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March 2008
(Covering February 15, 2008 to March 13, 2008)

In This Issue
The Economy in Perspective
This old house...
Inﬂation and Prices
January Price Statistics
Money, Financial Markets, and Monetary Policy
What is the Yield Curve Telling Us?
International Markets
Are We Importing Inﬂation?
Economic Activity and Labor Markets
Real GDP 2007: Fourth-Quarter Preliminary Estimate
The Employment Situation
Housing Doldrums
Preliminary Employment Data Might Miss a Recession Onset
Home Price Indexes
Regional Activity
Fourth District Employment Conditions
Labor Force Participation in the United States and Ohio
Patent Trends in the Fourth District
Banking and Financial Markets
Business Loan Markets
Banking Structure

Inﬂation and Prices

January Price Statistics
January Price Statistics
Percent change, last
1mo.a

2007
avg.

3mo.a 6mo.a 12mo. 5yr.a

Consumer Price Index
All items

4.8

6.8

4.7

4.3

3.0

4.2

Less food and
energy

3.8

3.1

2.7

2.5

2.1

2.4

Medianb

4.2

3.7

3.4

3.2

2.6

3.1

16% trimmed
meanb

4.3

3.5

3.1

3.0

2.4

2.8

22.9

19.8

13.3

13.7

5.9

11.3

Nonpetroleum
imports
Export Price Index

8.0

6.5

4.2

3.6

2.5

2.9

All commodities

15.0

10.6

Import Price Index
All commodities

7.9

6.7

4.1

6.0

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

CPI, Core CPI, and Trimmed-Mean CPI
Measures
12-month percent change
4.75
4.50
4.25
4.00
CPI
3.75
a
3.50
Median C P I
3.25
3.00
2.75
2.50
2.25
2.00
1.75
16% trimmed1.50
C ore C P I
mean C P I a
1.25
1.00
1998
2000
2002
2004
2006

03.11.08
by Michael F. Bryan and Brent Meyer
The Consumer Price Index (CPI) rose at an annualized rate of 4.8 percent in January, following
a 4.4 percent increase in December, outpacing its
6-month, 12-month, and 5-year trends. The usual
suspects (energy and food) contributed to the
increase in the headline number, rising at annualized rates above 8 percent, but were not the only
culprits, as the CPI excluding food and energy
(core CPI) advanced 3.8 percent during the month.
There is evidence of broad-based price pressure, as
the core CPI, the 16 percent trimmed-mean CPI,
and the median CPI outpaced all of their respective
longer-term trends. In fact, the core CPI saw its
largest monthly jump since March 2004, and the
last time the 16 percent trimmed mean was above
4.0 percent was September 2005. Import prices
have been elevated lately, rising almost 20 percent
(annualized rate) over the past three months, and
we may be seeing some pass-through onto retail
prices.
The 12-month growth rate in the CPI shot up to
4.4 percent in January from a recent low in August
2007 of 1.9 percent. The core CPI and trimmedmean measures have exhibited a similar upward
trend (to a lesser extent), and are now ranging
between 2.5 percent and 3.2 percent.

2008

a. Calculated by the Federal Reserve Bank of Cleveland.
Sources: U.S. Department of Labor, Bureau of Labor Statistics, and Federal Reserve
Bank of Cleveland.

CPI Component Price Change Distributions
Weighted frequency
45
January 2008
40
2007 average
35

Core services prices increased 4.6 percent in January, their largest monthly increase since October
2005, and pushed the 12-month growth rate to 3.4
percent. Core goods prices rose 1.9 percent during
the month, after remaining virtually unchanged
in December. The 12-month growth rate in core
goods prices ticked up to 0.2 percent.

30
25
20
15
10
5
0
<0

0 to 1
1 to 2
2 to 3
3 to 4
4 to 5
Annualized monthly percent change

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

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

Looking forward, household inﬂation expectations
for the year ahead ticked down slightly from January’s reading of 4.0 percent to 3.9 percent, according to the latest Survey of Consumers (University
of Michigan). Expectations over the longer term
(5-10 years) remained unchanged at 3.4 percent.
Since 1995, both the year-ahead and the 5-10 year2

ahead inﬂation expectations ﬁgures have averaged
3.5 percent.

Household Inflation Expectations*

Core CPI Goods and Core CPI Services

12-month percent change
6.0

12-month percent change
8.0
1-month annualized
7.0
perc ent c hange
6.0
C ore s ervic es
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
C ore goods
-4.0
1-month annualized
-5.0
perc ent c hange
-6.0
1998
2000
2002
2004
2006

One year ahead

5.5
5.0
4.5

F ive to 10 years ahead

4.0
3.5
3.0
2.5
2.0
1.5
1.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
*Mean expected change as measured by the University of Michigan’s Survey of
Consumers.
Source: University of Michigan.

2008

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

Money, Financial Markets, and Monetary Policy

What Is the Yield Curve Telling Us?
Yield Spread and Real GDP Growth*
Percent
12
10

R eal G DP growth
(year-to-year
percent change)

8
6
4
2
0

10-year minus three-month
yield spread

-2
-4
1953

1963

1973

1983

1993

2003

*Shaded bars represent recessions
Sources: Bureau of Economic Analysis; Federal Reserve Board.

02.20.08
Joseph G. Haubrich and Katie Corcoran
Since last month, the yield curve has gotten steeper,
with long-term interest rates rising and short-term
interest rates falling. One reason for noting this
is that the slope of the yield curve has achieved
some notoriety as a simple forecaster of economic
growth. The rule of thumb is that an inverted yield
curve (short rates above long rates) indicates a
recession in about a year, and yield curve inversions
have preceded each of the last six recessions (as deﬁned by the NBER). Very ﬂat yield curves preceded
the previous two, and there have been two notable
false positives: an inversion in late 1966 and a very
ﬂat curve in late 1998. More generally, though, a
ﬂat curve indicates weak growth, and conversely, a
steep curve indicates strong growth. One measure
of slope, the spread between 10-year bonds and
3-month T-bills, bears out this relation, particularly
when real GDP growth is lagged a year to line up
growth with the spread that predicts it.
The yield curve has continued to get steeper,
although long rates have now started to rise. The
spread remains positive, with the 10-year rate rising

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

to 3.72 percent and the 3-month rate dropping to
2.28 percent (both for the week ending February
15). Standing at 144 basis points, the spread is
above January’s 127 basis points and December’s
120 basis points. Projecting forward using past
values of the spread and GDP growth suggests that
real GDP will grow at a rate of about 2.7 percent
over the next year. This is on the high side of other
forecasts.

Yield Spread and Lagged Real GDP
Growth
Percent
12
10

One-year-lagged real G DP growth
(year-to-year percent change)

8
6
4
2
0
10-year minus three-month
yield spread

-2
-4
1953

1963

1973

1983

1993

2003

Sources: Bureau of Economic Analysis; Federal Reserve Board.

Yield Spread and Predicted GDP Growth
Percent
6
R eal G DP growth
(year-to-year percent change)

5
4

P redic ted
GDP growth

3
2
1
0
-1
-2
2002

10-year minus three-month
yield s pread
2003

2004

2005

2006

2007

2008

Sources: Bureau of Economic Analysis; Federal Reserve Board.

Percent
100
90
P robability of
recession

70
F orec as t

60
50
40
30
20
10
0
1960

1966

1972

1978

1984

1990

1996

2002

The probability of recession is below several recent
estimates, and perhaps seems strange in the midst
of recent ﬁnancial concerns, but one aspect of those
concerns has been a ﬂight to quality, which lowers yields on Treasury securities, and a reduction in
both the federal funds target rate and the discount
rate by the Federal Reserve, which tends to steepen
the yield curve. Furthermore, the forecast is for
where the economy will be next February, not earlier in the year.
To compare our 3.7 percent to some other probabilities and learn more about diﬀerent techniques
for predicting recessions, head on over to the Econbrowser blog.

Probability of Recession Based on the
Yield Spread*

While such an approach predicts when growth is
above or below average, it does not do so well in
predicting the actual number, especially in the case
of recessions. Thus, it is sometimes preferable to
focus on using the yield curve to predict a discrete
event: whether or not the economy is in recession.
Looking at that relationship, the expected chance
of the economy being in a recession next February
stands at 3.7 percent, down a bit from January’s
already low 4.8 percent and December’s 5 percent.

