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Federal Reserve Bank of Atlanta

EconSouth
STAFF

In This Issue
Volume 2, Number 2, Second Quarter 2000

Pierce Nelson
Editorial Director

CURRENT ISSUE

Lynn Foley
Managing Editor

Fed’s Regional Structure Provides Unique
Insight into the Economy

Michael Chriszt
Contributing Editor

COVER STORY

Jean Tate
Lee Underwood
Staff Writers
Harriette D. Grissom
Stephen Kay
Elizabeth McQuerry
Contributing Writers
Carole Starkey
Peter Hamilton
Designers
EDITORIAL COMMITTEE
Bobbie H. McCrackin
Vice President and
Public Affairs Officer
B. Frank King
Vice President and
Associate Director
of Research
Thomas J. Cunningham
Vice President
Research Department
Regional Section
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A Wealth Effect
Against a backdrop of soaring consumer
spending, there has recently been a great deal
of attention focused on the wealth effect. But
does this economic phenomenon really have a
significant impact on current spending by
consumers, and should policymakers be
concerned with increases in demand over
supply brought about by this increased
spending?

FEATURES
Higher Education Translates
Into Big Business
Thoughts of university towns remind many
people of the carefree days of college and big
games on Saturdays. But, as this article points
out, universities are more than just ivory
towers. In fact, universities provide a
significant economic boost to their home
cities, including jobs, community investments
and spending by students and faculty.
Mercosur: Back on Track?
While Mercosur has experienced successes as
a trading bloc in South America, its long-term
sustainability was called into question
recently as squabbles developed between the
principal countries. Today, however, with
improving economies and an emphasis on
resolving disagreements, Mercosur appears to
be headed in the right direction.

copy of the publication containing the reprinted material
is sent to the Public Affairs Department.

DEPARTMENTS

ISSN 0899-6571
photograph of car courtesy of Panoz Auto Development

Research Notes & News
Dollar Index
The State of the States
Southeastern Economic Indicators
Southeastern Manufacturing Survey

CURRENT ISSUE

Fed’s Regional Structure Provides
Unique Insight into the Economy
ne of the by-products of the unique structure of the Federal Reserve System is
the role the 12 regional banks play in gathering grassroots economic
information from their respective regions. The most familiar evidence of this
effort is found in the Fed’s Beige Book, a set of summaries of current
economic conditions from each region that, collectively, span the nation’s economy.
The view from the Southeast
The contributions to the formulation of monetary policy that can be made by the
regional sections of the Atlanta Fed’s research department extend beyond a simple
recitation of current developments and expectations. The Atlanta Fed’s Southeast
region, for example, represents a significant piece of the U.S. economy. As such, not
only does regional performance, by itself, carry considerable weight in national
performance, but there are theoretical reasons why regional trends can provide insights
into the performance of the rest of the economy.
Theoretically, it is useful to think of the Atlanta Fed’s region as an open economy that
trades with the rest of the world, mostly the rest of the United States. Economists have
a rich set of models and results that apply to small, open economies, but in the real
world few countries can match up to the theoretically pure case. The Southeast comes
close, however, because it really is an integrated part of the larger economy, and goods,
capital and labor flow freely in and out of the region.
Regional trends have national implications
One example of how this way of thinking about the Southeast
can inform national judgments is in single-family housing.
The Southeast has a disproportionate share of its
manufacturing concentrated in production of items for singlefamily homes — building products, carpets, textiles, furniture
and major appliances. Thus any assessment of national
housing has disproportionate implications for the Southeast,
and vice versa.
The surge in new housing construction that occurred at the
beginning of this economic expansion boosted employment
and income disproportionately in the Southeast because of
this concentration. Similarly, capital investment in Southeastern plants eased materials
shortages that hampered national construction in the mid-1990s. Whatever is going on
in the relevant portions of district manufacturing serves as a check on the larger view
of the national housing market. Another example is tourism, where national income
growth and confidence in future income growth play a disproportionate role in the
Southeast’s hospitality sector.
Since the Southeast region is quite large, the Atlanta Fed has branches across the
region, in Miami, Jacksonville, Nashville, Birmingham and New Orleans. Each branch

has its own board of directors, whose members provide economic reports that are used
by the Atlanta Fed’s research department. Often, the anecdotal data gathered from
directors and their business contacts precede national developments, where data are
available only with a lag. For example, reports from our Jacksonville branch of
tightening credit standards preceded the national “credit crunch” associated with the
downturn in the early 1990s by more than a year.
Implications for monetary policy
Clearly, the unique regional structure of the Federal Reserve can be an important tool
in forming monetary policy. To be sure, policy cannot be targeted at a particular sector
or geographic region, but regional information is still important to an evaluation of
national conditions. Thus, an understanding of how the regional and national
economies interact is a central feature in the formulation of sound monetary policy.
By Thomas Cunningham, vice president of regional research for the
Federal Reserve Bank of Atlanta

