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e e e e e e e The Economy in Perspective O n c e upon a time, a husband 2nd wife lived alone in the country, far fro111 the nearest town. Maynard and Philippa were a well-intentionecl couple. serious ancl analytical. Before long, they learned that they were to be parents. The news excited them, but it also caused anxiety, for they knew 11omi denlanding parenthood woulcl be. Maynard and Philippa had not gotten on very well with their own parents, ancl did not find it easy to turn to them for advice. Being practical people, they reasoned that their own common sense would see them through. Sure enough, labor ancl delivery went smoothly, and they becanle the proud parents of a baby boy. They narned him Econome, in honor of their own efficient rllanner of living. As it turned out, young Econonle was a precocious child; he was inventive, assertive, and highly nob bile at just one year. I-'roucl of him as they were, Maynard and Philippa worriecl. Their child had enormous potential, ancl they felt a heavy obligation to see that he constantly fulfilled it. Icnowing that young people could get into plenty of trouble if left to their own devices, they miere determinecl to find a parenting style that would keep Econome challengecl, yet safe. Sitting at the kitchen table one night, they reflected on their own chilclhoocl experiences. Maynard recalled feeling moody much of the time, alternating between shyness ancl aggression. Philippa cotnplainecl that she never could ~111derstancI her parents, nor they her. Both reme~nbereclfeeling physically awkward, ancl having tro~~ble learning to tell right from wrong. After sonle discussion, Maynard suggestecl a plan. Both he ant1 Philippa wantecl Econome to have self-reliance and a stro~lgsense of values. If accelerations and decelerations in his growth rate would cause mood swings and low selfesteeru, why not find a way to nloclerate the extreme fluctuations in his growth cycle? The solution, he said, was simple. They woulcl monitor Econome's height and weight. When he appeared to he growing too fast, they woulcl sinlply keep him in sn~allerclothes, and when his growth stallecl, they woulcl put him in looser ones. The couple assumecl that their chilcl would achieve the average of their own heights, 5 feet 11 inches. By their calculations, they should r e g ulate his gro-ivth to an average of 2.4 inches every year for the next 20 years. They would l<nowvwwrhen to alter his clothes hy being attentive to behavioral abnormalities, spotting them http://clevelandfed.org/research/trends May 1996 Best available copy just before they became entrenched. They woulcl get the hang of the correct sizing by experiment and rigorous recorcl-keeping. Maynard and Philippa put their plan into effect the next clay. For years, Maynard predicted Econome's growth, ancl Philippa rnacle clothing desig~ledto restrict or encourage it according to the size of the gaps between his actual and ideal height and weight. They even learned how to fine-tune the sizing with elastic waists, pleats, and rnovable buttons. But Econo~nestill hacl ~nooclswings. When his clothing was restrictive, he became clepressecl; when it was loose, he lost his inhibitions. There were other difficulties as well. Econome was wearing skintight clothes when baggies were fashionable. He felt that his parents didn't unclerstand hinl ancl would not let him be hirnself. He became prone to temperan~entaloutbursts and unpreclictable behavior. This only caused Maynard ancl Philippa to become still Inore obsessed with managing Econome's development. They planned his wardrobe months in advance. They were deeply upset when the boy received a gift of baggy sweatpants from a relative for his eleventh birthday. He was already too tall for his age! When they took them away, Econolne saict they always stoppecl him from having fun whenever he began to feel good about hirnself. Family life was not going well at all. Then one day these three had a surprise visit from Maynard's cousin Buck. After staying with them only a few clays, Buck saw that something was terribly wrong. By questioning Maynard ancl Philippa about their clothing mania, he learnecl that they were trying to moclerate their son's growth swings only in order to instill souncl values. Buck tolcl them that their intentions were laudablej but growth swings in a healthy chilct were natural. He saicl it was fine to keep an eye on Econome's height and weight, but to appreciate that those features could sinlply not be predicted or n~olcleclas precisely as they might wish. The best miay to forge a good character for Econome was to work directly on his moral development. He urged them to be clear with their son about their expectations for hi~n,and to set a good example through their own behavior. Growth is growth ancl values are values, he said. From that day, these conscientious parents followed Buck's aclvice, raising a well-acljusted son who 11ladethem proucl ancl was known as a man of constant purpose, souncl judgment, ancl excellent taste in clothing. e e e e b e http://clevelandfed.org/research/trends May 1996 Best available copy e Morzetary Policy Perceni,weekly averaqes Percent,weekly averages 1 LONG-TERM INTEREST RATES Percenl I Percent, weekly averages a. Predicted rates are federal funds futures. SOURCES: Board of Governors of the Federal Reserve System; and Chicago Board of Trade Since the Federal Open Marltet Corninittee's last meeting on March 26, interest rates ha\-e driftecl up The initial tumacross all