2008

*Estimated using probit model.
Note: Shaded bars represent recessions.
Sources: Bureau of Economic Analysis; Federal Reserve Board; and author’s
calculations.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

Of course, it might not be advisable to take our
number quite so literally, for two reasons. First,
this probability is itself subject to error, as is the
case with all statistical estimates. Second, other
researchers have postulated that the underlying
determinants of the yield spread today are materially diﬀerent from the determinants that generated
yield spreads during prior decades. Diﬀerences
could arise from changes in international capital
ﬂows and inﬂation expectations, for example. The
bottom line is that yield curves contain important
information for business cycle analysis, but, like
4

other indicators, should be interpreted with caution.
For more detail on these and other issues related to
using the yield curve to predict recessions, see the
Commentary “Does the Yield Curve Signal Recession?”

International Markets

Are We Importing Inﬂation?
January CPI Statistics
Annualized percent change, last:
1mo.

3mo.

6mo.

12mo.

2007 avg.

Consumer Price Index
All items

4.8

6.8

4.7

4.4

2.9

Less food and
energy

3.8

3.1

2.7

2.5

2.3

Median

4.2

3.7

3.4

3.2

3.1

Trimmed mean 4.3

3.5

3.1

3.0

2.7

Source: The Bureau of Labor Statistics

Import Prices
Average annual percentage change:
2/02-1/08
3.0

CPI
Imports
All

5.8

Foods

6.5

Industrial materials

17.0

Capital goods

−0.6

Automotive

1.0

Consumer

0.7

Petroleum

26.8

Nonpetroleum

2.2

Source: The Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

03.07.08
Owen F. Humpage and Michael Shenk
Headline and core price indexes recently have been
rising at a disconcertingly fast pace, reﬂecting the
direct and secondary pass-through eﬀects of record
oil prices, rapidly rising agricultural prices, and the
dollar’s depreciation. Some observers, noting the
international lineage of these price patterns, wonder
if world economic development and the integration
of global markets have doomed the United States to
a permanently higher rate of inﬂation. This question reﬂects a very common misunderstanding of
what price indexes tell us and of the true nature of
inﬂation. To be sure, greater global claims on scarce
world resources will raise our cost of living, but
inﬂation has everywhere and always been a homegrown, central-bank problem.
Inﬂation refers to the deterioration in the purchasing power of money that results when a central
bank creates more money than the public wants
to hold. Inﬂation manifests itself as a rise in all
prices and wages-in fact, anything denominated
in dollars. If the public’s demand for money grows
at 3 percent per year and if the central bank creates money at 5 percent per year, then prices will
eventually rise at 2 percent per year, and they will
keep climbing as long as the disparity between the
supply and demand for money continues. While
the rate of inﬂation is ultimately under the control
of central banks, the speed with which an inﬂationary monetary impulse ﬁlters through to wages and
prices seems to depend on many things, including
the amount of slack in an economy, whether the
public anticipated the inﬂation, and the degree of
price competitiveness throughout the economy.
When the economy is operating at full tilt, when
5

people generally anticipate inﬂation, and when
ﬁrms and workers operate in a highly competitive
environment, monetary excesses are likely to translate quickly into higher prices and wages.

Export Prices
Average annual percentage change: 2/021/08
3.0

CPI
Exports
All

3.6

Foods

10.1

Industrial materials

9.1

Capital goods

0.2

Automotive

1.0

Consumer

1.3

Agriculture

9.9

Nonagriculture

3.0

Source: The Bureau of Labor Statistics.

Real GDP Growth
Annual percent change
8

World
U.S.

7
6
5
4
3
2
1
0
-1
-2
1980

1985

1990

1995

2000

2005

Source: The Bureau of Economic Analysis; The International Monetary Fund,
World Economic Outlook Database, October 2007.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

Inﬂation is not the only type of price pressures that
an economy experiences. Individual prices adjust
continually to the ebb and ﬂow of supply and
demand pressures. Economists often refer to these
as relative (or sometimes real) price adjustments.
Although they hit our price indexes much like
inﬂation, relative prices adjustments are fundamentally diﬀerent. For one thing, relative price changes
convey important information about the relative
scarcities of goods and services. A rising relative
price indicates that demand has outstripped supply
(or that supply has fallen short of demand), while
a falling price denotes just the opposite. Relative
price changes also help stabilize the economy. A
rising relative price induces consumers to conserve
on a speciﬁc good and to look for substitutes. A
rising relative price also entices producers to bring
more of the good to market. Relative price changes
are vital for the smooth functioning of any market
economy; inﬂation, however, contributes no information useful to our consumption, production,
and labor choices.
Currently, petroleum and agricultural goods are
experiencing very strong upward relative price pressures. Two factors seem to account for this. First,
the world has experienced what seems to be unprecedented economic performance in recent years
according to IMF data. Between 2004 and 2007,
the world economy grew at an exceptionally strong
5.1 percent average annual rate, and nearly all nations have shared in this expansion. Emerging market countries in Southeast Asia, notably China and
India, have led the way. As these nations develop,
they place greater demands on world food stuﬀs,
petroleum supplies, and other resources. Also putting upward pressure on many prices has been the
dollar’s depreciation. Since early 2002, the dollar
has depreciated more than 25 percent on a broad,
trade-weighted basis. A dollar depreciation reduces
the foreign-currency prices of dollar-denominated
goods and thereby shifts world demand toward
those goods. Because of the dollar’s role as the key
international currency, most of the world’s com6

Foreign Exchange Indexes
Index, February 2002 = 100
110
Developing countries

105

100

Broad Dollar Index

90
85

Peak 2/02

80
75

25%

Major industrialized countries b

70
65

35%

60
2002

2003

2004

2005

2006

2007

2008

a: Other Important Trading Partners Index
b: Major Currencies Index
Source: Board of Governors of the Federal Reserve System

modities, like oil and agricultural goods, are denominated in dollars. The prices of U.S. foods and
industrial-materials exports, for example, are rising
at or near double-digit levels.
Although relative price pressures can be broad
based, their impact on the overall price level in an
economy is by nature transitory. Petroleum and
agricultural products enter the production process
of a very wide range of other goods. Consequently,
higher prices of these basic commodities tend to
pass through into the prices of other producer
and consumer goods. Nevertheless, as long as the
central bank is not creating an excessive amount
of money, this pass-through eﬀect is limited. As
consumers spend more money on higher-priced
petroleum and agricultural goods—the quantity
demand of these items seems fairly unresponsive to
price changes—then they eventually must have less
money to spend on other goods and services. Other
relative prices must then fall, so that over the intermediate to long term, the average rate of the price
rise tends to equal the underlying inﬂation rate as
determined by monetary policy. People’s cost of
living certainly will rise, their incomes will buy less,
and their economic well-being will be diminished.
Nevertheless, these relative price pressures do not
generate inﬂation.
One wrinkle in this story has to do with the dollar’s
depreciation. Since early 2006, the depreciation
seems to reﬂect international portfolio diversiﬁcation, rather than excessive U.S. money growth.
Over the past 25 years, the U.S. has ﬁnanced its
current account deﬁcits by issuing ﬁnancial claims
to the rest of the world. Economists have long
expected that, at some point, foreign investors—
both private and oﬃcial—would become reluctant
to hold additional dollar-denominated assets and at
this point the dollar would depreciate. Of course,
concerns about future inﬂation could motivate
portfolio diversiﬁcation and dollar depreciation,
but to date, direct measures provide little evidence
of rising inﬂation expectations. We are not importing inﬂation through the dollar’s depreciation.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

Economic Activity and Labor Markets

Real GDP 2007: Fourth-Quarter Preliminary Estimate
03.07.07
Brent Meyer

Real GDP and Components 2007:
Fourth-Quarter Advance Estimate
Annualized percent change, last:
Quarterly change
(billions of 2000$)

Quarter

Four quarters

Real GDP

18.2

0.6

2.5

Personal consumption

39.1

1.9

2.5

Durables

7.1

2.3

4.3

Nondurables

8.3

1.4

1.5

Services

24.1

2.1

2.6

Business fixed investment

23.2

6.9

7.3

8.7

3.3

3.6

Equipment

10.8

14.6

15.7

Residential investment

Structures

-32.5

-25.2

-18.6

Government spending

11.1

2.2

2.4

-0.4

-0.3

1.5

Net exports

National defense

26.3

—

Exports

17.0

4.8

7.9

-9.3

-1.9

0.9

-40.7

—

Imports
Change in business
inventories

Source: Bureau of Labor Statistics.