Americans have been on a spending spree lately. Is this big spending the result of the so-called wealth
effect, as some have argued, brought on by appreciating values in stocks, 401(k)s and home values?
uring the current record U.S. economic expansion, particularly over the last few years, Americans have been
spending — a lot — and then spending some more. In fact, since 1995 real personal outlays in the United
States increased at a strong pace — on average, about 4.1 percent per year.
Strong consumer confidence from a robust economy and a low-inflation
environment are surely contributing to Americans’ quest to buy goods. But
something else may be encouraging people to spend, and it’s probably not personal
income, which grew on average about 3.3 percent between 1995 and 1999. The
question is, What?
The wealth effect
Many people believe that the sustained increase in consumer spending out of
current income may be the result of a “wealth effect.” While this wealth effect was a somewhat remote concept
bandied around in the past by those in economic circles, today it’s being discussed by many Americans, particularly
people seeking an explanation for the recent consumer spending spree.
In economic terms, the wealth effect under discussion is an increase in aggregate expenditures brought on by
increases in household financial and nonfinancial asset holdings. Expressed another way, for every dollar someone
gains in asset appreciation, she will spend part of it even if she doesn’t realize the appreciation by selling the asset.
Taking stock
Research suggests that people have historically spent three to four cents out of every additional dollar of stock
market wealth. Some believe that the increase in outlays in excess of increases in income have added, on average,
about 1 percentage point to the annual growth of gross domestic purchases in the past five years. In 1999, 1 percent
of GDP equaled approximately $92.5 billion, which is serious spending.
And more people appear to own stock — either outright or through mutual funds, 401(k) retirement accounts or
other managed assets — than in previous decades. The Federal Reserve Board’s 1998 Survey of Consumer Finances
shows the dramatic change. According to the findings, approximately 48 percent of the families participating in the
survey either directly or indirectly held stock in 1998 versus approximately 31 percent in 1989. Half of that gain
took place between 1995 and 1998.
Not surprisingly, family asset values increased considerably, at least on paper, during that same period. Based on
calculations from Federal Reserve Board and U.S. Census Bureau data, families’ unrealized capital gains — on
assets such as businesses, real estate and stocks — rose annually by a per family mean of approximately 39 percent
between 1995 and 1998. Unrealized gains are gains in the value of assets that are yet to be sold.

So while more Americans own stock and while their assets have by and large appreciated considerably during the
past several years, does that mean that people will automatically spend more of their current income based on the
assumption of a future return?
TABLE 1
Reported Effects of Trends in Stock Prices
on Saving and Spending in the Past Few Years
Reported effect
No effect

Percent of stockowners
reporting each effect
85.0

Spend more/save less

3.4

Not specified

2.6

Bought a car

0.4

Bought a house

0.1

Gave more to charity

0.1

Took more vacations

0.1

Spend less/save more

11.6

Not specified

7.2

Invested in the stock market

3.3

Increased 401(k) contributions

0.7

Increased mortgage payments

0.4

Note: Stock-owning households were asked, “Have you [has your family] changed the amount of money you spend
or save as a result of the trend in stock prices during the past few years?” If yes, they were asked, “How has your
spending or saving changed?” and the response was recorded verbatim.
Sources: Federal Reserve Board of Governors Working Paper 1998-20 and Michigan Survey of Consumers

Not according to Martha Starr-McCluer, an economist at the Federal Reserve Board, who in a 1998 working paper
evaluated several monthly surveys from the University of Michigan’s Survey of Consumers conducted in 1997. In
her research, Starr-McCluer mentions that the vast majority — 85 percent — of stockholders reported no
appreciable effect of stock prices on their spending or saving (see Table 1). Only 3.4 percent of the household
stockholders in the survey said that they increased their spending or lowered their saving as a result of higher stock
prices. Interestingly, in those same University of Michigan surveys, approximately 70 percent of the respondents
owning stocks said that they had no plans to liquidate assets to make purchases or to save less in the next year. The
most common response by participants was that they were saving for retirement (see Table 2).
The stock market and consumer spending, however, may be related, but only passively. That’s because, as StarrMcCluer reasons, the stock market is a passive predictor of information. Stock prices, she argues, may simply lead
aggregate economic activity, with the market anticipating a pickup in production and employment that eventually
translates into higher consumer spending.
Clearly, consumers have been on a buying binge, but Starr-McCluer’s research seems to back up the belief of many
economists and even some manufacturers (see sidebar) that wealth gains have only a modest impact on current
spending. Instead, she says that her results support the life-cycle view that predicts only modest effects of wealth
gains on current spending, as spending gains would be distributed over a household’s lifetime.
TABLE 2
Reasons for Not Liquidating Assets or
Lowering Savings in the Next 12 Months
Reason

Percent of stockowners
with no plans to liquidate
assets or lower saving

Saving for retirement

45.0

Don’t need the money right now

33.9

Saving for precautionary reasons

17.6

Illiquidity of gains

9.7

Saving for major purchase

7.9

Saving for education

7.6

Saving to buy a home

3.5

Note: Figures are computed for the 69.5 percent of stockholders reporting no plans to liquidate assets or lower
saving in the next 12 months. Respondents could give more than one reason. The category “illiquidity of gains”
includes “cannot withdraw till retirement,” “would have to pay taxes on money,” “would have to pay penalties for
early withdrawal” and “would lose interest if withdrew money early.”
Sources: Federal Reserve Board of Governors Working Paper 1998-20 and Michigan Survey of Consumers

What are the policy implications?
Aside from consumers, policymakers with their finger on the pulse of the nation’s economy have also been intrigued
by the concept of the wealth effect, particularly as spending has remained so strong during the current record
economic expansion. A key question for policymakers considering the impact of the wealth effect is whether the
historic relationships between changes in wealth and expenditures still hold.
If the wealth effect is pushing consumer spending, there are some questions that policymakers must ask themselves,
such as how they should assess the macroeconomic effects of increased consumer spending and whether personal
saving is out of balance with spending.
IF THE WEALTH EFFECT IS
PUSHING CONSUMER
SPENDING, THERE ARE
SOME QUESTIONS THAT
POLICYMAKERS MUST
ASK THEMSELVES, SUCH
AS HOW THEY SHOULD
ASSESS THE
MACROECONOMIC
EFFECTS OF INCREASED
CONSUMER SPENDING
AND WHETHER
PERSONAL SAVING IS
OUT OF BALANCE WITH
SPENDING.

In describing how the wealth effect has worked in the U.S. economy, Fed Chairman
Alan Greenspan summed it up this way in a speech earlier this year: “A substantial
part of the excess growth of demand over potential supply owes to a wealth effect,
induced by the rising asset prices that have accompanied the run-up in potential rates
of return on new and existing capital. The rise in stock prices, as well as in the capital
gains on homes, has created a marked increase in purchasing power without
providing an equivalent and immediate expansion in the supply of goods and
services. That expansion in supply will occur only over time.”
But does that mean that the wealth effect is causing a significant imbalance, one that
could bring on inflationary pressures if demand is growing faster than supply? Going
a step further, would this potential imbalance be enough to cause the Federal Reserve
to take some measure to lessen the run-up in wealth, such as targeting a level for the
stock market?