mat~~rities. arouncl in long-term rates occul-reel just before the Pebru:isy 1 recluction rate. in the intencled fecleral f~~ncls A h:lrsh winter helpecl to pllsh up energy prices ancl raisecl concerns about inflation. Subsequent employment reports have revealed a stronger-than-exl>ectecI economy, clespite the severe \\leather and the strike at General Motors. Measurable gains in retail sales ancl inelus- trial procluction have corroboratecl the economy's underlying vitality. Strong economic activity is ~ ~ s u a l l y connecteel with higher rates of return on ne\v business investment anel, in turn, with higher level of interest rates in general. Long-term rates have j~lmpeclsi~bstantially,.i\,ithconventionrtl mortgage rates surging about 100 basis points above their recent trough in February. Concerns :tbout inflation and growing eviclence of economic strength have been associated with a change in market expectations regarcling the future course of monetary policy. Feel funcls futures now si~ggestn o liliely policy action in the near term. Hoxvever, futures contracts for late summer and early fall embeel an increasing expectation of a ~nodcstrise in the i~lte~lclecl funcls rate. In recent weelis, the yielcl on one-year Treasu~-yhills has mo\~eclpersistenrly above the effective fecleral fclncls rate. Moreover, interrnecliate-term interest rates have tenclecl to rise with maturity length. (continried on 17extp~~ge) 0 CB e e http://clevelandfed.org/research/trends May 1996 Best available copy e Monetary Policy (cont.) Percent B ~ l l ~ o of n sdollars, seasonally adjusted 1 1 3'950 THE M2 .AGGREGATEa 1994 1995 INTEREST RATES - 1996 Billions oi dollars, seasonallv adiusied a. Last plot is estimated for April 1996. b. Growth rates are percentage rates calculated on a fourth-quarter over fourth-quarter basis. Annualized growth rate for 1996 is calculated on an estimated Apr~lover 1995:IVQ basis. NOTE: Dotted lines are target ranges. SOURCES: Board of Governors of the Federal Reserve System; and Bank Rate Monitol; various issues. M2 growth s o far in 1996 has esceeclecl its average growth mte in each of the past five years. This strength has persisteel since ai3out micl-1F)95. largely reflecting the laggecl effects of falling interest rates. Banli deposit rates adjust relatively slowly to marliet conditions. Thus, the oppc)rtunity cost of M2 (meas~lrecias the differerlce I ~ e t ~ v e ethe n three-month Treasury yielcl ancl the stlare-weighted average yield paid on PI2 components) tends to rise z~tlclfall with market rates. The o ~ ~ ~ x ~ r t ~cost i n iof t yM2 haci 13een killing until the turnaround in short-term Treasury yields early this year. The recent rise in short-term rates is associatecl with a rise in M2's o p ~ ~ ~ r t u ncost i t y allel hence with an expected rnocleration in M2 growth over the I~alanceof the year. lietail money marlet mutual hlncls are a key component driving the aggregxte's recent strength. Money funcl yielcls ha\~etendecl to rise relative to savings allel small time cleposit rates, lnaliing these f~unclscorn- p:lratively :tttmctive. bloseover, the fl:lttening of the yielcl curve, ~vhich persisteel through e:~rly 1996, induced some investors to shorten the maturity of their portfolios. Banli loan growth continues to moclerate. Cocn~llercialand i~lclustrial loans fell slightly in March, reflecting in part a recluction of inventories, often fina~lced hy a clrawing down of bank credit lines. Consumer creclit continues to grow. but at a slower rate than previously. ( C O I I ~ ~ I011 ~ L17cxtp~~gc~j ~ C ~ http://clevelandfed.org/research/trends May 1996 Best available copy Monetary Policy (cont,) Percent change, seasonally adjusted annual rate Percent Billions of dollars, seasonally adjusted a. Growth rates are percentage rates calculated on a fourth-quarter over fourth-quarter basis. Annualized gmwth rate for 1996 is calculated on a March over 1995:IVQ basis. NOTE: Dotted lines represent growth ranges and are for reference only. SOURCES: Board of Governors of the Federal Reserve System; and Richard D. Porter and Ruth A. Judson, "The Location of U.S. Currency: How Much Is System, June 1995. Abroad?" manuscript. Board of Governors of the Federal R e S e ~ e O n e recent :lnomaly has been the sharp cleceleration in currency, which has increasecl only 3% since June 1995. This compares with an average annual sate of nearly 8!h% over the previous 22 yews. During these years, currency grew slightly faster than GNI', clespite periocls of high inflation anel the increasing use of alternative paytnent methocls. Recent eviclence suggests that a growing share of U.S. currency is tlelci outsicle the countty I>y inclivid- uals who are ~lllcertainabout their own currency's future value. To these investors, the dollar is a refuge during titlies of political ancl economic uncertz~inty. Moreover, the clollar is preferreci in rnatlp countries as :In acceptable tllecliutll of exchange ancl as a safe store of value. Sotlle an:llysts have esti~liateclthat as much ;IS 70% of U.S. currency is helcl al~roacl. The recent slowclown in currency growth is believecl to be related to foreign concerns surrouncling the March introcl~~ctiollof the redesigned SlOO bill, one of the most popuklr clenominations helcl a1,ro:icl. The new bill, introduced as an anticounterfeiting measure, r:lisecl questions about the genuineness of esisting foreign-held stocks anel is I~elievedto be the ltey ex.;planation for the suclclen slo~vclo~vn in demand. Although March saw currency ~kccelerateto its fastest rate in