Contribution to Percent Change in Real GDP
Percentage points
4
3
2
1
0

Prior four quarters
Advance estimate for fourth quarter 2007
Preliminary estimate for fourth quarter 2007

Business
fixed
investment
Residential
investment Change in
inventories
Personal
consumption

Imports
Exports

Government
spending

-1
-2
Source: Bureau of Economic Analysis.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

Real GDP remained unchanged from the advance
estimate, growing at an annualized rate of 0.6
percent in the fourth quarter of 2007. Downward
revisions to private investment and personal consumption were balanced by a positive improvement in net exports. Exports were adjusted up 0.9
percentage point, from 3.9 percent to 4.8 percent,
while imports (which subtract from GDP growth)
were revised down, from 0.3 percent to -2.2 percent. Personal consumption of durable goods was
adjusted down from 4.2 percent growth in the
advance estimate to 2.3 percent in the preliminary
estimate. Business inventories showed a slightly
greater contraction than previously estimated,
falling $40.7 billion during the quarter. On net,
private inventories lost $33.7 billion in 2007.
Personal consumption contributed 1.3 percentage
points to the percent change in real GDP, compared to the 1.4 percentage points of the advance
fourth-quarter estimate. Consumption has added
1.7 percentage points to growth over the past four
quarters. The contribution of real exports was revised up from 0.5 percentage point to 0.6 percentage point, while imports, which had subtracted 0.1
percentage point in the advance estimate, are now
adding 0.3 percentage point. Private investment
and inventories (together) subtracted 2.0 percentage points oﬀ of real GDP growth, compared with
a 0.5 percentage point reduction over the past four
quarters.
Looking forward, the Blue Chip Panel of economists expect below-trend real GDP growth of
2.2 percent in 2008. Of the 45 panelists, 19 have
downgraded their 2009 forecast since last month.
Recent data releases have been somewhat weak,
hinting that ﬁrst-quarter growth will be slow.
Indeed, the Blue Chip panel expects ﬁrst-quarter
growth to be 0.5 percent, before steadily rising
closer to trend growth by 2009.
8

Real GDP Growth
Annualized quarterly percent change
6
Forecast period
5

Final estimate
Preliminary estimate
Blue Chip forecast

Average 1981-2007
4
3
2
1
0
IVQ IQ
2006

IIQ IIIQ IVQ IQ
2007

IIQ IIIQ IVQ IQ
2008

IIQ IIIQ IVQ
2009

Source: Blue Chip Economic Indicators, February 2008; Bureau of Economic Analysis.

ISM Manufacturing PMI
Diffusion Index (+50 = expansion)
75
70

ISM PMI

65
60
55
50

Another signal about the near-term growth outlook
comes from the Purchasing Managers Index (PMI),
calculated by the Institute for Supply Management (ISM). In February, the PMI posted a value
of 48.3, a slight contraction in the manufacturing
sector (values greater than 50 indicate manufacturing sector expansion, based on survey responses).
In their Report on Business, the ISM stated that,
while an index level of 50 is the break-even point
for the manufacturing economy, “A PMI in excess
of 41.1 percent, over a period of time, indicates
that the overall economy, or gross domestic product
(GDP), is generally expanding; below 41.1 percent,
it is generally declining.” Taken at face value, that
would seem a reassuring sign, as it would indicate some GDP growth. However, over time that
relationship seems to be losing some explanatory
power, either because the last three recessions have
been relatively mild, or because of an underlying
structural change. Regardless, the ISM manufacturing index is correlated with real GDP, with a correlation coeﬃcient of 0.66. Coming out monthly, the
PMI gives economic observers a quicker read.

45
40

Overall economy
break-even line= 41.1%

35
30

25
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: Bureau of Economic Analysis.

Economic Activity and Labor Markets

The Employment Situation
Average Nonfarm Employment Change
Change, thousands of jobs
250
Revised

03.10.08
by Yoonsoo Lee and Beth Mowry

Previous estimate

200
150
100
50
0
-50
-100
2004 2005 2006 2007

III
2007

Dec Jan Feb

Nonfarm payroll employment declined by 63,000
in February, coming in below expectations of a
25,000 gain. January’s loss (initially 17,000) was
revised downward to a loss of 22,000. Payroll declines were last seen in August 2003, and this report
brings the second consecutive monthly decline. December’s gains were also cut in half to just 41,000
jobs. Somewhat surprisingly, the unemployment
rate dipped slightly, from 4.9 percent to 4.8 percent, but this was because of a decline of 450,000

Source: Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

Labor Market Conditions
Average monthly change (thousands of employees, NAICS)
2004

2005

2006

2007 YTD

Feb 2008

Payroll employment

173

211

175

−63

Goods-producing

−38

−89

Construction

−19

−39

Heavy and civil engineering

−1

−5

Residentiala

−2

−10

−26

Nonresidentialb

−9

−1

−7

−14

−22

−52

−4

−15

−40

Manufacturing
Durable goods

−9

−8

−10

−7

−12

Service-providing

Nondurable goods

148

179

172

132

Retail trade

−34

−8

−12

activitiesc

Financial
PBSd

−20

Temporary help svcs.

−7

−28

Education and health svcs.

Leisure and hospitality

Government

Local educational svcs.

4.6

4.8

Average for period (percent)
Civilian unemployment rate

5.5

5.1

4.6

a. Includes construction of residential buildings and residential specialty trade contractors.
b. Includes construction of nonresidential buildings and nonresidential specialty trade contractors.
c. Includes the finance, insurance, and real estate sector and the rental and leasing sector.
d. PBS is professional business services (professional, scientific, and technical services, management of companies and enterprises, administrative and support, and waste management and remediation services.
Source: Bureau of Labor Statistics.

jobs in the labor force, not a rise in employment.
Subtracting out the government’s contribution of
38,000 jobs, private sector payrolls fell by a signiﬁcant 101,000.

Private Sector Employment Growth
Change, thousands of jobs: 3-month moving average
350
300
250
200
150
100
50
0
-50
-100
-150
-200
2002

2003

2004

2005

2006

2007

Source: Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

2008

Goods-producing industries lost 89,000 workers
in February. The manufacturing sector led the way
with a 52,000 loss, its largest since July 2003 and
the twentieth straight month of decline. Within
manufacturing, durable goods lost 40,000 jobs
and nondurable goods lost 12,000. In production
manufacturing, 59,000 jobs were cut, the largest loss this category has experienced since July
2003. Construction continued its shedding trend
for the eighth consecutive month, losing 39,000
jobs. Within construction, residential construction
faced the largest losses (14,000), but nonresidential
construction also lost 3,700 jobs.
10

Labor Market Conditions and Revisions
Average monthly change (thousands of employees, NAICS)
Dec
current

Revision
to Dec

Jan
current

Revision
to Jan

Feb
2008

Payroll employment

−41

−22

−5

−63

Goods-producing

−73

−12

−54

−3

−89

Construction

−55

−10

−25

−39

Heavy and civil
engineering

−5.2

−5.3

−2

−5

Residentiala

−36.9

−5

−29.7

−2

−28

Nonresidentialb

−13.5

−5

10.1

−9

−22

−2

−31

−3

−52

Durable goods

−2

−5

−19

−7

−40

Nondurable
goods

−12

Manufacturing

Service-providing

114

−29

−2

Retail trade

−25

−13

−11

−34

Financial activitiesc

−8

−7

−8

−6

−12

PBSd

−18

−9

−20

−5

−11

−2

−28

Leisure and
hospitality

−15

−8

Government

Temporary help
svcs.
Education and
health svcs.