Not according to Greenspan, who in that same speech said, “The persuasive evidence that the wealth effect is
contributing to the risk of imbalances in our economy does not imply that the most straightforward way to restore
balance in financial and product markets is for monetary policy to target asset price levels. Leaving aside the deeper
question of whether asset price targeting is an appropriate governmental function, there is little, if any, evidence that
monetary policy aimed at achieving that goal would be successful.”
Along similar lines, some people have also expressed concerns about whether consumers are spending too much and
saving too little. Based on Federal Reserve Bank of Atlanta estimates, the personal savings rate may not be as low as
some contend: unrealized gains in people’s net financial assets, including an appreciation of 401(k) funds, if marked
to market would boost the estimated personal savings rate to nearly 12 percent. If these estimates are correct, the rate
of personal savings may not be as significant a concern as some suspect. What’s more, the increase in consumer debt
may not reflect a worrisome burden if balance sheets are strengthened by increases in wealth holdings.
Whether or not the wealth effect is encouraging consumers to spend more is a question for debate. What is clear,
though, is that consumers continue to spend at very high levels, levels that show few signs of declining.

No Wealth Effect Here
ypically, you might associate the good times in yacht sales with wheelers and
dealers who are flush with confidence from a significant gain in their dot com
stocks or a recently completed merger. Conversely, you might relate the down times in

the yacht business to a significant stock market correction, but those assumptions
don’t seem to hold water with Trinity Yachts, based in New Orleans.
They’ll still buy
According to John Dane III, president of Trinity Yachts and a member of the board of
directors at the Federal Reserve Bank of Atlanta, “If there’s a big [stock market]
correction, our clients might buy a smaller boat, but they’ll still buy.”
Trinity Yachts, until recently a division of Friede Goldman Halter Inc., builds three or
four boats a year, ranging in size this year from 118 to 177 feet and in price from $8
million to $21 million. Dane says Trinity Yachts’ sales have increased every year since
its early 1990s establishment but that there are practical limits on how many yachts
the company’s 218 employees can build each year. “You can’t really mass produce
these boats because quality will suffer.”
Dane says a new golden age of yachting has arrived in
the United States, brought about by communications
technology and the market for high-end charters. “The
previous golden age was just before the Great
Depression, with the Astors, the Vanderbilts, the
Whitneys. But to use their boats, they had to walk
away from their businesses for months at a time; they
were out of touch.” Now, of course, satellite and other
communications technologies have obviated that
problem. In fact, Dane says, “Every boat we’ve
delivered has been used for business purposes.”
ACCORDING TO JOHN DANE
III, PRESIDENT OF TRINITY
YACHTS AND A MEMBER OF
THE BOARD OF DIRECTORS
AT THE FEDERAL RESERVE
BANK OF ATLANTA, “IF
THERE’S A BIG [STOCK
MARKET] CORRECTION, OUR
CLIENTS MIGHT BUY A
SMALLER BOAT, BUT THEY’LL
STILL BUY.”

Surging demand for charter boats from movie stars, dot com millionaires and others
who can afford the rate of up to $100,000 per week (for a 150-foot boat) has also
helped the industry, Dane says. Charter income helps owners justify the initial
purchase. It also frequently helps the owner finance the purchase of a larger boat.
Finally, charters bring new potential customers to the industry. “If you like it, you can
probably buy it,” Dane says.
As an investment, Dane says yachts can be very competitive; they can appreciate
dramatically, especially for the first owner in the first three to four years after delivery.
It also helps that the market is literally mobile. Dane says that when demand falls
because of economic conditions in one part of the world, it picks up in another.
Delivery, of course, is not an issue.
Considering wealth
As for the wealth effect, “Our clients can never come close to spending their net
worth,” Dane says. “The stock market doesn’t seem to have an impact.” Still, the
wealthy are having an effect in New Orleans and other coastal cities, namely by
keeping maritime industries alive. Dane speculates that in the United States, yacht
construction employs more people than supply boat or tug construction, and he is
unequivocal that the work is steadier. In fact, he says that worldwide there are more
than 300 yachts over 80 feet long under construction today.
For Trinity Yachts, then, the wealth effect is altogether distinct from the one that acts
on the national economy because it is permanent. In that respect, too, it is altogether
more preferable.

Many people associate university towns with memories of studying, partying and attending big
games. But universities are more than just that. In fact, universities generally contribute
significantly to their local communities’ economies by making direct expenditures, such as those
for payroll, by attracting associated support industries and by bringing in students and staff who
spend money locally. These and other factors, including a university’s sources of funding, help to
differentiate the economy of a university town from other communities.
raced with tree-lined campus thoroughfares, traversed by seas of students moving between classes and
invaded periodically by cheering crowds of exuberant sports fans, university towns seem to exist in a
world apart from other urban venues. Music clubs, pizza parlors, fast food stops and microbreweries
coexist peacefully beside used bookstores, tiny import shops, art galleries and gourmet vegetarian take-out
concessions. These towns hum along madly from September to May but fall into deep lulls when most
students pack for home. To what extent does the economy of a university town mirror its unique atmosphere?
Studies by the business centers of three state-funded universities — the University of
Georgia in Athens, the University of Alabama in Tuscaloosa and the University of Florida in
Gainesville — suggest that these institutions, all of which are housed in smaller cities of
200,000 people or less in the metro area, provide some unusual benefits to their host
communities.
Fueling the local economy
As with any major public or commercial establishment in a small to medium-sized city,
expenditures by an academic institution and by a core population of employees and patrons
fuel the economy in a university town. According to University of Georgia economist
Jeffrey Humphreys, however, spending by universities is marked by an especially strong
“multiplier” effect; that is, every dollar spent by the institution and its affiliates generates more indirect
spending than another kind of business might in a similar-sized town. Humphreys speculates that the laborintensive nature of an academic enterprise and the extensive interaction between the university and the
surrounding community intensify the multiplier effect.
While university towns experience volatile seasonal swings in economic activity because of the shifting
student population, academic institutions appear to provide host cities with some cushion during times of
recession. Cutbacks in university funding, which tend to lag the business cycle by three to six months, can
nonetheless have an adverse affect on local economies.
Intangible benefits accrue from the presence of a university as well, such as an educated and skilled
workforce, access to advanced technologies and sophisticated cultural events, and, eventually, individuals who