Illore than a year, gronTth remains well belo~vits longer-term pace. http://clevelandfed.org/research/trends May 1996 Best available copy Percent weekly averages Frequency oi rates 60 3-MONTH AND 10-YEAR TREASURY YIELDS 1 Interest rate, percent Frequency of spread 6013-MONTH AND 10-YEAR TREASURY SPREAD^ -2.0 -1.5 -1.0 -0.5 0.0 05 1.0 1.5 2.0 2.5 3.0 3.5 I 4.0 Basis points (in hundreds) a. 3-month and 6-month instruments are quoted from the secondary market on a yield basis; all other instruments are constant-maturity series b. Estimate of the yield on a recently offered, A-rated utility bond with a maturity of 30 years and call protection of five years. c. Bond Buyer Index, general obligation, 20 years to maturity, mixed quality. d. 10-year Treasury constant maturity minus the secondary market 3-month yield. SOURCE: Board of Governors of the Federal Reserve System. The yielcl cul-ve has steepened slightly since I:~st month. It remains nearly linear-much 21s it loolied at this tilne last yezlr. Clearly, fears of an in\-ersion in January clicl not play out. Two closely rv:ltched sprerlcls -the 10-year, 3-month and the 3year, 3-month-stand at 143 and 100 basis points. ~ll,ove their historic averages of 125 ancl 85. Some observers r~ttributethe rise in long r:ltes t o concerns ;~l?outinflation ;lnd a strong econonly (nllegedly I ~ a dfor bo~lcls),I I L I ~ mrmy achiise a wit-ancls e e attitucie. Over the past month, other long rates-including mortgages, munici1x11 bonds, and utility boncls-have eclged up in step with 30-year Treast fallen more recently. uries. 1 ~ 1have Spreacls between these long bonds have remaineel fairly steady, 1 ~ 1 t luve closecl slightly in recent weeks: The spreacl between mortgage ancl utility honcl sates clecreased from 14 basis points to 6 between April 12 ancl April 19. One way to juclge the "normalcy" of toclay's interest rates is to look at the clistribution of interest rates in the recent past. I\/Iost yields o n 3month and 10-year Treasury boncls fall between 2% ancl 9%, placing current yielcls of 5.10% ancl 6.53% squarely in the normal range. Even the levels seen i11 late 1774, \\,hen the 10-year late :~pproached8%, clo not see111 out o f the orclinary (in 1981, rates exceeclecl 15%). The spreacl like\vise sho\\:s a lot of variability. It commonly moves below zero ancl above two, making toclay's level see111 clownright pedestri:un. http://clevelandfed.org/research/trends May 1996 Best available copy Inflation and Prices Index March Price Statistics IUU Annualized percent change, last: Imo. 3 mo. I PURCHASING MANAGERS' PRICE SURVEY I 1995 12 mo. 5 yr. avg. Consumer Prices All items 4.8 4.0 2.8 2.9 2.6 Less food and energy 3.7 3.5 2.9 3.2 3.0 Mediana 2.9 3.1 3.2 3.1 3.2 Finished goods 6.7 2.8 2.4 1.5 2.1 Less food and energy 0.3 1.9 1.7 2.5 6.9 6.2 2.5 5.4 Producer Prices 1.0 Commodity futures pricesb -1.3 12-month percent chanqe Percent oi forecasts jJ I DISTRIBUTION O F ECONOMISTS' 1 9 9 7 CPI FORECASTS~ 1 Annual percent change a. Calculated by the Federal Reserve Bank of Cleveland. b. As measured by the KR-CRB composite futures index, all commodities. Data reprinted with permission of the Commodity Research Bureau, a KnightRidder Business Information Service. c. Upper and lower bounds for CPI inflation path as implied by the central tendency growth ranges issued by the FOMC and nonvoting Reserve Bank presidents. d. Consensus forecast of the Blue Chip panel of economists. SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; the Federal Reserve Bank of Cleveland; the Commodity Research Bureau; the National Association of Purchasing Management; and Blue Chip Economic Indicators, January 16 and April 10. 1996. After a string of small increases, consumer prices have risen more quicltly in the past se\,eral rnonths. During the first cliiarter of 1996, the C o n s ~ ~ m Price e r Inclex (CI'I) rose at an allnc~alizeclr:ite of /t.O(%, 1.4 percentage points :ilx)vc its 1995 average. Such large sv.ings in price clata LLSe COI11111011. 1110~f:h. ;111~[ d0 IlOt necessarily ~narlttlle I~eginningof greater inl1:itionasy ~ ~ r e s s u xIns estimzite fact, tile 111eclian CI'I-:in of t h e economy's c~ncleslyinginflationary tr-encl-rose a n ;inncializecl 2.9% in .\larch :inel 3.1?/0cl~iringthe first three ~ n o n t h sof 1996. a pace virt~lallyindistinguishable from its a\.erage of the past five years. I'rice increases coming from the inclc~strialsector, where procluction gains have been meager since last scimlner, have been more moderate. Exclueling prices for food ancl energ3; (the latter comnloclity being par-ticularly troi11)Icsoruethis ycar), proclucer prices showeel essentially 110change dclring the first cluarter. Sirr~ilarly,the share of pcu-chasing rnallagers reporting increasing price pressures remainecl at a five-year low. The 12-month CI'I trencl, at 2.8%, is near the miclpoint of the centraltenclency range projected by Federal lieserve officials for 1996 (2.75% to 3Y)). While that view \iappearecl sonlewhat optimistic earlier this year, an incse:tsing n~lmberof economists no\v expect inflation to ren1~1inat, or very near. this range over the foresee:ible future. In J:inuary! 