40
3/01

9/01

3/02

9/02

3/03

9/03

3/04

9/04

3/01

9/01

3/02

9/02

3/03

9/03

3/04

9/04

FRB Cleveland • March 2005

SOURCES: Board of Governors of the Federal Reserve System, Federal Reserve Senior Lending Officer Survey, January 2005; and Federal Deposit Insurance
Corporation, Quarterly Banking Profile, various issues.

Credit availability for businesses continued to improve for most of 2004,
according to the Senior Loan Officer
Survey. In the October survey (covering August, September, and October)
respondent banks reported that they
had further eased lending standards
for commercial and industrial loans
to borrowers of all sizes. They also indicated that they had narrowed their
lending spreads, reduced collateral
requirements, and increased the size
of credit lines. This relaxation in lending standards was partly a response
to increased competition from other

banks and other sources of business
credit. What may be more important is
that many respondents said they eased
credit terms because the economic
outlook was more favorable or less
uncertain. Lending standards were relaxed despite a reportedly increased
demand for commercial and industrial
loans by businesses of all sizes. And
even with greater demand, prices
dropped, indicating that there was a
plentiful supply of business credit.
The relaxation of bank lending standards in 2004 appeared to translate
into increased bookings of commercial

and industrial loans by depository
institutions. Holdings of commercial
and industrial loans increased $16 billion in 2004:IIQ and $26 billion in
2004:IIIQ. This reversed 13 consecutive quarters of declines in commercial
and industrial loan balances on the
books of FDIC-insured institutions.
The increase in booked credits coincided with a decrease in the utilization
rate of business loan commitments
(credit lines extended by banks to
commercial and industrial borrowers),
another sign of an increase in the supply of business credit.

18
•

•

Foreign Central Banks
Percent, daily
7 MONETARY POLICY TARGETS a
6

Trillions of yen
–35
–30

–25
Bank of England

–20

European Central Bank
Federal Reserve

Current account balances

–5

–1

–2

Bank of Japan

–3

–4

–5

–6

–7

–8
4/1/01 10/1/01

4/2/02

10/2/02

4/3/03

10/3/03

4/3/04

Current account balances (daily)

–15
–10

Percent
39 BANK OF JAPAN b

Excess reserve balances

12
9
6

10/3/04

4/1/01 10/1/01

Current account less required reserves

4/2/02

10/2/02

4/3/03

10/3/03

4/3/04

Basis points
14 SPREAD BETWEEN AVERAGE CD INTEREST RATES OF LESS
THAN 30 DAYS AND 30–59 DAYS MATURITY IN JAPAN c
12

Percent
1.9 AVERAGE CONTRACTED INTEREST RATES
ON NEW LOANS AND DISCOUNTS IN JAPAN d
1.8
Domestically licensed banks

1.7

1.6

1.5

1.4

1.3

1.2

–2

1.1

–4

1.0

10/3/04

City banks

–6

0.9
4/1/01 10/1/01

4/2/02

10/2/02

4/3/03

10/3/03

4/3/04

10/3/04

4/1/01 10/1/01

4/2/02

10/2/02

4/3/03

10/3/03

4/3/04

10/3/04

FRB Cleveland • March 2005

a. Federal Reserve: overnight interbank rate. Bank of Japan: a quantity of current account balances (since December 19, 2001, a range of quantity of current
account balances). Bank of England and European Central Bank: repo rate.
b. Current account balances at the Bank of Japan are required and excess reserve balances of depository institutions subject to reserve requirements plus the
balances of certain other financial institutions not subject to reserve requirements. Reserve requirements are satisfied on the basis of the average of a bank’s
daily balances at the bank of Japan starting the sixteenth of one month and ending the fifteenth of the next.
c. Calculated as the difference between average interest rates on new issues of certificates of deposit of city banks; weekly data.
d. New loans and discounts exclude overdraft accounts and include renewed continuing loans; end of month data.
SOURCES: Board of Governors of the Federal Reserve System; Bank of England; Bank of Japan; and European Central Bank.

None of the four major central banks
has changed its policy setting since
the last Federal Reserve action.
Japan’s overnight interbank rate
has been essentially zero for about
three years, reflecting the Bank of
Japan’s anti-deflation policy of quantitative easing. For the past year, that
policy has maintained a level of current account balances and excess
reserves of the banking system that
is more than ¥25 trillion higher than
at the beginning of 2001. Recently,

the Bank has had occasional difficulty
attracting sellers of all the securities it
wished to buy in order to maintain
that level of balances. This has triggered questions about whether the
effective demand for its liquidity
might be declining relative to the
past year’s target.
As long as the Bank is able to meet
its current account balance target, the
zero floor on nominal overnight interest rates suggests that excess effective
liquidity might show up in lower nom-

inal interest rates at nearby maturities
and risk classes. There are hints of
such an effect. Since the end of September, the average interest rate on
new CDs at the maturity of 30–59 days
has declined very slightly relative to
rates on 0–29 day CDs. Average contracted interest rates on loans and discounts of all domestically licensed
banks have continued to decline; this
has occurred three times as much at
city banks, where loan quality is
thought to be better.

Full text of Economic Trends (Federal Reserve Bank of Cleveland) : Economic Trends - March 2005

FRASER