Local educational svcs.

a. Includes construction of residential buildings and residential specialty trade
contractors.
b. Includes construction of nonresidential buildings and nonresidential specialty
trade contractors.
c. Financial activities include the finance, insurance, and real estate sector and the
rental and leasing sector.
d. PBS is professional business services (professional, scientific, and technical
services, management of companies and enterprises, administrative and support,
and waste management and remediation services.
Source: Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

Service sector employment rose by just 26,000
workers last month, its weakest gain since October
2005. Even with the government’s 38,000 payroll
boost to the total services ﬁgure, private services
lost 12,000. Within services, leisure and hospitality
continued a positive streak, adding 21,000 to their
payrolls, and health services added 36,800. Food
services continued to go strong, adding 19,900
employees. Professional business services, which
lost 9,000 jobs in January, experienced its second
straight month of decline with a loss of 20,000
jobs. Temporary help fell the most within professional business services, with a loss of 27,600.
Financial service activities also fell by 12,000, in
line with a year of fairly consistent and comparable
decline.
The three-month moving average of private sector
employment growth dipped into negative territory
for the ﬁrst time since August 2003. This measure
can provide a cleaner read of labor market conditions because it removes some of the monthly
volatility and the consistent boost provided by the
government.
Overall, this month’s employment report points to
further weakening in labor markets. However, it
is worth noting that monthly numbers are volatile
and subject to revision. The Bureau of Labor Statistics (BLS) revised January’s initial loss of 17,000
jobs to a slightly larger loss of 22,000 in this
month’s report. December’s gain of 82,000 was also
trimmed back to a gain of 41,000. Payroll gains
(or losses in this case) for January and February are
subject to revision in the next report.

Economic Activity and Labor Markets

Housing Doldrums
Housing Price Indexes

03.12.08
O. Emre Ergungor

Percent change, year over year
20
15
10

S&P/Case-Shiller
OFHEO

5
0
-5
-10
1995

1997

1999

2001

2003

2005

2007

Source: OFHEO; S&P, Fiserv, and MacroMarkets LLC.

New Single-Family Home Sales
Millions of units
1.4

Thousands of dollars
280

1.3

260

1.2

240

1.1

220

1.0

200

0.9

180

Median sales price

0.8

160

0.7

140

0.6

120
100

0.5
1995

1997

1999

2001

2003

2005

2007

The deterioration in the housing market shows no
sign of abating. The S&P/Case-Shiller house price
index registered a 9 percent year-over-year drop in
the ﬁnal quarter of 2007, the sharpest decline in
its 21-year history. The Oﬃce of Federal Housing Enterprise Oversight (OFHEO) price index
also moved into negative territory for the ﬁrst time
in its 17-year history. While both indexes show
downward pressure on home prices, the magnitude
of the decline diﬀers signiﬁcantly between the two
indexes. The reason is that OFHEO tracks only
homes with mortgages below Fannie Mae and Freddie Mac’s conforming loan limit ($417,000 in 2006
and 2007), while the S&P/Case-Shiller index tracks
home sales in all price ranges and is therefore more
aﬀected by the pricey housing of the coastal areas.
(OFHEO’s limit has been temporarily raised to
$729,000 or 125 percent of an area’s median home
price, whichever is lower.)
The decline in prices has not translated into higher
volumes just yet. The number of new single-family
homes sold has dropped 58 percent since 2005,
reaching 588,000 units in January. The median
sales price, now at $216,000, has declined almost
18 percent since March 2007.

Source: Bureau of the Census.

In parallel with the weakening of demand and the
decline in prices, residential investment has slowed
sharply in recent quarters. Construction permits,
which signal building activity going forward, have
declined sharply, from 1.8 million units per year in
the fall of 2005 to 673,000 units in January 2008.

Single-Family Starts and Permits
Millions of units
2.0
1.8
Starts

1.6
1.4
1.2

Permits
1.0
0.8
0.6
1995

1997

1999

2001

2003

2005

2007

The sharp decline in new home sales and the high
levels of inventory suggest that the weakness in
this market is likely to stay with us for some time.
At the current sales pace, it would take about
10 months to move the existing inventory. This
pace represents a signiﬁcant deterioration from its
level early in the decade and is worse than when it
bottomed out at the end of the previous housing
downturn in 1991.

Source: Bureau of the Census.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

New Single-Family Homes for Sale
Months of supply
10

Thousands of units
600
550

500

450

400

350

300

250
1990

3
1994

1998

2002

2006

Source: Bureau of the Census.

Stock Market and Value of Housing
Four-quarter percent change
16
14

12-month percent change
50
40

S & P 500

-10

V alue of owner-oc c upied
real es tate

-20
-30

0
1995

1997

2000

2003

2005

Source: National Association of Realtors.

Private Construction Spending
Billions of dollars
1200
1000

Nonresidential
Residential
Total

800
600
400
200
0
1995

1997

1999

2001

2003

2005

2007

Source: Bureau of the Census.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

A concern for economic observers is that a home is
the most important asset in the household portfolio, comprising more than 30 percent of total
assets. When the stock market dropped sharply in
the 2000–2003 period, the strength in home values
cushioned the blow from falling stock prices and
allowed households to keep spending. The slowdown in appreciation over recent months suggests
that housing may not be there to pick up the slack
in the next downturn.
The deterioration in the housing industry and its
impact on the nation’s economic output are visible
in construction spending. While nonresidential
construction spending (commercial buildings and
shopping malls) has increased rapidly in the last
two years, its contribution to the economy could
not make up for the sharp decline in residential
construction activity. As residential construction
continues to deteriorate, whether the demand for
commercial buildings will remain strong remains to
be seen.
As the housing situation continues to deteriorate,
mortgage-related losses are taking a big bite out
of the proﬁts of mortgage lenders. The earnings of
thrifts—FDIC-insured depository institutions that
specialize in mortgage lending—dropped sharply
in the fourth quarter of 2007, a loss of almost $5
billion from a proﬁt of around $4 billion earlier in
the year.
The deterioration in earnings does not appear to be
widespread, but the institutions at which the deterioration is concentrated are among the largest in
the industry. The chart below shows the total assets
of unproﬁtable thrifts as a fraction of total industry
assets in a particular size category. (Year-end data
up until the end of 2006 are separated into diﬀerent categories of asset size and represented by diﬀerent lines. Data for 2007 appear in the bars and are
divided into four quarters. For example, the green
line expresses the assets of unproﬁtable thrifts with
total assets of more than $1 billion as a fraction of
the total assets of all large thrifts.) In 1990, almost
50 percent of large-thrift assets were owned by
unproﬁtable large thrifts. When 2007 began, this
ratio was 3.5 percent and it declined to 1.8 percent
in the second quarter. Fast forward two quarters
13

to December 2007, and 60 percent of large-thrift
assets are owned by unproﬁtable large institutions,
which exceeds the level during the thrift crisis of
the late 1980s. Note that asset sizes have not been
adjusted for inﬂation. Therefore, a $1 billion thrift
in 1990 was an economically bigger institution
than a $1 billion thrift today.

Thrift Industry Earnings
Billions of U.S. Dollars
6
4
2
0
-2
-4
-6
12/05 04/06 06/06 09/06 12/06 04/07 06/07 09/07 12/07
Source: Office of Thrift Supervision.

Assets of Unprofitable Thrifts
Percent of total assets
70
As s ets under $300 million
B etween $300 million and $1 billion
60
Over $1 billion
50
40
30
20
10
0
1985

1990

1995

2000

2005

QI QII QIII QIV

2007

Source: Federal Reserve Board.

Unprofitable Thrifts
Percent of total number
70
As s ets under $300 million
B etween $300 million and $1 billion
60
Over $1 billion
50
40
30
20

The charts below show the number of unproﬁtable institutions in each size category. In the ﬁrst
quarter of 2007 (bars), about 20 percent of thrifts
with assets less than $300 million and 10 percent
of thrifts with assets greater than $1 billion were
unproﬁtable. Those numbers jumped to 29 and
27 percent, respectively, at the end of 2007. These
numbers are well below the levels they reached in
late 1980s. What these numbers suggest is that
compared to 20 years ago, we have fewer troubled
institutions, but those that are troubled are the largest ones.
Bank holding companies and ﬁnancial holding
companies (BHCs and FHCs) seem to have fared
better in these diﬃcult times. BHCs and FHCs
are holding companies that own a diverse set of
ﬁnancial institutions, ranging from depository
institutions to insurance companies and investment
banks. While the number of unproﬁtable institutions has increased, the industry as a whole has
created enough proﬁt to absorb the losses from the
unproﬁtable institutions. Overall industry proﬁts
were still positive and strong in the last quarter of
2007.