45%)of the Blue Chip panel thought that the rate of retail price increases \voulcl move :ibove 3% in 1997; toclay. less tlxln 300/;,l~olclthat \.iew. (cotltitrlrcd otl nevtprigo) @ 8 a ' @ http://clevelandfed.org/research/trends May 1996 Best available copy 8 Inflation and Prices (cont.) Four-quarter percent change 7 , Four-ouarter rnovlno averaae, oercent increase Four-quarter percent change 1 EMPLOYMENT COST INDEX AND CPI INFLATION 12-month percent change 7 6 5 4 3 2 1 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 a. For all employees in nonfarm business. b. Includes wages, salaries, and employer costs of employee benefits for all civilian workers. c. Wage and benefit cost adjustments for collective bargaining settlements covering 1,000 or more workers. d. Mean expected 12-month change in consumer prices as measured by the University of Michigan's Survey of Consumers. SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; DRI/McGraw-Hill; and the University of Michigan. Moreover. the espectation that inflation xvill he signific;tntly recluced by next year seems to be g:lining support. compareel with Janua~y,when only 3% of the economists surveyed s a w 1997 retail inflation moving below 2.25'!41, ilpril's results show 15% expecting this outcome. The helinvior of wage groxvth is sonletilnes presun~eclto indicate ~ L I tctre inflationary pressure (although the evicience for silch a I~eliefis less than compelling). The theories linking wage increases to future inflation a r e among the Inost p:lssionately clebrttecl 11y economists: Some vie\\- wage growth as a cost that ultimately "pushes" prices up, while others consicier wages to be set by for~x~ardlooking xvorkers, whose inflation forecasts tend to be fairly accurate. Regardless of cause, the recent groxvth pattern of wages provicles little season to anticipate substantial near-term inflation changes. While hourly compensation has risen recently (up Illore than 4% cluring the past four quarters), compensation more broadly defined increased slightly less than 3% during that periocl (not much clifferent from the recent CPI trend). Liliewise, ctnion-negotiated wage scttle- ments, though marginally higher in the past few years, have heen l~olcling steacly at a r o ~ ~ n2.5% c l in recent quarters, even for life-of-contract increases extencling over three years. Indeed, o n e of the few inclications of higher near-term inflation cornes fro111 householcls, which anticipate inflation of over 4% for the next 12 mo~lths.While this is up a bit from a few e months ago, and is substantially higher than the current inflation trencl, householci survey clata have inbeen warning of an (~111realizecI) flationary c~pticlifor most of the past four years. http://clevelandfed.org/research/trends May 1996 Best available copy EconomicActivity Percent change, s.a.a.r.b 7 i 1 Real GDP and Components, 1 9 9 6 : l ~ ~ (Advance estimate, s.a.a.cb) chanae, billions of 1992 $ Real GDP Consumer spending Durables Nondurables Percent change, last: Four Quarter quarters 2.8 3.5 7.0 3.1 2.9 47.1 39.4 10.1 11.0 18.5 Business fixed investment 21.0 Equipment 18.7 Structures 2.6 Residential investment 2.9 Government spending 5.7 National defense 5.6 Net exports -1 4.4 Exports 5.4 Imports 19.8 Change in business inventories -8.6 12.1 14.5 5.8 4.4 1.8 7.4 1.8 2.7 5.9 2.7 9.1 5.9 6.7 4.0 1.3 -0.5 -3.2 6.5 4.7 - - - 1 2.8 Perceni change from corresponding month 01 previous year 12 RETAIL SALES AND CONSUMER CONFIDENCE^ Percent change from corresponding quarter of previous year 12 CONSUMER SPENDING a'C 8 I Index 1985 = 100 115 - d -4 - wej 44 r*r 5 ?: I f d -8 - I -1 2 10 ilia 1990 r; $ $5 3i d l l l l i IQ IIIQ IQ lila la 1991 1992 I ilia 1993 l l IQ IIIQ 1994 l l IQ IIIQ 1995 l la 1996 a. Chain-weighted data in 1992 dollars. b. Seasonally adjusted annual rate. c. Seasonally adjusted. d. March data are estimated by deflating nominal retail sales by the Consumer Price lndex for commodities SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; and The Conference Board. Advance estimates releasecl 1,y the Commerce Dcp:irtrnent show real GDP rising 2.8'!41in the first cluarter, substantially ;lI>o\,ethe 1.5% that analysts hacl generally :~nticipatecl.The lower forecilst lvas 1,:1secl in part on the General Motors strilie. the government shi~tclonn.:lncl the esceptiotlally liarcl winter. 'l'he Commerce Ilepartment estimateel that re:il GIIP woulcl ha\.e incre;lsecl 1-i.294~in the first cluarter lvithout the auto proc l ~ ~ c t i ofigilres, n ancl th;~tother speci:d klctors trimmecl O.2!41 off the overall g r o ~ v t lrate. ~ Aclvance estimates are basecl on vely preli~ninary clata. but the size of past revisions suggests that the final estirllates are i~nlikelyto drop as low as 1.5%. 01-er the past four cluarters, real GIII' ;tdvanced 1.8%. This rate is I,elow historic norms, but is not substantially different from recent estilnates of the economy's long-term gron.th potential (2.0%). Consumer spending rose a strong 3.5% in 1996:IQ ancl 2.7% over the last four cluarters, with big g;lins in consumer durahles. Early concerns about debt-l~urclenecl consumers ancl shrinliing consumer confidence seen1 to have been i111nl;lrrantecl. (Aclj~~stecl for inflation, March retziil sales fell slightly, but on a year-overyear I~asis seem consistent with moderate gro'iiqh.) Business fixed investment ivas a n~ajorcomponent of the strong firstcl~~arter sho~ving.Over the past year, corllpanies have purch:lsecl a large volume of information processing ecl~lipment,especially computers. (cotztil71tcdon 1 7 e . ~ t p ~ 1 g ~ j e e e e e e http://clevelandfed.org/research/trends May 1996 Best available copy e Economic ActiuiQ (cont.) Ratio Percent change, s a a r J F M A M J J A S O N 1995 Percenl change from corresponding quarier of previous year D J F M A 1996 Percent change from corresponding quarter of previous year 25 20 15 10 5 0 -5 -10 -15 -20 -75 a. Seasonally adjusted. b. Seasonally adjusted annual rate. c. Chain-weighted data In 1992 dollars. SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the Census; and Board of Governors of the Federal Reserve System. T h e pace of inventory ~ ~ c c u ~ n ~ ~tories l a - rose relative to shipments. Exclucling the production of automotion slowed in the first cjuarter. On biles and parts, which the GM strike balance, I>usinesses adcled S7.9 bilaffected. inclustrial production acllion (1992 clo1l:~rs)t o tlleir stocks, vanced 4.2% in the first quarter. comparecl with SI6.5 I>illion in Federzll governnlent purchases of 1795:IVQ. 