are destined to earn significantly more than they would have earned had they not received their university
diplomas.
These benefits are not, however, without costs. State appropriations supply significant amounts of university
funding. Students not only incur the cost of their education but also give up income they might have earned
during the time spent pursuing their college degrees. Additionally, the presence of a state university or college
may have an adverse effect on local revenues since a university requires significant infrastructure but is tax
exempt. Studies by the University of Alabama’s Center for Business and Economic Research indicate that,
despite these costs, the presence of the university is on the whole a big benefit for the host community and for
the state that funds the university.
Money, money, money
Academic institutions are significant local spenders. The University of Georgia in Athens registered initial
spending of $979.6 million in 1999. Much of this amount remained in the local area. Humphreys’ research
indicates that initial expenditures are magnified through re-spending so that every dollar spent generates an
additional 56 cents.
Looking at Georgia’s university system as a whole, which comprises 34 institutions statewide, Humphreys
found that initial spending by the institutions and students of roughly $5 billion in 1999 expanded to a total
output impact of $7.7 billion. Value-added impacts, which exclude expenditures related to domestic and
foreign trade and thus provide a more accurate indicator of in-state economic benefits, constituted $4.5 billion
of the total output impact — an amount equal to almost 2 percent of Georgia’s gross state product. Labor
income received by the residents of host communities equaled $3.6 million, or 78 percent of the value-added
impact. Georgia institutions as a whole thus tend to enhance the economies of their host towns.
Ahmad Ijaz, an econometric analyst at the University of Alabama’s Center for
Business and Economic Research, estimates a multiplier effect of 1.5 for
expenditures by his institution, indicating that each dollar spent by the
university and its students results in another 50 cents for the local economy.
Ijaz calculates that the total impact of the institution on the local economy of
Tuscaloosa County in 1998 was $619.3 million, a figure that represents about
19 percent of Tuscaloosa’s total personal income. Of this amount, 41 percent
was generated by student expenditures, 33 percent by the university’s payroll
and 26 percent by institutional purchases. Local economic impacts for the
University of Georgia and the University of Alabama do not include amounts
spent by visitors on sporting or other special events.

WHILE UNIVERSITY
SPENDING IS
EVENTUALLY AFFECTED
BY RECESSIONS, THE
IMMEDIATE IMPACT OF
RECESSIONS MAY NOT BE
EXPERIENCED AS
SEVERELY IN UNIVERSITY
TOWNS AS IN OTHER
PARTS OF THE STATE.

In 1993–94, which represents the last year a comprehensive economic impact study for the University of
Florida was conducted, the university accounted for expenditures of $1.8 billion. Of that amount, $986 million
went to salaries and benefits, $567 million applied to operating expenses, $263 million was spent by students
off-campus, $58 million was spent in construction, and $19 million was spent on visitors. Thus, much of this
amount remained in the Gainesville area, and 95 percent stayed within the state.
Recession-proof?
While university spending is eventually affected by recessions, the immediate impact of recessions may not be
experienced as severely in university towns as in other parts of the state. Since state-funded institutions are
significantly dependent on tax revenues, local recessions are more likely to be felt three to six months after the
start of a recession as the tax base shrinks and funding cuts take effect, says Humphreys. These cutbacks can
be particularly sharp in states like Alabama, where state funding for its educational trust is allocated as 90
percent of sales tax — a type of revenue that can be hard-hit by decreased spending associated with
recessions.
According to Ijaz, universities do not typically respond to cutbacks by laying off existing employees. Crimps
in funds are more likely to be reflected through decisions by administrators to leave positions vacant, through
elimination of departments with low enrollments or through the postponement of capital and research projects.
Thus, employment within the institution may remain stable relative to that of other types of industries or even
other state-funded agencies. The multiplier effect, however, is doubtless affected by curtailments in university

spending. The extent to which these kinds of cutbacks affect the host community depends largely on the
diversification of the local employment base, Humphreys notes.
During the 1981–82 recession, Auburn and Tuscaloosa in Alabama, Athens, Ga., Gainesville, Fla., and Oxford,
Miss. — all of which are home to major academic institutions — enjoyed significantly lower percent changes
in levels of unemployment than did their respective states (see the table). The same pattern held true during
the economic dip of 1990–91, with the exception of Gainesville, which experienced a slight decline in
employment as compared with a slight increase in Florida as a whole, and Tuscaloosa, which experienced a
decline in employment sharper than the state’s.
Athens typically enjoys lower rates of unemployment than other Georgia cities, according to Humphreys. This
lower unemployment rate occurs, he says, because students are not counted as unemployed while they are in
school. Additionally, students often leave Athens to return home after graduation so they do not show up
among the ranks of the locally unemployed. Despite apparently low levels of unemployment, however, the
labor market in Athens is not tight, explains Humphreys. On the contrary, he notes an abundance of potential
labor. Nonetheless, he argues that businesses placing a high premium on the availability of labor in selecting a
location might tend to avoid a city like Athens, which registers low official unemployment rates despite large
pools of highly skilled professional talent.
Percent of Employment Change During Recessions
in University Towns vs. State*
Jan. 1980–
July 1980