10
0

QI QII QIII QIV

1985

1990

1995

2000

2005

2007

Source: Federal Reserve Board.

Unprofitable BHCs and FHCs

BHC and FHC Earnings

Percent of total number
60
As s ets under $1 billion
B etween $1 billion and $10 billion
Over $10 billion
50

Billions of U.S. dollars
200
180
160
140

120
30

100
80

60
40

20
0

QI QII QIII QIV

1985

1990

1995

2000

2005

2007

Source: Federal Reserve Board.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

0
12/05 04/06 06/06 09/06 12/06 04/07 07/07 09/07 12/07
Source: Federal Reserve Board.

Economic Activity and Labor Markets

Preliminary Employment Data Might Miss a Recession Onset
03.18.08
by Yoonsoo Lee and Beth Mowry

Nonfarm Employment Change Over the
Past Eighteen Months
Monthly change, thousands of workersa
300
Initial release
Revised
200

100

0
Jul

Oct

Jan

Apr

Jul

Oct

Jan

-100

-200
2006

2007

2008

a. Seasonally adjusted.
Note: The shaded bar indicates the recession period.
Source: Bureau of Labor Statistics.

Nonfarm Employment Change 1990-1991
Recession
Monthly change, thousands of workersa
400

200
Jul

0
Jan

Apr

Jul

Oct

Jan

Oct

Jan

Apr

-200
Initial release
Revised
-400
1989

1990

1991

a. Seasonally-adjusted
Note: The shaded bar indicates the recession period.
Source: Bureau of Labor Statistics.

As we move further into 2008, concerns are growing about the U.S. economy heading toward recession. The Employment Situation reports released
by the Bureau of Labor Statistics have received a
lot of attention in recent months, as economists try
to determine the extent to which housing troubles
may have spilled over to the broader economy. This
month’s Employment Situation reported a decline
of 63,000 two nonfarm payrolls in February and a
revised loss in January, which increased the initial
tally of 17,000 job losses to one of 22,000. The last
time two consecutive months of decline occurred
was in June 2003.
While the timely information provided by preliminary numbers can help us to assess labor
market conditions, those numbers are subject to
two monthly revisions after they are ﬁrst released,
as well as annual revisions every February. These
revisions can be substantial and are sometimes even
larger than the payroll changes themselves. The
graph below, showing initial releases and revised
numbers, demonstrates how signiﬁcant revisions for
any given month can be. January’s report this year,
for example, initially reported a gain in December
of just 18,000 nonfarm jobs but was revised up in
the following report to a gain of 82,000. In August
last year a payroll loss was initially reported, but
with the revision the net change moved into positive territory.
Historically, payroll numbers usually dip sharply
during or prior to recessions. But it important
to note that this observation is based on revised
numbers. The data initially reported might have
shown a diﬀerent picture at the time. To get an idea
of how much this picture might change from initial
release to revision, we prepared graphs of both sets
of employment numbers around the two most
recent recessions.
Around the 2000–2001 recession, both initial and
revised data indicate a slowing labor market ap-

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

Nonfarm Employment, Change 2001
Recession
Monthly change, thousands of workersa
400

200
Mar Jun

0
Sep

-200

Dec

Mar Jun

Sep Dec

Initial release
Revised

-400
1999

2000

proaching July, although the initial data show a
somewhat steeper descent. Despite the slowing
trend in nonfarm employment growth in early
1990, growth continued to average about 200,000
jobs per month over the year. Payroll growth
sharply turned negative in July, the oﬃcial starting point of the recession. However, July’s loss of
219,000 jobs ended up being revised to a loss of
just 89,000 later.

2001

a. Seasonally-adjusted
Note: The shaded bar indicates the recession period.
Source: Bureau of Labor Statistics.

Revisions appear to have been more dramatic leading up to the 2001 recession than the 1990–1991
recession. The initial data show slowing, but employment gains looked solid right up to the onset of
the recession in March. However, the revised data
paint a much less optimistic picture, twice crossing negative territory in the two quarters preceeding the recession. Employment gains of 268,000
in January and 135,000 in Feburary were revised
down to –16,000 and 61,000.
As of January 2001, labor indicators such as payroll employment, the unemployment rate, and the
employment-to-population ratio all looked to be
holding strong. Reports based on the initial releases
of early 2001 thus painted a relatively positive picture of the labor market. Even the Cleveland Fed’s
January Economic Trends assessed labor markets as
“holding steady, albeit with slower job growth than
earlier in 2000, despite signs of weakening in the
overall economy.” However, with April’s employment report (of March activity), negative change
was posted, the unemployment rate edged up 0.1
percent, the employment-to-population ratio decreased 0.1 percent, and the percentage of the civilian labor force unemployed for 15 weeks or longer
increased slightly. The author of the Trends article’s
commented that, “While variations in these labor
market series are common, even during periods of
robust economic growth, their recent simultaneous
movements seem atypically strong and suggest that
ﬁrst-quarter economic activity slowed considerably.”
In both recessions, payrolls declined in the ﬁrst
month of the recession. While it seems as though
payroll numbers might be insightful turning-point
indicators, there are some notable exceptions as
well. For example, initial releases for July and

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

August 2000 showed respective declines of 108,000
and 105,000. However, these numbers were later
revised upward, revealing increases of 163,000 and
3,000 jobs.
Three-Month Moving Average of Employment Changes
Three-month moving averages can remove some of the volatility of preliminary data and provide a more tempered
trend of payroll employment.Â A moving average is useful because it takes into account both the latest preliminary
data and past monthsâ€™ revisions.Â However, the diluted nature of moving averages also delays their response to
turning points in economic activity. In the 2001 graph, for instance, a three-month moving average smoothes out
the peaks and troughs of the monthly change data, but it also shifts the start of the decline to after the start of the
recession.
The current three-month moving average of payroll change declined 55,000 to 42,000 between December and January.

Nonfarm Employment Change, 2001
Recession

Nonfarm Employment Change, over the
Past Eighteen Months

Thousands of workers, 3-month moving averagea

Thousands of workers
400

400

200

200
Jun

0
Sep

-200

-400
1999

Dec

Mar

Jun

Sep

Dec

0
Jul

Dec Mar

-200
Data from the preliminary release
Most recent data
2000

Oct

Jan

Apr

Jul

Oct

Jan

Data from the preliminary release
Most recent data

-400
2001

a. Seasonally-adjusted
b. The 3-mo. moving average represents real-time data, whereas the revised series
represents the most current data.
Note: The shaded bar indicates the recession period
Source: Bureau of Labor Statistics.

2006

2007

2008

Nonfarm Employment Change, 1900-1991
Recession
Thousands of workers, 3-month moving averagea
400

200
Oct

0
Jan Apr
-200

Jul

Oct

Jan

Apr

Jan Apr

Jul

Data from the preliminary release
Most recent data

-400
1989

1990

1991

a. Seasonally-adjusted.
b. The 3-mo. moving average represents real time data, whereas the revised series
represents the most current data.
Note: The shaded bar indicates the recession period
Source: Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

Economic Activity and Labor Markets

Home Price Indexes
03.18.08
by Michael Shenk

Real Home Price Indexes
Percent change, year over year
15

According to most major measures, home prices are
declining—and if market commentators are right,
prices may continue to fall in the near future. This
decline may be hard to stomach for recent home
buyers, home sellers, or those in need of reﬁnancing, but should it really have been so unexpected?

12
9

OFHEO Total House Price Index

6
3
0
S&P/Case-Shiller

-3
-6
-9

OFHEO average
S&P/Case-Shiller average

-12
1975

1980

1985

1990

1995

2000

2005

Sources: The Bureau of Economic Analysis; Office of Federal Housing Enterprise
Oversight (OFHEO); and S&P, Fiserv, and MacroMarkets LLC.