'l'he retail sector actually clrexv clown in\-entories, In\.ento~-y/ goods and services increasetl 6.7% in 1996:IQ, but continued to decli~le sales ratios suggest that further subon a year-over-year basis (clown stantial inventory corrections are un3.5%). The persistent reductions in likely. especially at the retail ancl fecleral expenditures have been conwholesale levels. blan~~hcturingg illcentrated in the defense category. ventories, howevcr: n ~ still y I>e a bit State ancl local government outlays high re1:ltive to shipments. Inclustrial have grown a fairly steady 2% in procluction slowecl in 1995 as inven- eadl of the last fexi- years. Residential fisecl investment acl\r:u~lcecI in the first quarter after declining on a year-over-year basis throughout 1995. Housing starts clropped 3.9% in March, but. discounting the extreme month-tomonth volatility in this series, have remained moderately high since early 1995. Existing home sales were u p a strong 6.9% in March, I~ringing the nleclian U.S. homc price to $115,300-a 6.8% increase from last ye:lr. 0 0 B e http://clevelandfed.org/research/trends May 1996 Best available copy e Busa'PzessFixed hueskment Billions of dollars. 3-month movino averaaes Perceni chanqe from lour quarters earlier u" I NONDEFENSE CAPITAL GOODS ORDERS AND SHIPMENTS / Perceni oi n o v ~ n aGDP l 6 CORPORATE PROFITS Perceni change year over year 40 1 I 30 Dividends 20 10 0 -10 -20 -- -'?n 1985 1987 1989 1991 1993 1995 1985 1987 1989 1991 1993 1995 SOURCES: U.S. Department of Commerce, Bureau of the Census and Bureau of Economic Analysis; and Standard and Poor's Corporation. Business fisecl investment-necessa1-y t o I~uildc:lpit:il, promote innovation. ancl l~oostliving st~knclnrclsrose 7.440 in 1995, capping three years of above-;lvel.agc gro\vth. 111vestment in proclucers' cl~~ral>le ecluipment, especially colnp~~ters, accountecl for much of the increxse. Investment in nonresic1enti:il structures, which was constl;iinecl hy overbuilding cluring the 19SOs, illso incre:isecl at a n al~ove-;lve~.age 11;ice in 1995. NIost forec;isters, ~ v h osulxitan- ti:llly ~~nclerestil~latecl the strength of 1,usines.s spencting in 1994 and 1995. espect business fisecl investment to continue actvancing this year ancl nest. hut at a rate nearer to its 25. " ', " " of 3.7%. They 11:lse this vcl,l,c expectation on a slowing in re:d economic growth ancl on 1:~s~ year's slight decline in the rate of capacity ~~tilix~tion. Nevertheless, new orelers for capital goods have recently eshil~itedstrong growth ancl continue to esceecl shipments. %sing interest rates are also a concern in the forecast, 11ut tl~eirrela- . tionship n.ith h ~ ~ s i n e l'isecl ss investment is cliMicult to discern. Although they increase the opportunit>. cost of financing investment projects, higher real interest rates tenel to reflecl greater prod~~ctivity of capital itself. Incleecl, the behavior of stoclis over the past year suggests that investors foresee increasing profits from the economy's capital stock, which shoulcl encoul-age in\.estment. The strong perfosm:lnce of corporate profits also l ~ o d e swell for adclitional investment. Q s s e http://clevelandfed.org/research/trends May 1996 Best available copy e Labor Markets Change thousands oi workersa IAVERAGE MONTHLY NONFARM EMPLOYMENT GROWH I Labor Market Conditionsa Average monthly change (thousands of employees) 1995 1996 Year IQ Feb. Mar. Apr. Payroll employment 144 221 Goods-producing -5 12 Manufacturing -14 -34 Construction 11 45 Service-producing 149 209 Services 93 125 Computer 9 7 Retail trade 19 33 Household 34 390 employment 631 148 30 112 483 273 10 107 178 2 -54 -71 -61 -17 5 -53 232 73 117 20 I1 11 40 20 437 438 -56 Average for period Civilian unemployment 5.6 5.6 5.5 5.6 5.4 rate (%) Mfg. workweek 41.6 41.0 41.6 41.4 41.5 (hours) 1990 1991 1992 1993 1994 1995 1996 to date 11) Feb. Mar. Apr. 1996 Percent Percent Percent chanoe, vear over veara a. Seasonally adjusted. b. Production and nonsupewisory workers. c. Vertical line ind~catesbreak in data series due to survey redesign SOURCE: U.S. Department of Labor, Bureau of Labor Statistics. Eruployment continuecl its seesaw pattern in April, as nonhrm payrolls edgecl up by only 2,000. '['lie ~lnusually small rise has been attril~uteclto ~llyriaclfactors, including the tinling of the survey, the implement:~tionof n e w seasonal acljustment klctors, a n d the \\,eather. ~Manufact~~ring ernployrnent continued to clecline in April (clo~vn 17.0001, \i~Iiile the factory n;\;orliw e e k lengthenecl slightly. Year-toclate job losses in manufacturing now ttor-al 120,000, about 75% of xvhich occurred in nos~clural~le goocls. Just offsetting April's loss in the goocls-producing sector was a 73,000 gain in service-producing employment. Notably, a solid sate of jol2 aclclitions has been eviclent in the q~liclilygrowing computer and data processing industry. The unemployment rate stoocl at 5.4%)in April, comparecl to 5.6% in March. Illucli like the establishment survey, householcl-reported employnlent nlay exhibit wide month-to- month swings. F-Iowcver, the longrun averages of the two series reflect sirnilas trencls in the labor marl<et. Increases in civilian \vorkers' wages ancl salaries have ho.irerccl aro~uncl3% for the past few years. and continuecl to cio so during the year encled March 1996 (3.2(%/0). i\/Ieanrvhile, growth in benefit costs (~vhichaccount for roughly one-thircl of total compensation) res~umetfits clo~vn~vard tsencl, falling from 2.S?t) to 2.2% over the same period. 