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The Economy in Perspective
Ex-L I J Z O~ I C I I Z ...
I Voters in Quebec recently incli-
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November 1995
Best available copy
giving way to customizeel local solutions.
All of these clevelopments - from clissolucatecl their opposition to seceding from the rest
tion to clevolution - should cause us to ponof Canacla. The outcome of the referenclum was
extremely close, however, ancl the separatists
der what we expect fl.om government in the
twenty-first century. What is left of our concept
vow to continue their ca~npaignuntil they are
of government after we outsource street cleansuccessf~ll.Commentators report that an actual
ing, park seniices! and the lilce? After we reseparation ~vv~uld
recluire extensive negotiations
place public education with a voucher-driven
o\.er horclers, treaties? claims to natural resystem of competitive schools? After we privasources, ancl a host of other property-rights contize prisons ancl Social Security ? Once we vent
cerns. Discussions surrounding this issue elicit
cleep ernotion~llresponses: People cleal-ly have
our frustration about ho\v poorly governments
strong feelings about living in a place whose
perform, what exactly clo we w:lnt our governvalues reflect their own sense of identity.
ments to clo? There is genuine confusion about
the answer, because governnlents are n o
The Canaclians are slot the only people relonger the most obvious solution to some of soexanlining the ~neaningof government in their
lives. Citizens of regions that formerly made up
ciety's economic problems.
The essence of government authority is the
the Soviet Union are exploring new forms of
ability
to force people to follow the law. Ironigovernment anel new relationships with Russia.
cally,
though,
the state's coercive power is a
Though some of these sit~lationsare being banclouble-eclgecl
sword. One sicle of the blade
cllecl peacefully, others have involveel procan be used to promulgate regulations ancl
tracted military conflict. Ancl in places like
policies that transfer wealth from some people
Northern Irelancl and the Miclclle East, bloocl
has been spilled over cluestions of bounck~ries to others, hut that clo not enhance society's
welfare as a whole. Some view these activities
and sovereignty for clecacles or centuries.
Two aspects of this soul-searching merit atas legalized theft, while others regarcl them as
a source of social equity.
tention. ?'here are nlany examples of large
The other sicle of the state's coercive blacle
countries splitting into several smaller ones,
with Germany being the notable exception.
can be usecl to provicle public goocls that markets would not provicle on their own. TraclitionWllether the process is called secession, separaally, these have incluclecl lighthouses, bridges)
tion, or partition, the catalyst is largely the same.
public health services, and national clefense. Rut
Within a country, a group of people begin to
feel alienated from a government they believe is
governn~entsthat worrp about caring for sick or
treating them unfairly. and they yearn for a new
destitute citizens could also force people to join
health care groups, or to pay into unernployreginle that will respect them anel protect their
ment insurance funds, in ways that truly divervalues. To reduce the tensions that can arise
sify the rislis of catastrophe. That is, governfrorn havin:,: to share a cotnn~ongovernment,
one group begins the process of separating
ments can force risk-sl~aringin situations mihere
private insurance rnarlcets may not f ~ ~ n c t i o n
from the other.
well. These are welfare-enhancing activities.
A seconci trencl can be seen in nations where
pressures exist to limit tlie role of all levels of
Government's role in society has two elistinct
government, but especially the central governclimensions. When governments provide goocls
and services, inclucling risk-bearing services,
ment. Here, the frustr:~tionsare less a matter of
they may i~nprovethe nation's social welfare.
one group :~g:iinstanother than of widespread
But what ~naclesense for a government yestercliscontellt about government itself. In the
LJnitecl States! Congress is considering eliminatday lnay not nlalce sense tornosrow. Governnlents also manifest a set of values regarding the
ing or reducing the constraints it now places on
rights of their citizens. Here, too, we shoulcl exstates and local governments as conditions for
receiving fecleral f~lnds.The ascenclant philosopect change. But isn't it odd that as the nations
phy holcls that government decisions shoulcl be
of the worlcl snove towarcl more openness in
their relationships, groups of citizens within
nlacle at levels closest to the citizen. One-sizecountries seek more clistance from one anotheri)
fits-all programs inventeel in m~shington are
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http://clevelandfed.org/research/trends
November 1995
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Monetary Policy
Deviation irorn trend, percent
NOTE: Shaded areas indicate recessions. All data in the Monetary Policy section represent deviations from long-run trend in percent. The trend is defined using a
two-sided filter with 12 leads and lags. For further details on this topic, see R. K~ngand M. Watson, "Money, Prices, Interest Rates, and the Business Cycle."
Federal Reserve Bank of Chicago, Working Paper 95-10, July 1995.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; and Board of Governors of the Federal Reserve System.
The link Ixtween money, prices,
interest rates. :111d the h~isiness
cycle is the s~lbjectof consiclelxble
clehate anlong policymaliers ancl
economists. Kese;~rchers coiltinue
to strive for a coherent, tlxctal~le
rnodel t o help them ~lnclerstanclthe
precise mec11:lnism I,y which Illonetary policy affects the rnacroeconorrly. Before setting out to develop
such a moclel, researchers must un-
dertake a thoro~ighst~lcly of the
availal~lcdata to iclentify the liey
features ancl reg~lla1-itiesthat a successful moclel must incorporate.
,?lo~~ementsin macro'cono~nic
variables can be h~.olienclo~vninto
two broacl categories. The cyclical,
component me:lsor high-fi~ecl~iency.
iires the short-rc~nfluctitatiotls of :I
given wrial~lefrom cluarter to cluarter or from \rear to year. The trencl,
or lo\\.-frequency, cornpotlent tneas-
uses the \.arial~le'slong-run hehavior. For these purposes. econoruists
typically clefine short-run movements :IS those lasting less than 32
cluarters. In contrast. the trencl cornponent captures movements over
Illany clecacles. The trencl cotnponent of a clata series can he iclentifieci using statistical techniclues to
clraw a smooth line through the
( c o i ~ t i i z l l e d011 I I ~ ~ Y ~ ~ L ~ P )
Monetary Policy (colzt.)
http://clevelandfed.org/research/trends
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Dev~at~on
iron1 trend percent
Deviation i r o n trend, percent
a. The real one-year Treasury yield is the nominal one-year Treasury yield minus one-year mean inflation expectations as measured by the University of Michigan's Survey of Consumers.
NOTE: Shaded areas indicate recessions.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; Board of Governors of the Federal Reserve System; the University of Michigan; and
U.S. Department of Labor, Bureau of Labor Statistics.
central tendency of' the dat:]. At each
point in time. the cyclical compon e n t is defitlecl :IS the clevi:~tion of
the variahle ti0111 its long-run trencl.