July 1981–
Nov. 1982

July 1990–
March 1991

Auburn

–2.5

–1.3

6.4

Tuscaloosa

–1.9

–3.0

–4.3

Alabama

–1.2

–5.5

–1.7

Athens

1.9

1.8

–1.4

Georgia

1.4

–0.3

–4.4

Gainesville

6.3

7.8

–0.3

Florida

–2.2

2.8

1.0

Oxford

–6.6

–2.4

2.5

Mississippi

–0.1

–5.2

–2.3

*Employment change measured from peak to trough during these recessions and derived from unemployment
insurance coverage
Source: Bureau of Labor Statistics

The availability of skilled and educated labor nonetheless remains a draw for high-tech and information-based
businesses. The academic specialties of the university affect the types of businesses that locate in the area.
Margaret Wagner Dahl, director of the University of Georgia’s Research, Development and Technology
Alliance, reports strong synergies in the Athens area for the development of bio-tech enterprises based on soil,
crop and dairy sciences. While many of these enterprises are spawned by faculty members within the
university, they help to provide the infrastructure that attracts companies from outside. For example, a
producer of veterinary pharmaceuticals recently located in Athens, attracted by the research potential provided
by the university’s school of veterinary medicine. Dahl was recruited by the University of Georgia from
Austin, Texas, and she sees similarities between the two communities.
According to Robert Wells, assistant academic vice president for research at the University of Alabama, the
presence of the university and the potential for shared projects in research and management training was
significant in the package of incentives that convinced Mercedes-Benz to locate in Tuscaloosa County.
Job incubators
Universities provide significant numbers of jobs in their state and local economies. In 1996 the University of
Alabama at Tuscaloosa was the largest employer in its county, hiring approximately 3,403 full-time workers,

or approximately 5 percent of Tuscaloosa County’s total workforce. Ijaz explains that the university’s share of
the total number of jobs has actually dropped in the last decade — from 7.7 percent of the county’s total wage
and salary employment in 1990 to 4.8 percent in 1998. (These figures do not include indirect impacts.) This
drop is explained by the fact that employment and wage growth are increasing at a pace much slower at the
university than in the county as a whole, particularly when compared with the private sector, Ijaz says.
Despite the decline in the university’s share of jobs overall, its share of total income in Tuscaloosa County has
risen significantly in the last decade, from around 4 percent in 1990 to around 7 percent in 1998. This change
reflects the fact that most of the job growth in the county has been in retail and service-related businesses,
which tend to pay less than manufacturing firms, which played a larger role in the economy a decade ago.
Athens researchers estimate that collectively the 34 institutions of Georgia’s university system generated an
employment impact of approximately 94,700 jobs in fiscal year 1998 and nearly 100,000 jobs in fiscal year
1999 — an increase of 5.6 percent. This figure, which includes part-time jobs and indirect employment as a
result of institutional and student spending, accounts for 2.7 percent of all the jobs held by Georgians, or about
one in 37 jobs in the state. Each million dollars of initial spending by the university system in fiscal 1999
resulted in 20.1 jobs.
The University of Georgia, the largest employer among the 34 state institutions, accounted for a total
employment impact of 19,708 in the 1998–99 fiscal year. This number equals about 16 percent of the jobs in
the six-county area that comprises the Athens economic region included in Humphreys’ study. Of these jobs,
14,443 were related to salaries and institutional operating expenses paid by the university, 828 were related to
capital expenditures and 4,447 were related to students’ personal expenditures.
MANY UNIVERSITIES
DRAW SIGNIFICANT
RESOURCES FROM
OUTSIDE THE REGION
AND THE STATE. THESE
CONTRIBUTIONS MAY
COME FROM OUT-OFSTATE STUDENTS,
VISITORS TO THE CITY,
RESEARCH GRANTS, OR
OTHER FEDERAL AND
PRIVATE FUNDS.

Though most of the University of Florida’s 37,559 employees were located on
campus in Gainesville, employment impacts extended throughout the state
through county offices of the cooperative extension service, regional research
and education centers, and other off-campus programs. According to 1993–94
data, 4,486 of these employees were faculty, 9,915 were staff, 16,900 were
students employed part-time and 3,587 were employees at Shands Teaching
Hospital. An additional 2,672 worked at the University Medical Center in
Jacksonville. Excluding student workers, who are typically not counted on
employment rolls, University of Florida employees made up nearly 30 percent
of the total number employed in Alachua County. This figure does not account
for university employees who may live in adjacent counties.

Since both employment and expenditure impacts are directly correlated with the number of students enrolled
at an institution, according to Humphreys, one might reasonably expect the economies of university towns to
follow student demographics. In other words, when student populations increase, whether because of greater
accessibility of education (such as that produced by the Hope Scholarship in Georgia) or greater numbers of
university-aged students, the economies of university towns may be stimulated; conversely, a drop in student
enrollment because of dwindling numbers of university-aged students or factors that limit the accessibility of
university education could cause contraction.
Many universities draw significant resources from outside the region and the state. These contributions may
come from out-of-state students, visitors to the city, research grants, or other federal and private funds. In
1993–94, out-of-state students contributed over $31 million to the University of Florida in tuition and other
fees, approximately 33 percent of total fees of $95 million. Visitors to the University of Florida spent $19.2
million in 1993–94 to attend athletic, cultural, commencement and other activities. This estimate is
conservative, says the University of Florida’s David Mulkey, an economist who worked on the 1994 study.
Athletic events drew the most visitors by far — 327,500 of the 458,000 total (see sidebar). Federal research
support provided more than $94 million in 1993–94, and federal financial aid provided nearly $75 million to
students from within the state. The University of Alabama attracted $38 million in federal grants, most of
which was spent in the region.
Retirees may eventually become an important feature of the university town. The University of Florida has
recently planned a retirement village for alumni and faculty in Gainesville and reports a waiting list for
occupancy. While Florida has a special appeal for retirees, they are increasingly moving to other areas of the