8 8 . e . e http://clevelandfed.org/research/trends May 1996 Best available copy S Pmductivig Trends Annual percent change, constant dollars Percent chanae, vear over vear I " " REAL OUTPUT AND COMPENSATION PER HOUR I Average scorea I SCHOLASTICAPTITUDE TEST SCORES a. Minimum score, 200; maxlmum score, 800. SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; U.S. Department of Labor, Bureau of Labor Statistics; Citibase; and College Entrance Examination Board. Growth in hourly o i ~ t p h:~s ~ ~ tcleceleratecl significantly since the early 1970s; reflecting a clecline in l;lbor procl~~ctivity growill. Sluggish labor procluctivity growth is associated with slaclt gains in hourly compensation, which suggests that progress in U.S. living stanclartls h21s slo\vecl to a craxvl. Labor procluctivity changes can be dividecl into those arising kom technological changes ancl those clue to changes in the mount o f capital per xvorlter (capital cleepening). 1,oth of which are clifficult to measure. A proxy for technologixnd cal change-growth in resc~~sch clevelopment spencling-inclicates that this factor nlay have contrihutecl to slo\ver productivity growth during the mid-1970s. R&D outlays g 1980s, 1 ~ 1 11:lve t surged c l u r i ~ ~the slo\ved again in recent years. The rate of capital deepening, c;llci~l;~tecl with an all-inclusive measure of c:lpital. shows co~lsiclerable tlecline after the micl-1970s, some of it attribtable to baby boorners' entry into the Inl~orforce. Just as important, however. is the cluxlity of the labor force. &fore young entmnts ant1 fewer olcler \x;orliers--a consecluence of the gro\ving trencl toward earlier retirement-meant that the post-1970 \vorliforce was less experiencecl than I~efore.Ivloreover. Scholastic Aptitude Test scores indicate that nen. entrants xvere less accomplishetl than their prectecessors. Because sltills and esperience are forms of capital, these dat:~suggest th;lt the measured clecline in the capital/lahor ratio may unclerstate its true extent. I http://clevelandfed.org/research/trends May 1996 Best available copy The Minimum Wage Current dollars 1992 dollars a. Dotted line indicates the proposed increase in the minimum wage. SOURCE: U.S. Department of Labor, Bureau of Labor Statistics. Economists prefer solutions to social problems that rnalte some people better off \vithout mal.;ing others worse off. Using this criterion, fe\v economists fincl the r-tlit~irnl~rn \\age attractive. Nearly 2 million \\iorliers receiveel the $4.25 federal minimum wage in 1995. Approxin~:~tely60%) of them are i~ncler25. most (64%)\vorlc ~ : I I T time, ancl their jolx feature vely high rates of turnover. Comparecl to ~t-orliersreceiving ~ O L I S wages, IJ' minim~~m-\\rage earners i n c l ~ ~ dae disproportionate share of minority \\j\iorkers. Alnlost 42% of rnitli~l~umwage earners are unmarrieci women. Stilelies suggest that a 10% hiice in the minimum wage will recluce employ~lzentrolls by 1%to 3%.This implies that the proposed 21% increase (to S5.15) will cut between 41.400 ;lncl 124,000 minimu~n-wagejol~s. Assuming that the approximately 1.S- 1.9 ~llillio~l ~vorkess~ v h osenlain eniployecl work 27 hours per week (the current average), each will receive a n adclitional $24 weekly, or $1.251 per year. . , I hese r o ~ ~ gcalculatio~ls h assume that all else rerllains co~lstant.But L: higher minimil111 wage \\iill induce o n capital for further s ~ ~ l ~ s t i t u t iof ~lnsliillecllal>or anci will encoilsage the practice of \vorlting .'off the hooks." Eventually, 21s economic growth ancl inflation aclvance tlie average \\rage rate. the relative size of the minimum wage will cl\\rindle and clemancl for i~nsliilleclw.orliers \\.ill rise. Both the positive and negiti1.e effects of the ~liini~liiinl wage \ \ d l pro\x? temporary. http://clevelandfed.org/research/trends May 1996 Best available copy The Ohio Economy Percent change, year over year 0 10 EMPLOYMENT G R O W H IN GOODS AND SERVICES Perceni oi labor force seasonally adjusred 16 UNEMPLOYMENT RATE I UNEMPLOYMENTRATE BY COUNTY: FEBRUARY 1996a I Unemployment Rate by Metropolitan Areaa (Percentof labor force) Akron Canton-Massillon Cincinnati Cleveland-Lorain-Elyria Columbus Dayton-Springfield Hamilton-Middletown Lima Mansfield Steubenville-Weirton Toledo Youngstown-Warren February 1996 February 1995 5.3 6.2 4.6 5.3 3.5 4.6 4.8 6.5 6.5 6.8 5.3 6.7 4.9 5.4 4.5 5.3 3.3 4.2 4.4 5.5 6.1 7.2 5.1 6.5 a. Data are not seasonally adjusted. SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; and Ohio Bureau of Employment Services Ohio startecl 1993 \\',it11 one of its lowest ilnemployment sates in recent years-it. j%,. While that mte was not sustained, the state stayecl consistently helow the U.S. average throughout 1995 nncl into 1996. This represents a major turn:~rouncl from last decacle's Iiilst Belt periocl. when Ohio hacl one of the highest jobless rates in the n:~tion. T h e source of this impro\.ement is the increasecl stability of goodsproclucing employment at all points in the latest business cycle. Jobs in this sector (:~pprosimately 80% of xvllich are in manufacturing in Ohio) fell milch less in the 1990 recession thz~nin the early 1980s' clownturns. Employment in goods procluction also grew more slowly, but :lt a ste:iclier pace, in the current recovery, ancl in 1995 expanded at nearly the s:lme rate as service jolx. 