Focusing our :ittention o n the
cyclical components of the cl;]ta reve.a 1.s some
.
interesting reg~~larities.
First, except for a periocl it1 the micl1980s. there is a rc.l:iti\.cly strong
ts
correlation hetween m o ~ ~ e n i e nin
o u t p ~ (:IS
~ t I I I C : I S L I ~12y
~ ~ I-e:il GIII))
: ~ n dthe nominal Iiioney srock (as
meas~~recl
by tlie b11 nggreg:lte).
Moreo~,er,changes in the money
stocl\: tend to prececle changes in
real o u t p i ~ t , s ~ ~ g g e s t i nt11:lt
g
the
money stocli may l>e a useful leacling inclicator.
Notice that each of the last fi1.e recessio~ls12-21s prececlecl 11). ;] periocl
\\-hen the money stock cleclinecl relati1.e to trencl. But it is important to
note that the colnovernent of money
~mcio ~ l t p ~ieecl
~ ~ t not irnply the exisal
rimtence of :I c a ~ ~ s reI:~tionship
ning f'rom money to oc~tp~lt.
Incleecl.
many researchers argue precisely
tile reverse-that
the level of real
output determines ji~sllion. m ~ l c h
money people are \\.illing to holtl.
A secontl obser\;:ltion is that interest rxtes, 120th nominal :11icl re;il,
tent! to rise prior to recessions :inc[
thus also behave like le:lding incliG~tors. Thircl, tlie ove~-:ill level of
prices (as me:is~lrecl by the GI)['
~coilfi~l![c~/
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http://clevelandfed.org/research/trends
November 1995
Best available copy
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Monetary Policy (cont.)
Dev~at~on
from trend percent
NOTE: Shaded areas indicate recessions.
SOURCES: Board of Governors of the Federal Reserve System; and U.S. Department of Labor, Bureau of Labor Statistics.
implicit price deflator) tencls to
move opposite to the clirection of
real o u t p i ~ over
t
rnost of the sample
period. This countercyclical 11eh;~vior of prices is consistent \vith the
view that output fluctuations are
largely causecl hy supply-side clisturbances that shift the economy's
aggregate supply cur\.e I)acli ancl
forth along a clo\\-nwarcl-sloi>i~~g
aggregate demancl curve.
Countercyclical prices are pastic~ilarlyeviclent during the 1974 and
1980 recessions. These periods coincided \\;it11 sharp increases in oil
prices, \i~\;hicheconomists generally
interpret as representing large supply shocks.
The money stock and the sate of
i n f l a t i o ~clisplay
~
strong cornovement until 1984. after v,.hich the inflation rate stahilizecl anel the
Inolley stock experienceci large
swings above ancl helo\v trend. This
behavior is often attrihutecl to regulato~ychanges ancl financial i~lnovations that hlurred the clistinction between motley and other financial
assets, thereby affecting people's
willingness to holcl nloney. One h e tor. that influences the desire to holcl
money is the nominal interest rate,
(cot7tinlred o~ 11extpci~qe)
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Monetary Policy (cont.)
http://clevelandfed.org/research/trends
November 1995
Best available copy
Deviation from [rend, peicerit
Deviat~onirom trend peiceni
NOTE: Shaded areas indicate recessions.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; and U.S. Department of Labor, Bureau of Labor Statistics
which is highly correlateel lvith the
r:ite of inflation over the entire
s a ~ i l p l eperioci. 'I'his suggests that
:iclj~~sttheir reinvestors cl~~iclily
cluirecl Ixte of return to compens:ite
Sc)r the effects of inflation.
Many analysts I~elievethat shortterm movements in re:~l C;I>I' ancl
the unemployment n t c contain infosmation : I ~ I O L Ithe
~ ~ L I ~ L Icourse
SC
of
, cyclic:il [>:itinflation. ~ o n . e v e rthe
terns in the clata tcncl to I)e e r ~ i t i c .
sheelcling some cloul,t on the validity
of this hypothesis. 11~1ringrecessions, the cyclical component of real
GI>P :iI~\\.:iys cleclines, nhilc the
cyclic:il componenl of the unemploy~nentKite al\xl);s rises. Incleecl,
these tencl to be the clefining ch:iucteristics of :i recession. In contrzist,
the cyclical component of inilation
has heen ohser\ecl to rise, kill, or
e\.en change clirection cl~lringrecessions. 7'hils. the clau clo not s~1ppo1-t
the notion that rllere is :I consistent
trzicle-off l>et.v\;eeninf1:ition and unemployment.
Empirical relationships in economics are often imprecise and subject to change. Nevertheless, hroacl
regularities appear in econorilic clata.
A kno\\.leclge of the cyclical regular-ities among money, prices, interest
Utes. ;inel outpi~tis necessary I>oth
for for111~11:itingancl for unclerstancling monet:i~-)policy.
http://clevelandfed.org/research/trends
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Inflation and Prices
Percent change, annual rate
9.0
MEDIAN CPI BREAKPOINTSC
September Price Statistics
Annualized percent
change, last:
I
1994
average
Irno.
9 rno.
5 yr.
All items
1.6
2.8
2.9
2.6
Less food
and energy
Mediana
3.0
4.4
3.3
3.6
3.4
3.3
2.7
2.8
Finished goods
3.8
1.7
1.2
1.8
Less food
and energy
2.6
2.6
1.9
1.6
Commodity futures
pricesb
32.6
5.7
0.4
3.5
Consumer Prices
Producer Prices
12-month percent change
3.75
12-month percent change
IHOUSEHOLD INFLATlON EXPECTATIONSe
3.50
FOMC central tendency as of July 1995"
-----------
3.25
3.00
2.75
2.50
2.25
2.00
1993
a. Calculated by the Federal Reserve Bank of Cleveland.
b. As measured by the KR-CRB composite futures index, all commodities. Data reprinted with permission of the Commodity Research Bureau, a Knight-Ridder
Business Information Service.
c. Horizontal lines represent trends.
d. Upper and lower bounds for CPI inflation path as implied by the central tendency growth ranges issued by the FOMC and nonvoting Reserve Bank presidents.
As of July, the stated range (fourth-quarter to fourth-quarter percent change) is 3.125 to 3.375 for 1995 and 2.875 to 3.250 for 1996.
e. Mean expected 12-month change in consumer prices as measured by the University of Mich~gan'sSurvey of Consumers.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics; the Federal Reserve Bank of Cleveland; Board of Governors of the Federal Reserve System; the
Commodity Research Bureau; and the University of M~chigan.