Case-Shiller Real Home Price Index
Index
180
160
140
Estimated
level

120
100
Actual
level

80
60
40
20
0
1987

1992

1997

2002

2007

Sources: The Bureau of Economic Analysis; and S&P, Fiserv, and MacroMarkets LLC.

Over the past 30 years, and presumably even before
that (we don’t have much data prior to the mid1970s) nominal home prices have risen steadily.
According to the data we do have, prices have risen
approximately 2–2.5 percent annually on average after adjusting for inﬂation. Of course, price
growth isn’t within this range every year, but prices
do seem to dance around it. Growth of this sort is
often referred to as mean reverting since the series
ﬂuctuates in the short term but always seems to return to the average rate of growth in the long term.
If home price growth is in fact mean reverting, one
would expect periods of above-average growth to
be followed by periods of slow growth—barring
any fundamental shift in the market. For instance,
one of the many factors that inﬂuences the price of
homes is population growth; if population growth
were to fall permanently from its long-term average
of 1.3 percent to, say, 0.8 percent (the long-range
growth forecast of the Census Bureau), we would
expect the average growth rate of home prices to
permanently shift down as well.
In reality, it is diﬃcult to tell whether changes in
price appreciation are the result of fundamental
changes in the market or just short-term changes
due to speculation or varying economic conditions.
If we assume for the sake of argument that there
hasn’t been a fundamental shift in the market, we
should be able to get a good idea of how much farther home prices might fall by looking at the price
levels warranted by their average long-term growth
rate.
To calculate this estimate of where home prices
“should” be, we need to make a few additional

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

assumptions. The ﬁrst assumption is that home
prices grow at a constant rate over time. The second
assumption is that all of the available data are valid
and consistent with the ﬁrst assumption. This
means we won’t exclude periods where the growth
might seem atypical. Using a basic loglinear regression, we get the following two pictures of our
estimates.

OFHEO Real Home Price Index
Index
400
350
300

Estimated
level

250
200

Actual
level

150

According to these rough estimates, homes prices
are still above the levels warranted by their average
growth rates and therefore seem likely to fall somewhat in the future. Just how much they are likely
to fall depends on the index one looks at and how
much one expects the market to compensate for
the above-average growth of the past few years. As
the charts show, housing prices seem to be meanreverting: Periods in which prices are above their
“expected” levels are generally followed by periods
in which prices are below these levels. Keep in
mind that these are real ﬁgures and that any future
inﬂation reduces the amount by which home prices
are likely to fall.

100
50
0
1975

1980

1985

1990

1995

2000

2005

Sources: The Bureau of Economic Analysis; and Office of Federal Housing
Enterprise Oversight (OFHEO).

Regional Activity

Fourth District Employment Conditions
02.22.08
by Tim Dunne and Kyle Fee

Unemployment Rates*
Percent
8
7
Fourth District

6
5
4

United States

3
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
a. Seasonally adjusted using the Census Bureau’s X-11 procedure.
* Shaded bars represent recessions. Some data reflect revised inputs, reestimation,
and new statewidecontrols. For more information, see http://www.bls.gov/lau/launews1.htm.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

The district’s unemployment rate jumped 0.5
percent to 5.7 percent for the month of December. The increase in the unemployment rate can be
attributed to an increase in the number of people
unemployed (10.4 percent), as well as a decrease
in the number of people employed (−0.6 percent)
with no change to the labor force. December’s
sharp rise in the district’s unemployment rate cancels out the large drop in the rate seen in November. We discussed the recent ﬂuctuations in regional unemployment statistics last month in The Ups
and Downs in Regional Employment Statistics.
Compared to the national unemployment rate, the
district’s rate stood 0.7 percent higher in December
and has been consistently higher since early 2004.
From the same time last year, the Fourth District’s
unemployment rate increased 0.3 percentage point,

whereas the national unemployment rate increased
0.5 percentage point.

Unemployment Rates*
Percent
8

County-level unemployment rates diﬀer signiﬁcantly across the district. Of the 169 counties in the
Fourth District, 25 had an unemployment rate below the national average in November and 144 had
a higher rate. Rural Appalachian counties continue
to experience high levels of unemployment. Conversely, Fourth District Pennsylvania has 8 counties
with unemployment rates below the national rate.
Unemployment rates for the District’s major metropolitan areas ranged from a low of 4.2 percent in
Lexington to a high of 6.6 percent in Toledo.

7
Fourth Distr
6
5
United States

3
1990 1992 1994 1996 1998 2000 2002 2004 2006
a. Seasonally adjusted using the Census Bureau’s X-11 procedure.
* Shaded bars represent recessions. Some data reflect revised inputs, reestim
and new statewidecontrols. For more information, see http://www.bls.gov/lau/la
Source: U.S. Department of Labor, Bureau of Labor Statistics.

Payroll Employment by Metropolitan
Statistical Area 12-month perc ent c hange, Dec ember 2007
C levela
nd
T otal Nonfarm

C olumb
us

C incinn
ati

P itts bur
gh

Dayto
n

T oled
o

Akro
n

Lexingt
on

U.S
.

0.0

0.5

0.3

0.1

-0.4

-0.2

0.7

0.9

G oods -producing

-0.2

-1.8

-1.9

-1.8

-1.0

-3.2

0.6

-1.3

-2.0

Manufacturing

-0.2

-1.9

-1.2

-2.1

-1.3

-4.0

0.2

-2.5

-1.8

0.0

-1.5

-3.5

-1.2

0.0

-0.7

2.1

2.4

-2.3

0.1

0.9

0.7

0.4

-0.2

0.5

0.7

1.2

1.4

-0.3

-0.5

-0.1

-0.2

-1.1

-0.9

0.0

-1.3

0.9

0.5

-0.5

-3.2

-3.0

0.0

2.4

2.2

2.1

-0.7

F inancial activities

-0.4

-1.1

0.0

1.5

1.6

0.0

-0.9

-1.2

P rofes s ional and bus ines s services

-0.9

2.8

0.4

1.4

-0.6

1.1

2.2

-7.4

2.0

0.8

0.5

3.3

1.0

0.2

1.9

1.1

3.8

2.9

Natural resources , mining, and cons truction
S ervice-providing
T rade, transportation, and utilities
Information

E ducation and health services
Leis ure and hospitality

-0.2

2.3

2.7

0.3

-0.5

0.0

-0.3

5.8

2.8

Other S ervices

-0.2

-1.3

-0.5

-0.9

1.8

0.7

0.0

-1.0

0.8

1.3

1.8

-0.2

0.4

-0.3

0.4

0.6

6.3

1.1

6.3

5.1

5.2

4.7

6.2

6.6

5.6

4.2

5.0

G overnment
December unemployment rate (s a, percent)

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

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

Lexington and Akron are the only large metropolitan statistical areas (MSAs) to have comparable
nonfarm employment growth with the nation over
the past 12 months (0.7 percent, 0.7 percent, and
0.9 percent, respectively). By contrast, Dayton and
Toledo were the only large MSAs to see declines in
nonfarm employment. Employment in goods-producing industries increased in Akron (0.6 percent),
while all other Fourth District metropolitan areas
all lost goods-producing jobs. Nationally, goodsproducing employment declined by 2.0 percent.
Table image Table text
Employment in service-providing industries saw
its largest gains in Lexington (1.2 percent) and
Columbus (0.9 percent). On the national level,
employment in service-providing industries increased 1.4 percent. Nationally, employment in
trade, transportation and utilities services increased
0.9 percent since last December; however, no large
metro area in the Fourth District experienced
change in employment in these industries. Professional and business services employment grew
faster than the nation’s 2.0 percent in Columbus
(2.8 percent) and Akron (2.2 percent). Compared
to the nation’s 2.8 percent increase in education
and health services employment over the past 12
months, Lexington’s 5.8 percent growth in these
industries is noteworthy.

Regional Activity

Labor Force Participation in the United States and Ohio
03.12.08
by Tim Dunne and Kyle Fee

Labor Force Participation Rates
Percent
68
Ohio
67
U.S.
66

63
1980

1985

1990

1995

2000

2005

Source: Current Population Survey.

Labor Force Participation Rates
U.S.