'The 1:lttcr is noteworthy because nation;illy, service-producing employment continuecl to grow in 1995. while goocls employment actually shm11li. Even though the state as a whole has postecl exceptionally low jobless r:ttes in recent pears. Febr~lary clata shon. that some pockets of higll unemployment remain. The \\.ealiest areas are the counties ne:ir the Ohio Iiiver ancl the I-'ennsylvania I~orcler.By contrast, many ri~ral counties (particularly in western Ohio) ancl the six largest metropolitan areas \vere lvell below Fehru: I I ~ ' S n:ltiotlal johless Kite of'6%)(not sensonally acijusted). * B e e ( P e http://clevelandfed.org/research/trends May 1996 Best available copy e Employment Revisions Employment Revisions in Fourth District and Other Statesa (Number of jobs) Original jobs growth Revised jobs growth Kentucky 101,700 106,600 Ohio 262,500 354,700 Pennsylvania 167,100 201,800 West Virginia 42,400 42,600 California 389,900 Illinois 245,500 I Employment Revisions in Fourth District Metropolitan Areasa (Number of jobs) Original jobs growth Revised jobs growth Cincinnati 39,200 46,600 Cleveland 73,500 65,200 Columbus 57,300 60,000 Erie 6,200 8,400 Lexington 20,400 21,400 590,600 Pittsburgh 21,400 42,600 325,800 Toledo 29,000 15,700 I a. Jobs growth from March 1994 through December 1995. SOURCE: U.S. Depariment of Labor, Bureau of Labor Statistics 6 f Eve17 year, the 13ureau of I~tl,orStatistics (BLS) corrects the employment series for jolx ruissed by the monthly establishment survey, \\~Iiiclicovers rilore than 350,000 ~vorkpl;lces.'I'he corrections are 1,asecl on data from nearly all L.S.employers. collectecl cluarterly at the state le~.elancl ~ ~ s e c l to aclminister the unemployment illsurance systern. The establishment s~rrve).misses n e w locations as the). open ancl cannot clisting~~isliclosures from other nonresporrclents, s o the BLS figures inclucle state-specific acljustlilent f:lctors to account for the average effect of openings and closings. '~IILIS, 1:lrge changes in the rehenck marliecl figures occur ivhen states are breaking with their recent employment histories. .1.his year's national rebenchmarli will liliely be minor when officially anno~~ncecl in June. O n March 6, the I3LS co~llrllissionerreleaseel a preliminary f i g ~ ~ rofe just over half a million Illore jobs. Despite a state revision average of only 0.3% of employment, several states hacl signifi- cant changes. Ohio's revision, while smaller than last year's. \i~\i:ts o n e of the l~lrgestof any state : ~ t 92,200 :ldclecl jobs between March 1994 ancl December 1995. In levels, o11ly California's increase of 200,700 was higher. The other Fourth Federal Res e n e llistrict states :dso gained jobs, but at a lesser rate. i\Ietropolitan employment throughout the 1)istrict -i\.:is generally revised upward, with the exceptiorl of Cleveland and Toleclo (\vhicli still grew at reasonable sxtes). http://clevelandfed.org/research/trends May 1996 Best available copy Banking Conditions Percent Percent Percent O I NET LOAN CHARGE-OFF RATES B~ll~ons oi dollars Percent I Number of banks 700 IFDIC'S COMMERCIAL BANK PROBLEM LIST NOTE: All data are for FDIC-insured commercial banks. SOURCE: Federal Deposit Insurance Corporation. The latest statistical information on insurecl cornmercial hanlis confirms the strength of the banking industry. In 1995, about 97 percent of commercial b:u~lksreported profits, ancl 68 percent of them posted higher profits than in 1994. Comlnercial bank profits reached S48.8 1,illion in 1795, topping 1994's record level 11y $4.2 billion. Banks' improveel financial performance last year is explainecl by year-o\-es-year increases of 57.7 billion in net interest income, $6.2 billion in non-interest revenues, ;ul~cl$1.1 billion in securities sales. Masl<ecl behind these improvements, banlts' net charge-ofk were $920 lllillion larger in 1995 than in 1994, despite lower net c1l:lrge-offs in real estate loans, cornmercial and inclustrial lozul~s,and "other" loans. The increase in this category resultecl solely fro111 higher consumer loan losses, particularly those on credit carcl loa~ls,where net chargeoffs rose $1.8 I~illion(or 36.1 percent) over tlleir 1994 value. Nevertheless, 1995 continuecl the trencl in the numrecent clo\\i~~\varcl I ~ e of r problem I~anlisas well as their assets, taking both of these variables to their lowest levels since 1986. Follossling the salne trencl, only six FDIC-insurecl co~nmercial banlis fiuilecl in 1995. ;ill of them cluring the first three cpxters of the year. j 1,750 o e o e e a e Bank Mergers andAcquisitions http://clevelandfed.org/research/trends May 1996 Best available copy Billions of 1980 dollars 100 SOURCES: Stephen A. Rhoades, "Bank Mergers and lndustrywide Structure, 1980-94," Board of Governors of the Federal Reserve System, Staff Study No. 169 (January 1996); and "Mergers and Acquisitions by Commercial Banks, 1960-83," Board of Governors of the Federal Reserve System, Staff Study No. 142 (January 1985). Between 1960 ancl 1979. U.S. bank mergers anel accluisitions totaleel 3,404. This consoliclation continueel in the 1980s ancl exsly 1990s. largely clue to state regulator); changes that allowecl out-of-state banli holtling cornpatlies to accl~iire hotne-state hanks. From 1980 to 1994. 