+
<
I he inf1:ttiori indicators were misecl
in Sci1~temhcr.The C o n s ~ ~ ~ iI'rice
ier
Index (CI'I) contin~lecito rise at Ailgust's meager 1.606 ::Innu;:Ilizecl sate,
contributing to its 17est five-!;e;u. performance siiice the 1:ite 1960s. Other
inflxtion m e ; ~ s ~ ~were
r e s not cli~iteas
encouraging. ho\vever. 'I'lic I'rocluces I'sice Incles rose at :tn 2inntlal
rate o f 3.8'1.i)clilring tile niontl~,ancl
the tneclian CPI-a 1ne:tsul.c 01' col-e
inflation-climlxci .l..ii!4i,so~ncn-list
ilig11e1-th:111the 3'1.i) l e d it 11~sa\-er-
::~gcclover tile last three years.
7'ile 12- non nth rate for the meclia~i
CI'I rem;iins within this year's CI'1
centsill tenclency range projecteel 1))the I:eclel.;~lOpen iVfarliet Conlrnittee
(I:OkfC) last July, .v\;hile the 12month change in the standarc1 CI'I is
~velll~elon.the FOMC's projections,
I-Iouseholcls arc o ~ the
i more pcssirnistic eucl of the spectrum. 11ccor-cling to survey cl:ita, the avesige
ti.S. ho~~scholcl
espects infl;trion to
rise 4% o\-cr the nest 12 ~nonths.
rnore than 1% al?ovc the Cl'I's ::~vcrage since 1990 (2.9%)).
Commoclity prices, 21s measurecl
17); the Comtnoclit); Research 13~1reau's composite futures incles. increased :it 2111 :lnn~~alizedrate of
32.6°4i in September. spilrred 11);
n k a t , corn, ancl soylxan prices.
Still. the yens's c~lrn~~lati\.e
g:iin of
5.7%)is ku less omino~is.1)uring tile
1970s. increases in commoclity priccs
tenclecl t o be followeel 1,). higher
(coiztir?rrcclor1 rlevtprigc2)
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Inflation and Prices (cont.)
12-month percent change
Percent share o i CPI market basket
35
"
DISTRIBUTION OF PERCENT CHANGE IN CPI, 1995:lllQa
<-6
-610-4-4to-2
- 2 t o 0 O t o 2 2104
Tenths of a percent
12-month oercenl chanae
4to6
1
4'5 ~ C PCOMMODITY
I
AND SERVICE PRICES
I
>6
12-month oercent chanoe
a. Weighted distr~butionof percent change across goods, using the same 36 CPI components and respective CPI weights employed in the Federal Reserve
Bank of Cleveland's median CPI computation.
SOURCE: U.S. Department of Labor, Bureau of Labor Statistics.
-
j
2
-
---
consumer prices. Recent statistical
tests, horvever. show^ little eviclcnce
of this relationship after 1985.
Much of the clo~\~nward
pressure
on the CI'I czume &om the motor fuel
a n d energy services components.
Motor fuel prices cleclinecl at an ann ~ i a llate of nearly 2;0(%)in Septems
ber, while energy s e r ~ ~ i c eprices
clroppecl 17%.This csplains much of
the clisparity hetween the CI'I ancl
the mecli:ln CI'I. 'l'he ~neclianme:rsuses core inflxtion 17y f o c ~ ~ s i non
g
thc center of the weighteel clistribution of price changes. linliltc :I
weighteel average, s ~ l c has the stan-
clarcl CI'I, the meclian is not influencecl by large changes at either encl
of the clistribution. On the other
hand, the median [nay fail to account for the tangible i~npactof such
a11 increase or decrease on consumers' budgets and on the cost of
living.
Subst:~~ltialdifferences in price
changes are observecl not just bet.v\.een incli\riclual CPI components.
but :11so het\veen component groups.
For esample: there is a wick ancl persistent difference in the gro\\~thrate
of goocls anel services prices - :I clispxity that remains an important
point of contention among economists attempting to define price
stal3ility. r\iIany believe that the price
differential simply reflects the mismeasurement of services. For esample, neither the cluality of a service
nor the prod~~ctivity
of the service
sector is easily measurecl, ancl to the
estent thrrt either is ~~nderesti~twtcd,
we will necessarily overestimate its
sate of price increase. But it may be
that the ,.rnat~~ring"
[J.S. econotny
sinlply clem:~nclsmore se~vicesthan it
does goocls, ancl that the steeper rise
in services prices merely reflects tllis
relative change.
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Economic Activity
Perceni change, s a a r a
8
HOURS WORKED AND REAL GDP
Real GDP and Components, 1995:lllQ
(Advance estimate, ~ . a . a . r . ~ )
change,
billions
of 1987 $
Real GDP
Consumer spending
Durables
Nondurables
Services
Business fixed
~nvestment
Equipment
Structures
Res~dentialinvestment
Government spending
National defense
Net exports
Exports
Imports
Change in business
inventories
Index January 1990 = 100
Percent change, last:
Four
Quarter quarters
56.8
26.8
15.6
0.2
11.0
4.2
2.9
11.7
0.1
2.2
4.3
4.0
9.2
2.7
3.4
15.3
14.0
1.4
5.8
7.0
1.I
0.9
18.3
17.5
8.3
9.7
3.5
10.9
3.1
2.1
10.6
8.6
18.4
21.2
9.1
-2.9
1.2
-4.4
1.O
-
-
-
14.3
14.1
Billions oi 1987 dollars
48
I REAL NONDEFENSE CAPITAL GOODS O R D E R S ~
I
Coincident
108
a. Seasonally adjusted annual rate.
b. 1995:IVQ consists of October data only.
c. Three-month moving average of seasonally adjusted data.
SOURCES: U.S. Department of Commerce, Bureau of Econom~cAnalysis; and U.S. Department of Labor, Bureau of Labor Statistics.
Advance estimates of' seal (;Ill'
suggest th~it the ecc)nom). rel ~ o ~ ~ n c lin
e cthe
l ~hirclcl~iarterhorn
its I:icl.;I iisier pc.rfi)rrnance in
1995:IIQ. 'l'hc h'!.ir increase in hours
\vorl\rccl for Octol~eris eq~iallyenco~rragingancl is inclicative of'continirccl stsicles in O L I ~ [ I L I ~gro\\.th in
the coming ~nontlis.Increases in
g o v c r n ~ n c n t spencling :inel consilnler- dusal)les, u p .3.1°41 ancl
1 1 .7'?4).
~.especti~.cl).,
\\.ere ~ n a j o r
sources of strength. Invest~nentacti\.ity. ~ ~ : ~ t i c ~ i l ainr l ecli~ipment,
y
;ilso ilnpsovecl. Resiclenti:~l invest~iient,\\.bile still off sligl~tl)~
h r the
yeas. m;iintainecl the strong act\.;inces oI,servecl ill recent monrhs.