Ohio

Age

2000

2006

2000

2006

16 to 19

52.2

43.7

58.9

53.0

20 to 24

77.9

74.6

81.3

77.1

25 to 34

84.6

83.0

85.3

84.5

35 to 44

84.8

83.8

85.1

45 to 54

82.6

81.9

83.2

82.1

55 to 64

59.2

63.7

57.3

64.1

65+

12.8

15.4

12.4

Total

67.2

66.2

67.1

67.2

Source: Current Population Survey.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

A key determinant of the size of the labor force is
the labor force participation rate. The labor force
participation rate is the fraction of the working
age population (16-year olds and up) that is currently employed or actively looking for employment. Changes in the labor force participation rate
along with the growth in the population determine
the growth in the labor force. For the nation as a
whole, the labor force participation rate has risen
markedly since World War II. This rise is well
documented and is due primarily to the increased
participation of women in the labor force and the
U.S. baby boom after WWII.
Ohio has also experienced a substantial rise in its
labor force. Closing out the last century, the gains
in Ohio’s rate of labor force participation were
similar to those of the nation as a whole. From
1980 through 2000, the U.S. rate rose 3.4 percentage points, and Ohio’s rose 3.7 percentage points.
However, from 2000 to 2006, the national labor
force participation rate dropped 1 percent to 66.2
percent, while Ohio’s edged up 0.1 percent to 67.2.
What is behind these recent patterns in labor force
participation rates? Several studies have noted that
important shifts in the labor force participation
rates of speciﬁc age groups have aﬀected overall
labor force participation rates. The table below
illustrates this observation by disaggregating labor
force participation rates into diﬀerent age groups
for the years 2000 and 2006. For workers under the
age of 55, labor force participation rates fell or held
steady in the United States as well as in Ohio. For
workers over the age of 55, participation rates rose.
Somewhat surprisingly, labor force participation for
individuals in the 16 to 19 age group drops quite
a bit. Nationally, the labor force participation rate
of these younger workers fell 8.5 percentage points,
roughly 16 percent—a very large downward shift
for this group. Ohio has also experienced a relatively large drop in labor force participation for this age
21

group, though not as large as the U.S. decline. Alternatively, older workers have markedly increased
their participation rates. Workers aged 55 to 64
increased their labor force participation by 4.5
percentage points across the United States and by
6.8 percentage points in Ohio. This rise in the labor
force participation of older workers is a more recent
phenomenon, having begun in the mid-1990s.

Ohio Labor Force Participation Rate
Decomposition, 2000 - 2006
Age
Share of working
population
Labor force
participation rate
Cumulative

16 to 19
20 to 24
25 to 34
35 to 44
45 to 54
55 to 64
65+
Total
-3

-2.5

-2

-1.5

-1

-0.5 0 0.5
Percent

1.5

2.5

Source: Current Population Survey.

U.S. Labor Force Participation Rate
Decomposition, 2000 - 2006
Age
Share of working
population
Labor force
participation rate
Cumulative

16 to 19
20 to 24
25 to 34
35 to 44
45 to 54
55 to 64
65+
Total
-3

-2.5

-2

-1.5

-1

-0.5 0 0.5
Percent

1.5

2.5

Source: Current Population Survey.

In order to see which age groups of workers have
had the largest impact on changes in labor force
participation rates over the 2000–2006 period, we
do a decomposition analysis. The analysis separates
the changes in overall labor force participation rates
into two sources: one is that the participation rates
of diﬀerent age groups could be changing, and two
is that the share of workers in each group could be
growing or shrinking. For example, the labor force
participation rates for age groups could hold steady
but if the share of workers in high labor-force-participation groups fell (age groups 25 through 54),
then overall labor force participation rates could
fall. For each age group, the charts below decompose the contribution to the overall change into the
part that is due to changes in labor force participation rates for the group and the part that is due to
changes in the age group’s share of workers. Bars
that extend out from the center to the left indicate
a negative impact on the labor force participation
rate and bars that extend out to the right show a
positive eﬀect. Green bars show the impact of a
change in the share of workers in an age group,
blue bars show the eﬀect of change in the labor
force participation rate for the group, and red bars
show the eﬀect of the aggregate eﬀect.
The U.S. decomposition shows that the largest
negative impact on the labor force participation
rate comes from the 35 to 44 age group. Driving
the negative eﬀect is the share of workers (the long
green bar).While the participation rates of workers aged 35 to 44 are very high, their falling share
of the overall labor force has acted to lower the
overall labor force participation rate. The youngest
age group also has a substantial negative eﬀect on
overall labor force participation. However, its eﬀect
is driven by the fact that the labor force participation rate has fallen sharply for this group, while the
change in the share of workers makes less of a con-

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

tribution. On the positive side, the rise in the share
of workers aged 45 through 64 has acted to increase
the nation’s labor force participation. On balance,
though, the overall eﬀect (the last set of bars on the
chart) is negative, with both changes in shares and
labor force participation rates acting to lower the
overall U.S. labor force participation rate.
In the case of Ohio, the patterns are roughly similar
with a few key diﬀerences. The share of workers
in the 45–54 age group grew strongly in Ohio,
and this accounted for a substantial fraction of the
rise in the labor force in Ohio. While this group
behaved in the same way in the nation as a whole,
its impact was much weaker. A diﬀerence between
Ohio and the U.S. emerges in the 20–24 age group,
which had a slight positive impact on labor force
participation in Ohio but a net negative eﬀect for
the nation. Finally, similar to the national story,
changes in labor force participation patterns for the
youngest group of workers exerted an overall drag
on Ohio’s labor force participation rate.

Regional Activity

Patent Trends in the Fourth District
Patents in the U.S. and the Fourth
District
Patents per 10,000 residents
4.0

United States

3.5
3.0
Fourth District
2.5
2.0
1.5
1970

1980

1990

2000

Year issued
Note: The Fourth District includes Ohio, eastern Kentucky, western
Pennsylvania, and the panhandle of West Virginia.
Source: U.S. Department of Commerce, Patent and Trademark Office.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

03.14.08
by Robert J. Sadowski
Education and innovation contributed more to
income growth at the state level than other potential factors, according to research conducted at the
Federal Reserve Bank of Cleveland. Educational
attainment, for example, increased a state’s average per capita personal incomes relative to other
states by 8 percent, but innovation—measured by
patents per capita—boosts personal income nearly
20 percent. Given the importance of innovation to
economic performance, we investigate patenting
activity in the Fourth District and compare District
trends with those across the nation.
Until the mid-1990s, patenting in the Fourth
District exceeded that in the U.S. on a per capita
basis. However, in the late 1990s, patenting rates
began to accelerate across the nation and within the
District, but the acceleration at the national level
23

Patents Excluding Electronics, U.S.
and the Fourth District
Patents per 10,000 residents
3.0
Fourth District
2.5
2.0
United States
1.5

1.0
1970

1980

1990

2000

Year issued
Note: The Fourth District includes Ohio, eastern Kentucky, western
Pennsylvania, and the panhandle of West Virginia.
Source: U.S. Department of Commerce, Patent and Trademark
Office.

Electronics Patents, U.S. and the
Fourth District
Patents per 10,000 residents
2.0
United States
1.5
Fourth District