Southeast as well. The University of Georgia is also aware of the potential to attract retirees and is currently
building a retirement center. Universities that include medical care also offer older residents state-of-the-art
health treatment facilities.
Live, graduate, pay taxes
The short-term benefits of the presence of a major academic institution are clearly significant for their host
communities, but long-term impacts may be even more important for the state and the region.
In a 1995 study, the University of Alabama’s Center for Business and Economic Research calculated the value
a degree from the university added to the lifetime income of its graduates. A graduate with a bachelor’s degree
would earn $408,696 more over his or her lifetime than a graduate with a high school degree; a graduate with
a master’s degree would earn $131,487 more than a graduate with a bachelor’s degree; and a graduate with a
doctorate would earn $236,797 more than a student with a master’s degree.
Return on investment is calculated by dividing the value added by the approximate cost of the degree. The
cost of the degree considers not only the actual cost of tuition and living expenses while in school but also the
cost of forgoing income appropriate to one’s educational level. The average annual return on investment for a
bachelor’s degree was 21.3 percent; for a master’s degree, 10.7 percent; and for a doctorate, 13.3 percent on
top of the previous degree.
While state institutions often rely heavily on tax dollars for the cost of their operation, they also generate taxes
through consumer spending and faculty and staff incomes, the higher incomes of their graduates and their
capacity for retaining individuals who might otherwise go outside the state to seek an education. University of
Alabama economists found that the state invested a total of $103.6 million in the graduating class of 1995.
Sales taxes and income taxes collected from faculty and staff during the period of the students’ residency
provided $63 million to help offset this amount. Taxes collected as a result of “value added” to the class of
1995 by the university would provide another $116 million, representing a gain by the state of over $75
million, or an average annual real rate of return of 4.3 percent. In 1995 about 65 percent of the University of
Alabama’s alumni resided in state while 66 percent of Florida’s alumni remained living and working in
Florida as of 1994.
Despite seasonal fluctuations, vulnerability to funding cuts and the effects of shifting student demographics,
universities appear to provide a relatively stable economic base for their host cities. Over the long term,
universities’ educated labor pools can be expected to draw technologically oriented and information-intensive
businesses. Although graduates’ higher salaries do not have a direct impact on local economies, graduates who
remain in the state will contribute to the states’ revenues that in turn support universities.

Visitors Provide Pay Dirt to University Towns
lag-waving, horn-honking carloads of rowdy sports fans may cause headaches for
residents of university towns, but they keep the wheels of the local economy
spinning through their expenditures on lodging, food, tickets and souvenirs. Visitors
may also be drawn to university towns for cultural events, graduations or special
occasions, but athletic events — particularly football games — exert the largest draw
and economic impact by far.
Visitors to the University of Alabama had a total economic impact of $57.5 million in
1998, according to recent studies by the University of Alabama’s Center for Business
and Economic Research. Of this amount, $42 million went toward attendance at
athletic events. The four-home-game football season alone drew $38.2 million, or
approximately $9.6 million per game. Each college football fan spent an estimated
$114 per game. Other sporting events such as basketball, baseball, gymnastics and
swimming drew about $3.8 million in visitor spending. These totals do not include the
expense of staffing athletic programs or building and maintaining facilities. Visitors
for commencement, alumni weekends, band concerts, academic and business
conferences, and educational programs provided about $15.5 million to Tuscaloosa’s
local economy.

The University of Florida drew nearly half-a-million visitors to its campus in 1993–
94, and they spent an estimated $19.2 million during their stay. Football drew the
biggest crowds — 240,000 fans spent $13.6 million to cheer for their favorite teams.
Another 87,000 visitors spent about $1.4 million to see basketball, baseball, track and
other sporting events. Cultural events attracted about 70,000 visitors and $800,000
dollars, while commencement alone accounted for 30,000 visitors who spent $2.2
million to celebrate graduations. The cost of staging these events is not included in the
analysis.
The athletic association at the University of Georgia generated expenditures of at least
$30 million in 1998. Of that amount, $6.3 million went to salaries and benefits, $6.9
million supported operating expenses and $4.3 million paid for construction projects.
Sports spectators were, however, the biggest spenders by far. In a conservative
estimate, economist Jeffrey Humphreys places football revenues at $11.4 million.
Basketball and gymnastic spectators spent a much more modest $1.4 million attending
events.

Dozens of regional trading blocs, touted by member countries as boons to global free trade, have
sprung up around the world in the past 15 years. But do such regional trading arrangements (RTAs)
promote or impede trade with countries outside the bloc? Supporters of RTAs argue that they foster
internal economic reform and liberalization that ultimately enhance global trade. One RTA, Mercosur in
South America, has been hard hit by internal squabbles, but ultimately Mercosur seems to be a viable
and effective trading bloc.
he emergence of Mercosur, which includes Argentina, Brazil, Paraguay and Uruguay (with Chile and Bolivia
as associate members), has led to deeper economic ties within South America and has coincided with a rapid
expansion of trade between the United States and the Mercosur countries. The success of Mercosur is an
important step toward the eventual development of a hemispherewide Free Trade Area of the Americas agreement.
Although there has been a series of trade disputes within Mercosur in recent months, tensions appear to be
subsiding, and Mercosur’s future appears bright.
Disagreement
After a year of deteriorating trade relations, the process of economic integration in the Southern Cone of South
America appears to be back on track. Mercosur experienced its worst crisis in its short history after Brazil’s currency
devaluation in January 1999. After the devaluation, Argentina and Brazil, which account for 90 percent of
Mercosur’s collective gross domestic product (GDP), found themselves involved in a series of trade disputes.
The devaluation sparked conflict within Mercosur over issues that had been simmering for some time. Brazil’s
currency lost as much as 42 percent of its value following the devaluation, while Argentina’s currency remained
pegged to the U.S. dollar. These developments made Argentine exports more expensive in Brazil and Brazilian
exports cheaper in Argentina. This disparity, along with an economic slowdown in the region, contributed to a 28.5
percent drop in Argentine exports to Brazil in 1999; Brazilian exports to Argentina fell 20.5 percent during the same
period.
Nevertheless, Argentina still maintained a $325 million trade surplus with Brazil. After the devaluation, some
Argentine firms complained that they could not compete with cheaper Brazilian imports and requested government
protection. The government responded by imposing import restrictions on Brazilian footwear, paper, pulp and
textiles. Brazil protested the measures, and before long the two countries were engaged in a series of trade disputes
that have now been mostly resolved, although a number of Argentine firms continue to petition the government for
protection.