The incles o f coinciclent inc1ic:ltors rose a n annualized 2% in Septe~nl,es. c o ~ ~ t i n u i nthe
g tsencl th:it
st:il-tecl at the beginning of the e s pansion. 7'11e flat Iilovenlents in the
composite incles of leacling inclicatoss. hon-e\.es, suggest a possil~le
leveling off in ovelxll econo~nicactivity in the months aileacl.
I3y conrust. se:d nondefense callital goocls orclers macle solicl gains
in Septenll>er. iilcrcasing at a n annual rate of 29%,. 'rhis hocles \\-ell
for fcitilre 1,usiness activity.
Impso\.ement in tile e c o n o m ) . ' ~
gso~vthsate \vas eviciellt across \jarious sectors. Real final sales, a goocl
prosy fi)s aggregate clemancl,
~ ~ O t 7 t i t l C)?l
l f ~t ~ l~ i~ . ~ t ~ l ~ ~ < ~ ~
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69
Economic Activity (cont.)
Billions oi 1987 dollars, s a.a.r.a
Perceni change, s a a r."
8
65
Raiio
2 65
I BUSINESS INVENTORIES
55
6
2 60
45
4
35
2
25
0
15
2 55
2 50
5
2 45
-2
-5
Change in business inventories
-4
-6
-
- 15
IQ
IIIQ
1990
IQ
IIIQ
1991
la
ilia
1992
IQ
IIIQ
IIIQ IQ
la
1993
Percent change lrom correspondln~month ol previous year
6
1994
1 PERSONAL INCOME AND SPENDING TRENDS
- 25
IIIQ
1995
I
1110
1991
I
IQ
IIIQ
1992
2 40
Business iiiveniories/sales
IQ
IIIQ
1993
la
IIIQ
1994
la
IIIQ
2 35
1995
Perceni change, s.a.a.r."
25
a. Seasonally adjusted annual rate.
SOURCE: U.S. Depaliment of Commerce, Bureau of Economic Analysis.
~lclvancccla n ann~ializecl4.2% in the
tliircf clu;irter, i ~ nc:trly
p
1l/i percentage points from its 30-yc:lr aver-age.
'I'his suggests tll:~t the increase in
activity resiilted fro111 ~~nclerlying
clemancl a11cl not fro111an). signific:mt in\.entor). acciimul;~tion. Husinesses :iccumulatecl o\.er S35 I~illion in in\.entories last quarter
(1987 clollars). S 1 I,illion 111ol-ctli:~n
in 1')95:IIQ. 7'he seconcl-cl~~arter
slow-c1on.n a13pc;li.s to Ilave hec11 a
temporary adjustment. bloreover.
l>~~sinesses
have ~naintz~inecl
a relatively constant inventoty/sales ~.atio
tllis ye:lr. with o111y slight increases
o\.er 1994 levels.
Consumer z~ctivity re~nainecl
he:llthy in September, clue in part to
solicl gains in real clisposal,le personal income (up 3.5%). This rise
helpeck io spur a 3.3% i11cre:lse in
consumer spending for the mollth.
fie:~l net exports 11lacle equ;llly
strong g:~ins in the third qu:lrter.
wit11 exports incre;~sing:kt a 10.6(!4)
:lnnual I-ate \vl~ile iinports rose
8.6°/o. Strength in real exports
sterlllilecl ~tiostlyfrom ~nerci~anclise
tl:~cle, which rose nearly 15% in the
Jiily-Septeml~er pcriocl. while e s ports of services were rel~~tively
flat.
Overall, howe\;er, real imports cxceeclecl real exports I>j- $12 5.3 hillion, a n impro\.ement of less t h m
S1 hillion.
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Chanqe, thousands oi workers"
U""
I AVERAGE MONTHLY NONFARM EMPLOYMENT G R O W H I
Labor Market Conditions
(Seasonally adjusted)
Average monthly change
(thousands of employees)
1994
Year
Payroll employment 294
Goods-producing
58
Construction
30
Manufacturing
30
Service-producing 236
Services
117
Businessservices 46
Finance, insurance,
and real estate
4
lllQ
1995
Aug. Sept.
Oct.
114
-30
9
-36
144
90
53
263 50
9 -15
25
7
4 -38
254 65
166 67
81
68
116
4
28
-21
112
57
-1
9
9
9
18
Average for period
Civilian unemployment
rate (%)
6.1
Mfg. workweek
(hours)
42.0
lo date
5.6
5.6
5.6
5.5
41.5 41.5 41.7
41.5
i995
Thousands
550
Percent
10
500
9
450
8
Percent rising three-month span
80
70
Total nonfarm industries
60
50
7
400
40
350
6
Manufacturing industries
30
Civ~iianunemployment ratead
300
250
1988
1989
1990
1991
1992
1993
1994
1995
1996
5
4
20
10
1990
1991
1992
1993
1994
1995
1996
a. Seasonally adjusted.
b. Production and nonsupervisory workers.
c. Four-week lagged average of seasonally adjusted data.
d. Vertical l~neindicates break in data series due to survey redesign.
SOURCE: U.S. Department of Labor, Bureau of Labor Statistics and Employment and Training Administration
The nation's labor ~llarlietscontinuecl t o grow at a s l o ~ v~lnclsteady
pace in October, \\:it11 nonfarm
payroll employment rising by
116,000. Year-to-date figures for
1995 show a ~ ~ e r a gmonthly
e
jobs
growth of 138.000 - slightly less
than half the 1994 I-ate.
The goods-proclucing sector experienced a srllall net upturn in
jol~sfi)llo\\.ing a clccline in SeptemI ~ e r . Manuk~cturing elnployrnent
t~1m1,leclhy 21,000. partl). :is a result of strilies in the airc~-af'tind~istry anel cutbaclis in instr-uments-
related proclucts anct apparel.
After falliiig sharply for the better
past of this year, the cliffusion
index of manufacturir~gemploy11ient has rel~oundedsomewhat.
Even so! a mere 40% of detaileel
iridustries within this sector have
reported job gains over the past
few rmonths.
Service-producing firms acldecl
112,000 workers last month, :tlthough the rise in the tiarrow s e n ices category was helow avemge.
Incleecl, net jobs gro-cvth in husiriess services turned negative for
the first tirile in four years, as cleclines in the typically robust personnel supply component erased
gains in computer and clam processing services. Finance, insurance,
and real estate employment was
up 15,000 in October, with notal2le
contributions from real estate ancl
mortgage hanliing. Mean\vhile, the
unemployment rate remained little
changed last month, arid initial
claims for unemployment insur:mce continued to hover arouncl
350.000.
http://clevelandfed.org/research/trends
November 1995
Best available copy
Labor Markets (cont.)