1.0
0.5
0
1970

1980

1990
Year issued

2000

2010

Note: The Fourth District includes Ohio, eastern Kentucky, western
Pennsylvania, and the panhandle of West Virginia.
Source: U.S. Department of Commerce, Patent and Trademark Office.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

was greater. One industry—electronics—is primarily responsible for the surge. Because electronics is so highly concentrated in a few geographic
areas—primarily California, Texas, and the Boston
to New York corridor—the gap in patents per
capita between the nation and the Fourth District
has widened over time. If patents in the electronics industry are excluded from the comparison,
the Fourth District actually has more patents per
capita than the United States as a whole from 1975
through 2003. (The curiously steep decline in
patents during the late 1970s was brought about
by budget constraints at the United States Patent
and Trade Oﬃce (USPTO). These constraints had
caused a three-month patent printing backlog by
the end of 1979.)
Electronic patents began trending upward in 1984.
Nationally, the number of electronic patents issued from 1975 through 1983 was relatively ﬂat,
averaging 9,900 per year. This average increased
to 18,400 between 1984 and 1997 and climbed
even further to 48,000 from 1998 through 2003.
Growth was nonuniform across diﬀerent subgroups
of the industry. The share of patents in computer
hardware and peripheral equipment increased from
15 percent between 1975 and 1983 to 30 percent
between 1998 and 2003, while at the same time
patents for instrumentation declined from 43
percent to 28 percent. The share of patents in communications equipment and electronic components
held steady at about 38 percent between 1975 and
2003.
From 1984 to 2003, the nation’s average annual per
capita growth in electronic patents exceeded that
of the Fourth District by two percentage points.
Further, 36 percent of all patents issued nationally
were in electronics compared to 20 percent in the
District. California led the nation in electronic
patents, having garnered 25 percent of those issued
between 1975 and 2003. Other leading states
include New York, Texas, Massachusetts, and New
Jersey. Among companies, IBM was assigned the
highest number of electronic patents with almost
six percent of the total. Other high-patenting companies include Motorola, Eastman Kodak, Xerox,
and AT&T. Within the Fourth District, inventors living in the southwestern area—from Dayton
24

south through Lexington—were awarded the highest number of electronic patents. The ClevelandAkron area received the second-highest number,
followed by the Pittsburgh metro area. Leading
District organizations for electronic patents include
Westinghouse, General Electric, Lexmark, Proctor
& Gamble, and the U.S. Air Force.
Electronic patents are highly concentrated in 18
counties across the United States. These counties—call them the high-tech counties—are found
primarily in the ﬁve states cited earlier. Inventors
living in the high-tech counties were awarded 39
percent of all electronic patents issued between
1975 and 2003, while inventors residing in the
168 counties of the Fourth District received 3.6
percent. On a per capita basis, electronic patenting
in the high-tech counties stood at 81 per 10,000
residents compared to 14 in the District and 17 in
the remainder of the United States.
Fourth District patenting activity remains vigorous.
As mentioned earlier, the District has a higher per
capita patent rate than the nation across the entire
1975–2003 period when electronics industry patents are excluded from the comparison. Although
the District lags the U.S. average in electronics
patents, it nonetheless remains highly competitive
in innovation across most broad-based industry
groups, especially chemicals and machinery

Banking and FInancial Markets

Business Loan Markets
Domestic Banks Reporting Tighter
Credit Standards

02.22.08
by Joseph G. Haubrich and Saeed Zaman

Net percent
60
50

Medium and large firms

40
30
20
10

Small firms

0
-10
-20
-30
2000

2001

2002

2003

2004 2005

2006

2007

2008

Sources: Senior Loan Officer Opinion Survey on Bank Lending Practices,
Board of Governors of the Federal Reserve System, January 2008.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

The Federal Reserve Board’s January 2008 survey of
senior loan oﬃcers (covering the months of October 2007 through December 2007) found considerable tightening of credit standards for commercial
and industrial loans since the last survey. About
one-third of all domestic banks and two-thirds of
all foreign banks surveyed reported having tightened standards for these types of loans for small as
well as large and medium-sized ﬁrms. The remaining fraction of banks reported little change. The
25

Domestic Banks Reporting Stronger
Demand
Net percent
45
30

Small firms

15
0
-15
Medium and large firms

-30
-45
-60
-75
2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: Senior Loan Officer Opinion Survey on Bank Lending Practices,
Board of Governors of the Federal Reserve System, January 2008.

Quarterly Change in Commercial and
Industrial Loans
Billions of dollars
100
90
80
70
60
50
40
30
20
10
0
-10
-20
-30
-40
2001
2002

2003

2004

2005

2006

2007

Source: Federal Deposit Insurance Corporation, Quarterly Banking Profile,
Third Quarter 2007.

Utilization Rate of Commercial and
Industrial Loan Commitments
Percent of loan commitments
41
40
39
38

reasons cited for tightening included a less favorable
economic outlook, a reduced tolerance for risk, and
worsening of industry-speciﬁc problems. A large
fraction of domestic and foreign banks increased
the cost of credit lines and the premiums charged
on loans to riskier borrowers. About two-ﬁfths of
the domestic banks and nearly eight-tenths of the
foreign banks surveyed raised lending spreads (loan
rates over the cost of funds).
Demand for commercial and industrial loans
continued to weaken over the period surveyed,
though the fraction of large domestic banks reporting weaker demand is relatively unchanged from
the previous survey. About 35 percent of small
domestic banks and 40 percent of foreign banks reported weaker demand. Those who reported weaker
demand cited decreased investment in inventories,
plants and equipment, and a decrease in customers’
need to ﬁnance mergers and acquisitions as reasons.
Bank balance sheets have yet to reﬂect the decline
in businesses’ appetite for bank loans in the face of
tightening credit standards. The $90 billion increase in bank and thrift holdings of business loans
in the third quarter of 2007 is one of the biggest
quarterly increases ever, and it marks the fourteenth
consecutive quarterly increase in the bank and
thrift holdings of commercial and industrial loans.
The sharp reversal in the trend of quarterly declines
in commercial and industrial loan balances on the
books of FDIC-insured institutions prior to the
second quarter of 2004 is still going strong.
The utilization rate of business loan commitments
(draw downs on prearranged credit lines extended
by banks to commercial and industrial borrowers)
held at 36.53 percent of total commitments. It held
steady despite the fact that recent ﬁnancial turmoil
has made access to capital markets more diﬃcult,
which suggests the possibility of lower demand by
borrowers.

37
36
35
34
2001

2002

2003

2004

2005

2006

2007

Source: Federal Deposit Insurance Corporation, Quarterly Banking Profile,
Third Quarter 2007.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

Banking and FInancial Markets

Banking Structure
Commercial Bank Offices

02.22.08
by Joseph G. Haubrich and Saeed Zaman

Number, thousands
100
Banks
Branches
90
80

Passage of the 1994 Reigle–Neal Act, which regulates interstate banking, has spurred the consolidation of depository institutions. The number of
FDIC-insured commercial banks fell from 10,166
in the middle of 1995 to 7,350 in the middle of
2007, a decline of more than 27 percent. The total
number of banking oﬃces, however, increased
nearly 28 percent over that period, from 65,321 to
83,358.

Offices

70
60
50
40
30
20
10
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Note: Annual Figures, reported in June of each year.
Source: Federal Deposit Insurance Corporation, Summary of Deposits, 2007.

Savings Association Offices
Number, thousands
20
Savings and loans
Branches
18
16

Offices

14
12
10
8
6
4

The number of FDIC-insured savings associations
fell by about 40 percent over the period, from
2,082 in 1995 to 1,244 in 2007. The number of
savings association oﬃces also declined, but less
sharply than the number of institutions (less than
12 percent, from 15,637 in 1995 to 13,903 in
2007). In contrast, the total number of oﬃces of
FDIC-insured depository institutions increased almost 20 percent, from 80,958 in 1995 to 97,261 in
2007. This count does not include other channels
for delivering banking services, such as automated
teller machines, telephone banking, and online
banking. Hence, the reduction in the number of insured depository institutions has not decreased the
availability of bank services for most consumers.

2
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Note: Annual Figures, reported in June of each year.
Source: Federal Deposit Insurance Corporation, Summary of Deposits, 2007.

Interstate Branches as a Percent of Total Offices*
Greater than 30%
Between 15% and 30%
Less than 15%
NH
VT
ME

WA
MT
OR

ID
WY
NV

MN
WI

SD
IA

NB
UT
AZ

KS
OK

MI
PA

IL IN OH
WV
VA
KY
NC
TN
AR
SC
MS AL GA
LA

The eﬀects of the banking industry’s interstate consolidation are evident: All but ﬁve states now report
that more than 15 percent of depository institution
branches are part of an out-of-state bank or savings
association. And in over half the states, 30 percent
or more of all branches are oﬃces of out-of-state
depository institutions.

MA
RI
CT
NJ
DE
MD

FL
AK
HI

*Figures reflect percent of branches owned by out-of-state commercial
banks and savings institutions.
Source: Federal Deposit Insurance Corporation, Summary of Deposits, 2007.

Federal Reserve Bank of Cleveland, Economic Trends | February 2008

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Federal Reserve Bank of Cleveland, Economic Trends | February 2008

Full text of Economic Trends (Federal Reserve Bank of Cleveland) : Economic Trends - March 2008

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