1,anli mergers s%velleclto 6,345. Moreover. other data avail:~hlefor 1995 provide aclclitional e\.iclence thitt this latest wave of mergers ancl acclr~isitionsis continuing. Thc banliing sector's recent merger activity is explaineel by the Interstate Banking and Branching Efficiency Act. Enacted in 1994, this legislation made interstate branching easier ant\ Illore attractive, particularly when pursued through the acquisition of existing banks. It clefined n:~tionwide standards for a hank holcling company's accluisition of a bank in any state (implying that state laws o n out-of-state acquisitions would n o longer apply) and createcl the necessary conclitions by which bank holding conlpanies will soon he able to convert their silt,sidiaries into a single netxvorl< of branches. This industry consoliclation affects how sorne banlts conduct business. Significant changes occur within an accli~ireclbank, maliing it more similar to its accluirer in both usual performance measures ancl its asset portfolio. This suggests that economies of scale and cost savings clue to the accluirer's greater manageri:~l efficiency have been important nlotix~tionsfor bank mergers. http://clevelandfed.org/research/trends May 1996 Best available copy International Developments Billions of U S dollars OU ~U.S.INTERNATIONALTRADE IN GOODS AND SERVICES Output and inflation I (Percent change, ~.a.a.r.~) Consumer Price Index Real GDP Year over year Quarterly change (1995:IVQ) Year over year Monthly change (Mar.1996) Germany 1.0 -1.6 1.6 1.0 Japanb 2.2 3.6 0.3 4.6 u.K.~ 4.1 4.0 2.7 4.9 U.S. 1.3 0.5 2.8 4.7 Average 2.2 1.6 1.9 3.8 Index, January 1991 = 100 l , An IV Percent FOREIGN EXCHANGE RATES 130 120 110 100 90 80 70 fin a. Seasonally adjusted annual rate. b. CPI is not seasonally adjusted. c. Three-month interbank rate or nearest equivalent; weekly average of daily rates. SOURCES: DRIJMcGraw-Hill; U.S. Department of Commerce, Bureau of the Census; U.S. Department of Labor, Bureau of Labor Statistics; and Board of Governors of the Federal Reserve System. 111January. the g:ip I x t ~ v c e nC.S. imports ancl esports n:~rro.rvecl.It's too s o o n to tell n.hether this represents a break in n.li;~t ;lppe:lrs to be at1 a l ~ n o s ~ t ~ n i n t c r r ~ ~ pclecline t e c l in net exl>ortssince 1992. (Actu~tlly. since early 1995-aro~~nd the time the dollar's clecline n.as reverseclnet exports have Ixcn relatively constant). The past yeat-'s stronger dollar may reflect lower U.S. inflation cornparecl to the rest of the \vorlcl or a change in the real terms of track. (Tile trade-weighted dollar averagecl 104.5 in April versus 103.7 in AlIarch.) Since the latest inflatio~~ numbers are al~llost uniformly ;~pproxihigher-with U.S. i~lflatio~l 11latelyconstant relative to the rest of the \vorld-the change in the terms of track points to real, not nominal, factors. Although 1110st peo~Aehave been trained to clisfavor a \vicleni~lg tmcle deficit. the U.S. tlacle cleficit simply reflects a desire to borrow gootls :lncl sen~icesfro111 the rest of the world. Therefore, reversal of the clecline i l l net exports since early 1995 implies a lessening of the nation's clesire to borrow from abroad. U.S. o ~ ~ t ~isx cl ~ t ~ r r e n t growing ly more slowly than that of mosl of its ( C O I ~ ~ ~ ~ on L L irext I ~ Cp61ge) ~ .International . Developments (cont.) 8 , http://clevelandfed.org/research/trends May 1996 Best available copy O Billions of U.S. dollars, annual rate U.S. International Trade (Billions of U.S. dollars) Feb. 1996 Net services exports Services exports Services imports Net goods exports Goods exports Goods imports Jan. Feb. 1996 minus Feb. 1995 Feb. 1995 1996 5.60 5.19 4.75 0.85 18.38 17.78 16.44 1.94 12.78 12.59 11.69 1.09 -13.81 -15.08 -14.22 0.41 49.70 49.01 45.58 4.12 63.51 64.09 59.80 3.71 /CHANGE IN IMPORTS, FEBRUARY 1996 MINUS -1,000 -800 -600 -400 -200 0 200 400 600 800 1000 CIiange niillions of dollars Change, millions of dollars SOURCE: U.S. Department of Commerce, Bureau of the Census and Bureau of Econom~cAnalysis trading partners. If today's slo\v grom~lilx~~tencls slo\v tcit~iregrowth. the climinishecl U.S. clesire to I)orro\\~ froni other co~intriesma)- simply indicate that the future clues not looli rosy enough to ensure repayinent of Therefore, the narso\ving of the lo:i~~. ly t h e trade deficit can a c t ~ ~ a l reflect bad 11ew;s-a slowing of U.S. gro\vth relative to th:~t of its tr:icling plrtners. About 67% of last yc:~r'sincrease in net exports of goocls ancl services came from an expansion of net sewices exports. Even net goocls e s p o ~ t s rose in 1995, reversing a f o ~ ~ r - y e a r clecline. Trade in goods continued to account for 83% of the nation's imports of goocls and services and al3out 73% of its exports. Imports fell slightly from January to Fehrua~y,largely clue to a clecline of almost $900 inillion in industrial supplies and materials imports. Con\:essely. exports of American goocls ancl services rose over the montll in :I broad-basecl advance. Much of the esport gain \\/as accountecl for by capital goocls :inel services. This is welcome nexijs f o r the Fourth Federal Iieserve District, \i~hosebusinesses are k e ) ~players in the capital goocls sector. Apart from consumer goods, which zilso postecl a healthy increase, 111ostexport a t e gories changed only slightly from J:IIIII:~I-~ to FeI>r~iai-y.
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