Percent oi all children
100
) CHILDREN UNDER AGE 18 LIVING WITH BOTH PARENTS
^j
Percent of all children
27
24
21
18
15
12
9
6
3
n
Mother only
Percent of children in age category
100
LIVING ARRANGEMENTS OF CHILDREN
UNDER AGE 6. BY AGE OF THE PARENT. 1993
Father only
Other arrangement
Family Income by Living Arrangement
of Child, 1993
Percent of
children living with:
Both
parents
-
Mother
only
Family income
Under $10,000
21.6
73.3
$10,000-$14,999 47.7
47.5
$15,000-$19,999 61.3
33.7
$20,000-$24,999 66.1
27.7
$25,000-$29,999 73.3
22.1
$30,000-$39,999 82.3
14.1
$40,000-$49,999 88.4
8.6
$50,000 and over 94.6
3.9
Average income $49,971 $17,859
Father
only
5.0
4.8
5.0
6.2
4.6
3.6
3.1
1.5
$29,494
- -
Less than 20 years
20 to 29 years
30 to 39 years
40 years and over
a. Data not available prior to 1980.
SOURCE: U.S. Department of Commerce. Bureau of the Census.
A nation's stanclarcl of living depends hez~vilyo n its al~ilityto I~uilcl
h ~ ~ m capit;ll-;l
an
process that st:lrzs
with its c1iilclre11's XL-elf'ru.e.
For the
first ti~llein 30 )le;lrs, the percentage
o f Americ;~nchilclr.en livin, in twopztrent families has risen. In 1770,
8S(Yo of chilclren uncles the age of 18
lived with 110th parents. I3y 1793.
that figure Ilad clroppecl to 72%, its
lo\sest le\.el. 'I'lie clcclirle was
sharpest cluring the 1970s ancl has
st;~l~ilizecl
in recent yexrs.
'
-
8
d
5
7'his phenomenon has l x e n ohserved across many ethnic groups.
Black chilclren, in particular, are
no\\? m ~ ~ less
c h lilcely to be rezlrecl in
tn.0-parent fa~niliesthan they were
in 1970. hloreover, the vast majority
of chilclren not brought up 11) 110th
11;~rentxlrecarecl for by the mother
alone. While the percentage of chilclren living n.it11 only their k~therhas
increaseel. it remains under 4%.
Children under age six who live
with only their mother are much
younger pare11t than are cliildren
living with 110th parents. Incleecl.
85% of the cliilclren I ) ~ . o ~ ~ LgI h~ )tI>y
teenage parents li\.e solely \\.ith
their mother. These chilclren are
also milch more liliely to g r o ~ v1111
in poorer families, since there is
only one Income to go around ;inel
hec:luse the avel.age earning poten\\.omen
tial of young, less ecl~~c'atecl
is \.cry lo\v.
http://clevelandfed.org/research/trends
November 1995
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Regional Conditions
Percent change, first quarter over iirst quarter
Percent change, first quarter over first quarter
IMANUFACTURNG
EMPLOYMENT
TRANSPORTATION AND UTILITIES EMPLOYMENT
Percent change, flat quarter over iirst quarter
Percent change, first quarter over iirst quarter
lo
ICONSTRUCTION
EMPLOYMENT
I
120
IHOUSING
STARTS
I
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics, and U.S. Department of Commerce, Bureau of the Census
For the first titne sitlee tlie recoverj.
began in the e:lrly 1990s. regional
employment ancl housitlg clata are
offering some signs that the exp:unsion may he cooling. In all regions
of the nation, the growth rate of employment in construction, rnzinufilctilring. ancl tile tr.ar~sport~ition
anel
utilities sectors has continued its
clown\v:lrcl trencl. Althoc~ghgro\\~th
rates m:iy clecline from year to year,
zictt~alemployment nurul>ers still incre:isc as lotig zls the growth rate is
positive.
In the last yeas, every region hat1
~i pc)sitive gro\vth rate in tratlsportation anel utilities ernplojlment. but
other sectors have not farecl as well.
h,I:tn~~kcturing
employment retained
a positive growth rate in the Micl\\,est. 1 ~ 1 experienced
t
an actual clecline in every other region. In tlie
construction industry, employment
gro\vth incre:~sedbetween 1992 ancl
1994 in all regions hefore dropping
off. While the South, West, and Mid\vest tnercly slowecl their rare of incre:ise in conslructio~~
employment.
the Northeast lost 3.6% of its emj~loyeclconstrl~ctionworkforce :tfter
rcziching a peal< gro\vth rate of 7.2%
hetween 1993 ;tnd 1994.
I h e estreme vo1:itility of housing
st~irtsesperiencecl it1 the early pxrt
of the clecacle has easecl sometvhat.
Since the beginning of 1994, the
South has heen the only region to
sllo\v continuecl gro\\~tliin the rate
of ne\v starts, \vhich expanded
nearly 30?h I>et\veen 1994:IQ :~ncl
199S:IQ. Ilespite the clecreasing
gro\vth rates in Inost regions, the
nation h ~ i sshown a n ovelxll rise in
hoi~singstzirts cluritlg the past six
months.
fcorrtir//reclor/r ? ~ x t p c ~ g c ~ j
http://clevelandfed.org/research/trends
November 1995
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Regional Conditions (cant.)
Percent
iliousarids of 1982-84 dollars
9
140
UNEMPLOYMENTAND HOUSING PRICES: MIDWEST
I
Percent
Thous?ndsoi 1982-84 dollars
9
- 140
UNEMPLOYMENTAND HOUSING PRICES: NORTHEAST
R~almedian housing pricesa
- 125
- 110
-
95
-
80
-
65
v
3
1984
Percent
Thousands of 1982-84 dollars
I UNEMPLOYMENTAND HOUSING PRICES: WEST
I
I
I
I
1986
Percent
9
l
I
1988
I
I
1990
I
I
I
1992
I
.
1994
5
0
Thousands or 1982-84 dollars
140
'!"
a. Real median sales prices of new single-family houses sold, not seasonally adjusted.
NOTE: All data are for the second quarter.
SOURCES: U.S. Department of Housing and Urban Development, U.S. Department of Commerce, Bureau of the Census; and U.S. Department of Labor,
Bureau of Labor Statistics.