Perhaps the most sensitive sector of trade within Mercosur has been the automotive sector. Commerce in autos
between Argentina and Brazil accounts for more than 30 percent of bilateral trade flows. The 58 percent drop in
Argentine auto exports in 1999, largely due to a decline in exports of auto parts and components to Brazil,
underscored the urgency of reaching an agreement. The situation was further aggravated by reports in the Argentine
press that many firms were relocating at least part of their Argentine production to Brazil in order to take advantage
of lower production costs.
The fact that several Brazilian states had been developing incentive packages to attract automotive firms to relocate
production to their states caused further tension within Mercosur. The so-called fiscal war became a significant point
of contention within Brazil when Ford decided to open a new plant in the northeastern state of Bahia rather than in
the state of São Paulo, where it already had production facilities. In addition to causing tension between individual
Brazilian states, the Argentine government complained that the incentives provided an unfair advantage to Brazilian
producers. Some Argentine firms cite Brazilian state subsidies when they argue that their government should provide
similar incentives in Argentina.
Underlying problems
The tensions that emerged within Mercosur during these trade disputes in 1999 underscored Mercosur’s main
structural weaknesses. First, Mercosur lacks an adequate institutional framework to deal with trade disputes between
individual members. So when Brazil reached an impasse with Argentina over restrictions on textiles, it took the
dispute to the World Trade Organization because there was not an adequate dispute resolution process within
Mercosur.
Furthermore, Uruguay and Paraguay periodically voice objections to Argentina and Brazil’s dominance of Mercosur
and their tendency to reach bilateral policy agreements without consulting the two smaller countries. Uruguay
produces only about 2 percent of Mercosur’s GDP while Paraguay produces about 1 percent (see Chart 1). The most
recent example of this problem came when Brazil and Argentina were negotiating over the automotive sector.
Uruguay objected to being excluded from the process, and both Uruguay and associate member Chile claimed that
the final agreement did not serve their national interests. The fact that there is such a significant disparity between
the sizes of the Mercosur economies means that Argentina and Brazil will continue to dominate Mercosur’s policy
agenda, and such dominance will likely lead to periodic disagreements with the smaller countries.
CHART 1
Country Share of Mercosur GDP

The most serious policy obstacle to the process of
integration within Mercosur has been the general
failure to coordinate macroeconomic policies. As
discussed earlier, Argentina’s and Brazil’s disparate
exchange rate policies took their toll on trade relations
within Mercosur in 1999. The Mercosur member
nations have discussed coordinating common deficit,
debt and inflation targets, much like the European
Union did in the Maastricht Treaty. Such an
arrangement could eventually pave the way for a
single Mercosur currency. But reaching such policy
goals does not appear likely anytime soon given
disagreement over exchange rate policy and the lack
of progress in fiscal harmonization. For example,
Argentina is not considering departing from its fixed
exchange rate policy, which has been in place since
1991, and Brazil has no plans to alter its flexible
exchange rate. Consequently, any move to a single
currency appears to be a long way off. Meanwhile,
there is concern in Argentina over the potential fallout
from further devaluation of Brazil’s currency.

Reconciliation
Despite the recent tensions within Mercosur, there are
signs that the crisis has eased. The recent elections of
President Fernando De la Rua in Argentina and Jorge
Source: Economist Intelligence Unit
Batlle in Uruguay have brought a renewed impetus to
“re-launch” Mercosur. In early 2000, Mercosur’s
leaders agreed to take steps toward creating a permanent tribunal for dispute settlement. They also declared that they
would move toward greater macroeconomic coordination but, in the meantime, would not let the differences in

Argentina’s and Brazil’s exchange rates serve as an obstacle. The Mercosur governments have plans to share and
standardize macroeconomic data and set common inflation and fiscal goals in order to help avoid shocks like
Brazil’s 1999 devaluation. Furthermore, Brazil’s President Cardoso has issued a call for more cross-investment and
joint marketing of Mercosur-produced goods.
Mercosur’s re-launching was further boosted by the announcement in late March that, after several years of
negotiation and conflict, Argentina and Brazil agreed to establish a common automotive trade policy. The new rules
will gradually reduce restrictions on trade in cars and trucks before eliminating restrictions entirely in 2006. Under
the agreement, cars imported from outside Mercosur will face a 35 percent tariff, and for cars to be considered
manufactured in Mercosur, they must have 60 percent Mercosur content.

What Is Mercosur?
hile Mercosur officially came into being with the Treaty of Asunción in 1991, it
had its origins in the Latin American Free Trade Association (1960) and the
Latin American Integration Association (1980). In 1988, Argentina and Brazil set the
goals of eliminating tariff barriers, harmonizing macroeconomic policies and
establishing a common market between the two countries. The arrangement, which
eventually became Mercosur, came to include Uruguay and Paraguay. Chile and
Bolivia became associate members in 1996 and 1997, respectively, and have signed
free trade agreements with Mercosur.
Mercosur represents a combined market of 210 million people, with a GDP of over a
trillion dollars. The Mercosur countries produce 50 percent of Latin America’s GDP
and contain 43 percent of its population and 59 percent of its total landmass. The per
capita GDP of its four countries is 30 percent higher than that of Latin America as a
whole. Argentina and Brazil dominate Mercosur, accounting for over 90 percent of the
trading bloc’s GDP.
Mercosur operates a customs union with largely tariff-free intra-bloc trade. It operates
around a set of common external tariffs that range between 0 percent and 20 percent
and apply to around 90 percent of tradable goods. Each country can maintain a list of
exceptions of up to 300 items, but these are scheduled to be phased out by the end of
2000. There is an additional list of exceptions, including autos, sugar,
telecommunications equipment, computer equipment and capital goods, that are
scheduled to converge toward the common external tariff between 2004 and 2012. The
average tariff for Mercosur member countries is 14 percent.
The ultimate goal of Mercosur is to create a common market that would allow the free
mobility of all production factors and goods and services as well as the harmonization
of macroeconomic policies and the elimination of all tariff barriers. In addition to
being a trading bloc, Mercosur also played an important political role in the region
when its member countries acted in unison to oppose military coups in Paraguay and
Ecuador.