3
2
-3
-
The i~nemployment I-ate is frequently used :is a measure of economic conditions. As the chzlrts
show, the unemployment rate tracks
\\.ell, rising
the business cycle cl~~ite
during the e c o n o ~ r ~ clownturn
ic
of
1990-91. for example, anci falling
clrlring the current recovery. Apart
from the cyclic~ilvariability of unernployment. there is also a trend cornponent. The i\/Iiclwest, \Vest, ancl
South sho~x-1: clo\\~n\varcl trend.
while the Northeast exhibits a slight
LI pwarcl trend.
Unemployment, ho\\rever, is not
311 1,acl. 1':u-t of it results horn work-
ers se:lrching for new anci better
jolx. The normal churning of the
lal2or m:irl<et may help re-sort some
worlters to better job matches aricl
hence higher wages. For others,
however, unen~ploymentmeans a
recluction i r i lifetir~ieearnings that
lea\res then? worse off.
Along with unemployment, the
charts show real median prices for
hoilsing, which is typically a lior-neowrier's largest asset. Although the
tre11cl in housing prices across all regions is up, there are tinles when
housing prices are not rising as fast
fillling.
as PI-e\.iouslyor are act~~allp
These times match up lvell xvith Llnclerlying econornic conclitions. During 11acl times. when i~nemployment
is high, housing prices taper off or
clrop. This implies that inclivicluals
not only s ~ ~ f flosses
er
during times of
high unemployment (months hen
they are out of work, for ex:lmple),
1x1~
111:ly ZIISO face :I recluction in re;d
wealth when their homes lose \lalue.
D ~ ~ r i ngood
g
times. sorlle of these
losses m:ly be reco~lped:however. in
ho~~sing
the West ancl Northe~~st,
prices have yet to regain their pre1.ious growth rates.
http://clevelandfed.org/research/trends
November 1995
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Agricultural Policy
Billions oi 1987 dollars
Ratlo
42 5
25
NET FARM INCOME
n
Billions oi dollars
FARM DEBTIASSETS
Share of total farm sales
nn
7"
I MARKET SHARE BY FARM SIZE, 1991-1993
Fiscal yearb
Annual sales in thousands
a. U.S. Department of Agriculture forecast (average if range is given).
b. Twelve months beginning in October of the preceding calendar year.
SOURCES: U.S. Department of Agriculture; and Mark Drabenstotl and Alan Barkema, "A New Msion of Agriculture Policy," Federal Reserve Bank of Kansas
City, Economic Review, vol. 80, no. 3 (Quarter 3 1995), pp. 63-77.
Since their inception in the 1930s,
no~nicb:~seof most rural commi~niU.S. agrici11t~1r:il
policies have been
tics has since broadened, ancl agriairnecl at stabilizing the cloniestic
culture is no longer their leading infood supply ancl fi~rlners'incomes.
dustry. 'I'he composition of U.S.
Congress is iscurrently scr~~tinizing agric~llturehas also changed dmmatthese policies with :m eye to deficit
ically, with large farms no\y do~iiireduction, 17ut i2ro:lcf e c o ~ ~ o ~ l l i cnating the industry. Through vertical
trends offer more funcl:~ment:ll reaintegration, capital-intensive methsons fix ch;~rting:l new course.
ods, ancl procluct specialization,
Origi~lally,r~lmlwelfare \\,as a n
large farms achieve substantial effiimportant ot>jective of the nation's
ciencies anel are better poised to
agricultur.al policies, I3ut the econ,ithstancl ~llarltetadversities than
:(re small fr-~rms.Nevertheless, large
operations receive a substantial portion of L1.S. fitrm-support payments.
Ilesignecl for a clo~llesticallyfocused industry, U.S. agricultural
policies raise 3 number of issues regarcling our international competitiveness. Price supports can exceed
glol>allevels, rigid crop patterns prevent qi~iclt:lcl:lptation to changing
markets, ancl foreign proclucers
seize the opportunity created by
idlecl l i . S . capacity.
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http://clevelandfed.org/research/trends
November 1995
Best available copy
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Banking Conditions
Billtons of
Biliions of doilars
dollars
1 000
Index, 1941-43=10
Index, 1941-43310
STOCK MARKET RETURN
1
990
980
970
960
950
940
930
920
91 0
115
3130
6/22
1994
9114
1217
311
5124
8116
1995
1118
Percent
Percent
55
(FUNDING R A T E S ~
Peiceflt
I
a. All data are pro rata monthly averages of Wednesday values.
b. Bank Rate Monitor national indexes for depository institutions.
SOURCES: Board of Governors of the Federal Reserve System; Standard &Poor's Corporation, and Bank Rate Monitor.
Loails by commercial 1,anlis continue to espzulcl at a steacly pace, LIP
10.5% over a year ago. I3y contrast,
Ixnks h:uve seen lo\v gro\vth in thcir
securities holdings iirliich, clespite
solllc tips alicl cloivns, rerriaill very
close to their levels of late August.
The gro\vth in loans cloes not
seem to be :u reaction to major
cllanges on either the clem:ul~cl or
the supply sicle of the banking marlict. While the 30-year mortgage rate
has clropped from 9.14% last No\-emlxr to 7.36%)now, its current
1evc.l is just sliglltly a1xn.e the rate
posted in mid-July. Rates on home
ecl~iitylines of credit show ;t similar
but much more attenuated ]?attern:
The current level of 8.87% represents a tlrop of only 7S basis points
(1/100 of 1%) fro111 its peak in
March. As expected, creclit-carcl
sates rernain fairly steacly.
On the supply side, the rates
Ixunlis p:uy for ft~nclshave entereci :I
stal,le pattern not observecl i11 a
ivl~ile.The sis-month CD rate has
clroppecl only one basis point (to
.4.77(%),the first decrease since September, ancl remains almost itlentical
to theJi11y fate (4.78%). Money mar-
liet accounts sllow even more stability, ~viththe current 2.82% rate :u111iost even with late Fel~rt~arp's
2.83%).
The 111:lrliet for bank stoclis tool<
the continueci increase in loans at
steady or slightly tightening mzirgins
as good news, increasing in tandem
\vith the Stanclarcl & Poor's 500
Composite. i\Iore recently, hoivever,
I~ankstoclis 1i:uve droppect sharply,
perhaps reflecting i~ncertaintyabor~t
hon. long profitable 1o:ltl growth
can contintie.
(cor7ti?zrlcdor1 rzextpag('/
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http://clevelandfed.org/research/trends
November 1995
Best available copy
@
Banking Conditions (cont,)
Billions of dollars
Number of banks
I
250 BANK FAILURES
Number of banks
1,750
FDIC~SPROBLEM LIST
Assets of problem banks
- Number of problem banks
Percent
9.0 [BANK ASSET QUALITY
Percent
4.0
1
Percent
25
Percent
15
BANK PROFITABILITY
I
1,500
[rl Percentageof unprof~lablebanks
I
a. Troubled assets include noncurrent loans and leases plus other real estate owned.
NOTE: All data are for FDIC-insured commercial banks. 1995 data are for the first half of the year and are annualized where appropriate
SOURCE: Federal Deposit Insurance Corporation.
Mitlyear cl:lta :~lsoindicate a continuctl ovel;tll he;~lthyperformance
11y the com~nerci:il I>anl<ingsector.
,\ were
Only foiir commercial I>anl.:
shut clown during the first h:rlf of
1995, the same number as \\;ere
closed cli~ringthe first half of 1994.
?'he nurnI>er of Ixinks no\\- classified ;is "prol~lerninstiti~tions"11:~s
sllown a ~n:~rkeciclecline-to 190,
clo\vn from 2't7at the eiid of I99.,'t.
The :issets of these trou1,lecl Ixinl.;s
h:~ve;ilso filllen, from $3.3 billion to
$23 I~illion,reflecting a clecre~~se
in
the :lverage size of the institutions :is
xvcll as tile tlropoff in their niitnher.
The cliiality of commercial l>:mli
assets Ilas also continued to sho\v
significant improverllent. Equity capital as a percentage of total :Issets
reachecl 8.03% at rlliclyear 1995, u p
froln 7.83%1one yezir e:lrlier, as eelciity capital gro\vth outpaceel an increase in assets. Nonperformin:c:assets. which stooci at 1.27?41of total
~Lssets it1 mitl-1994, declinecl to
0.94'Hr of total assets.
As the health of' the commercial
I>anl<ing sector continues to impave, s o cloes the profitability of
commerci:~lhanlis. The percentage
o f iinprofital~leb:inlis fell to 3.20%
at midyear 1995. clo\\.n from 3.89%)
at the entl of last year. Return on assets. although clo\vr~slightly from
last year's perform:lnce, remains
a l ~ o v e1%).:~lmosttwice the level of
1989-9 1.
http://clevelandfed.org/research/trends
November 1995
Best available copy
Pntemational Trade
Billions of dollars
Biliions of dollars
I
(u.s.T R A D E D E F I C I T
I
rnovtng average
..
1994
Billions of 1987 dollars
Index, 1973.lQ=100
Billions oi 1987 dollars
1995
iiidex, March 1973=100
a. Average GDP growth in Germany, Japan, France, the U.K., Canada, Italy, the Netherlands, Belgium, Sweden, and Switzerland, weighted by trade shares.
Annual data for Belgium are interpolated to a quarierly series. Data extended using growth rates from national accounts and the lnternational Monetary Fund's
1995 forecasts for Belgium, Sweden, and Switzerland.
b. Weighted average of dollar exchange rates against the above-listed countries, adjusted for inflation differentials.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the Census; lnternational Monetary Fund; Board of Governors of the
Federal Reserve System; the Federal Reserve Bank of New York; and the Federal Reserve Bank of Cleveland.
linexpecteclly strong U.S. export
growth in August narro\ved our
trade cleficit to $8.8billion. This wxs
the second consecutive monthly decline in a deficit t1i:lt has generally
espanclecl this year.
T h e U.S. tracle deficit is sensitive
to differences hetx~eeno l ~ r12te of
economic growth and that of o ~ l r
major tracling partners. In the h t e
I9SOs, the relatively early onset of
the U.S. recession narro~v-eelthe
tracle shortfall. In the 1770s. our rel:ltively quick recovery and the
speed of our subsequent economic
growth widenecl ~ L I Stracle cleficit.
Early eviclence now suggests that
foreign economic growth is again
catching up.
S\vings in real exchange sates ;llso
affect our net exports, but often with
:I sul~sta~ltial
lag. Although the real
tmcle-weigltec dollar has clepreci-
ated 3.4% since early 1994: it has
fluct~~:lted!
without any ~inclerlying
clirection, since 1990.
At best, these :Ire only proximate
cleterrllinants of our tmde balance. A
nation esperiencing a tmcle shortfill1
is not gerlemting sufficient savings
to finance its investmerlts. Illtiruately, the factors that :~ffect our
saving anel investment decisions cleternline our tmcle I3alance.
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http://clevelandfed.org/research/trends
November 1995
Best available copy
e
Global Savings and Investment
Measured Real Interest Ratesa
(Percent)
1960s
1970s
1980s
1990sb
1992
1993
1994
1995'
U.S.
2.5
0.7
4.5
3.3
3.2
2.9
4.1
3.4
~apan~
3.7
0.7
4.0
3.2
2.7
2.7
3.4
2.6
Germany
4.1
3.2
4.6
4.2
4.0
2.3
3.3
3.8
France
2.3
1.1
4.4
5.8
6.0
4.7
5.5
5.7
Italy
2.1
-1.4
2.8
6.6
7.6
6.2
6.1
6.9
U.K.
3.2
-1 .O
3.9
3.8
3.1
3.5
5.3
5.0
Canada
3.3
1.3
4.7
5.7
5.0
6.1
7.5
6.3
GI 0 averagee
2.9
0.1
4.2
4.0
3.8
3.4
4.4
3.9
Savings and Fixed investment
(Percent of GDP)
Gross savings
Gross fixed investment
1960s
1970s
1980s
1990sb
1960s
1970s
1980s
1990sb
U.S.
20.1
19.8
17.8
15.4
18.3
19.1
19.0
16.0
Japan
34.4
35.3
31.8
33.5
31.6
33.1
29.1
30.6
Germany
27.3
24.4
22.4
22.2
24.8
22.6
20.3
22.3
France
26.3
25.9
20.4
20.1
23.4
24.1
20.6
20.0
Italy
28.3
26.0
21.8
18.4
24.8
24.0
21.3
18.5
U.K.
18.5
17.9
16.5
13.7
18.0
19.2
17.5
16.4
Canada
21.5
22.4
20.1
14.2
22.4
22.8
21.4
19.1
GI 0 averagee
24.5
24.1
21.4
20.0
22.6
22.9
21.2
20.0
a. A two-year backward-moving average of inflation is used to proxy inflation expectations.
b. 1990 through 1994.
c. For September 29, 1995. Based on inflation through 1995:llQ.
d. The table uses the average return on Japanese long-term telephone and telegram coupon bonds from 1961 through 1979. From 1980 to 1984, yields on
government bonds and telephone bonds were essentially identical.
e. Weighted by GDP fixed weights. The forelgn G I 0 countries comprise Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzer
land, and the U.K.
SOURCES: Organisation for Economic Co-operation and Development (OECD); International Monetary Fund; and Bank of England.
As glol,al capit:il rnarlicts I3ecomc
incre:isingly integ~itccl,worlcl\\-icle
influences on sa\-ings. in\.cstmcnt.
ancl real-interest-r~itepatterns n.iil
tenel t o clomin:itc co~intry-specific
cievelopmcnts. :iceorcling to ;I recent
stiicly hy the Group ot' 'I'cn ( G 10)
coiintr-ics. Intcg~itionshoi~iclpermit
:I growing cli\-essence I,et\veen savings ;inel investment in any single
c.ountr-y. :inel consccliiently shotilcl
accorn~notlaten.icler. more persistent current account inl11:iIances
than i n the past. -l'l~o~igli
capit:il
m:irl\-ets are kir 1-ro1ncomplctcly integr:itecl. re:(!-interest-rate movements aro~inclthe glolx are l~ecoming more closely corrcl:itecl.
Over the past 35 yc:u.s. cotintries
ha\.? esperiencecl :i sm:lll increi~sein
real long-term interest n t e s . 'fhe
G I 0 concluclecl tlxit tiiese higiier
Kites reflect :i clecline i l l gloIIal sat.ing r:ites. \\-hich stems m;iinl>.tr.0111 a
deterioration in the fiscal positions
of industri:ilizeci countries. l ' l ~ eclrop
in saving Utes outp:icecl :t clecreasc
in in\.estinent. n.hich the C 1 0 ;ittrih-
utecl to slo\ver lal3or-force g r o ~ v t h
and recl~~cecl
prod~~cti\.ity
g:iins.
Viihile the rise in real capital marliet rxtes has been srn;ill. the o~itlook
for t'iit~iresa\.ing patterns in de\.elopecl countries creates uncertainties
aI>out their future growth rates ancl
;iI~out s~~staineclclevelopment in
emerging ancl tl-ansition:il economies. l'he fiscal positions of most
countries may IIe slo\v to improve.
T~iclitionally.a clear link between
cleficits. or government clel,t. ancl
( c o ~ ~ t i t l [ [ojl
e d~ze.~t
f~~ige)
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http://clevelandfed.org/research/trends
November 1995
Best available copy
@
GlobalSavings and Investment (cont.)
General Government Fiscal Balance and Net Debt
(Percent of GDP)a
Fiscal ~ a l a n c e ~
1%Os
U.S.
-0.1
1970s
1980s
-1 .O
-2.5
Net debtC
1990sd
1960se
1970s
1980s
1990sd
-3.1
38.3
24.1
25.6
35.4
Japan
1.O
-1.7
-1.5
0.5
-5.7
0.0
22.0
6.8
Germany
0.7
-1.7
-2.1
-2.8
-12.6
0.1
19.4
29.0
0.0
-0.4
-2.1
-4.0
n.a.
-0.2
7.7
23.0
Italy
-2.4
-8.6
-1 1.O
-9.8
31.2
49.5
76.6
110.2
u.K.~
-0.3
-2.4
-2.0
-4.9
75.9
60.2
43.5
36.2
Canada
-0.3
-0.8
-4.5
-6.0
21.4
9.4
28.7
55.4
0.0
-1.8
-3.0
-3.3
25.3
19.1
29.1
36.3
19771979
19801982
19831985
19861988
19891991
1992
1993
1994
-0.7
0.0
-2.3
-3.2
Japan
0.8
0.0
2.8
3.5
Germany
0.5
-0.5
1.7
France
0.8
-1.2
Italy
1.6
-2.2
U.K.
0.2
1.9
Canada
-1.9
Gl 0 averageg
-0.2
~rance~
GI 0 averageg
Current Account Balance
(Percent of G D P ) ~
U.S.
-1.2
-1.1
-1.6
-2.3
1.8
3.2
3.1
2.8
4.3
2.2
-1.2
-0.8
-1.1
-0.6
-0.2
-0.8
0.3
0.8
0.7
-0.5
-0.2
-1.7
-2.3
0.7
-1.6
-3.0
-1.7
-1.9
-0.1
-0.7
0.1
-2.3
-3.9
-4.0
-4.3
-3.3
-0.8
0.5
0.5
-0.3
-0.5
0.5
0.8
1.2
1.3
a. OECD definitions.
b. Negative numbers represent a deficit.
c. Net financial liabilities as defined in the System of National Accounts.
d. 1990 through 1994.
e. 1964-1969 for Japan and Italy, 1966-1969 for the U.K., and 1961-1 969 for Canada.
f. Fiscal balance figure is for 1963-1 969.
g. The foreign G I 0 countries comprise Belgium, Canada, France. Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, and the U.K
SOURCE: Organisatlon for Economic Co-operation and Development.
--
i
-
---
real long-ter~ninterest rates lias remainecl e l ~ ~ s i v eMany
.
econoruists
contencl that the l>orro\\-ingin1plic:itions of government cleficits rlixy be
less intr~1six.ethan tlie clistortionary
effects of incliviclu:~l txs-and-spencl
progmrtis. In a glohai mz~rliet.however; tlie indi\-icl~lalefforts even of
I:~rge countries ma); h:~\.c little impact on real long-term interest rates.
,'
I h e cllallenge is to foster p~11>1ic
saylngs \\-orlu~vlc~e.
I'o~~~llation
trencls rnzl). ~ ~ l s~lclo
vet-sell. affect s;~\.ingrates in develI
1
. I
opecl countries. I>emogr;~pIiersespect ciepenclerlcy ratios-the percentage of young ancl elderly in a
countl-1. relative to its \\.orking-age
popul:ltion-to
rise in inclustrial
countries. Other things equ:ll, nations \\.ith high depcnclcncy ratios
have lo\\~ersaving I-ates.
A l t h o ~ ~ gi~~lesr)ectcd
h
changes in
monetal-y lx)lic), ma). affect real interest rates in the short run. rnonetary po~rcy-e\:en
o n a glorlal
scale-c:~nnot determine real interest mtes. Coilntries with higher inlla2
,
7
tion Ixtes experience higtier longterm nominal interest rates. The (; 10
stclcly also fincls that in Inan). countries, financi:kl marliets set inflation
~xenii~~m
with
s
long memories
: L ~ I O Lpast
I~
131.ice perforrn:unce. hIonetary creclil>ility rnay be slon. to
1,uilcl ancl cl~liclito crumble. h,Ionetary z~~ltllorities
contrilx~teto longterm economic gron.th ancl clevelol3lllellt o11ly 11)' c ~ ) ~ ~ s i s t e nfostering
tly
.
.
prlce
srarxrrry.
7 . 2 .
@FedFRASER