Economic recovery
Recent economic indicators suggest that the region’s economies are recovering, and improved economic
performance will certainly contribute to relieving some of the trade disputes within Mercosur. Argentina’s economy
is expected to grow 3.4 percent in 2000 compared to –3.1 percent in 1999 while Brazil’s economy is projected to
grow 4 percent compared to just 0.5 percent in 1999. In March 2000, Argentine exports to Brazil were up 26.4
percent compared to March 1999 while automobile production was up 70 percent. Furthermore, with the automotive
agreement settled and a renewed commitment from the Mercosur governments to coordinate macroeconomic
policies and strengthen Mercosur’s institutional framework, it appears that relations within Mercosur have
improved.
Looking ahead, Mercosur could expand if Chile or Bolivia seeks full membership. Chile has expressed serious
interest in becoming a full member of Mercosur, but its membership is unlikely to come about under the current
tariff structure. Chile is engaged in a multiyear process of lowering its external tariffs, which were cut from 15 to 11

percent in 1991 and are currently scheduled to drop to 6 percent in 2003. Mercosur’s average common external tariff
remains significantly higher, at 14 percent. Bolivia has expressed interest in full membership but only as a long-term
goal. Bolivia is already a member of the Andean Community, which is itself negotiating an agreement with
Mercosur.
The negotiations with the Andean Community are an example of how Mercosur has sought to expand through
negotiating trade agreements with other regional trading blocs. Participating in a hemispherewide Free Trade Area of
the Americas (FTAA) agreement is a goal for Mercosur. But while FTAA negotiations appear stalled, Mercosur is
actively pursuing trade agreements with the Andean Community, the European Union (EU) and South Africa.
Negotiations with the EU aim to liberalize trade in
goods and services by 2005. Mercosur imports from
the EU quadrupled from U.S.$6.1 billion to $26.6
billion between 1990 and 1998 while exports grew
more slowly, from $14.4 billion to $20 billion (dollar
amounts are not inflation-adjusted). The Mercosur
countries want greater access to the EU market for
their agricultural products, and Mercosur’s demand
that the EU lower agricultural subsidies will no doubt
be a politically sensitive bargaining point as
negotiations move forward.

CHART 2
Annual Exports to Argentina, Brazil, and Chile
from Sixth Federal Reserve District States, 1992–99

The United States and Mercosur
The renewed spirit of cooperation within Mercosur is
a positive development for the United States. In recent
years U.S. foreign direct investment in the Mercosur
Source: Regional Financial Associates
countries and exports to the region have grown
significantly. Foreign direct investment in Argentina,
Brazil and Chile reached $46 billion in 1998, while U.S. exports to the Mercosur countries have grown almost 250
percent since 1991. South America is one of the few areas where the United States has run a trade surplus in recent
years.
The Southeast is no exception to the trend. Exports to Argentina, Brazil and Chile from the Sixth Federal Reserve
District states (Alabama, Florida, Georgia, Louisiana, Mississippi and Tennessee) have grown considerably since
1992 (see Chart 2). Exports to Brazil more than tripled from 1992 through 1998 while exports to Argentina grew
nearly 80 percent during the same period.
The range of exports to the Mercosur countries from the Southeast includes both
manufactured goods and primary products. Exports of chemical products, primary
metals and tobacco products to Mercosur expanded rapidly in the 1990s. Tennessee
saw tremendous growth in exports of paper and rubber and plastic products to
Argentina; in Mississippi, exports of transportation equipment to Brazil surged. As in
the rest of the country, overall levels of exports from the Southeast to the Mercosur
countries declined in 1999. But current indicators suggest that exports to the region
will recover in 2000.

THE RANGE OF EXPORTS
TO THE MERCOSUR
COUNTRIES FROM THE
SOUTHEAST INCLUDES
BOTH MANUFACTURED
GOODS AND PRIMARY
PRODUCTS. EXPORTS OF
CHEMICAL PRODUCTS,
PRIMARY METALS AND
TOBACCO PRODUCTS TO
MERCOSUR EXPANDED
RAPIDLY IN THE 1990S.

A promising future
The year 1999 was by no means easy for Mercosur, but it is important to place it in
perspective. If one considers that only 10 years ago Mercosur did not exist and the
region was emerging from the “lost decade” of the 1980s (characterized by slow growth and the debt crisis),
remarkable progress has been made. Governments in Latin America have now ended decades of closed,
protectionist, state-led development and embraced freer trade and open markets. Inefficient state-owned enterprises
are being privatized, and the region has reopened itself to foreign investment. Inflation has been lowered
dramatically, and trade has expanded rapidly. From this perspective, recent trade disputes within Mercosur seem like
a minor bump in the road, and there is every reason to believe that economic integration within Mercosur will
deepen.
This article was written by Stephen Kay, a senior economic analyst in the Atlanta Fed’s Latin America Research Group.

Regional Versus Multilateral Trade
Which Is Better?
egional trading arrangements (RTAs) like Mercosur and NAFTA have sprung up
all over the globe in recent years: 46 were created between 1986 and 1994. But
do RTAs contribute to or detract from global free trade? There is an ongoing debate
over this issue. A fundamental principle of free trade is that countries cannot
discriminate against foreign producers. But while RTAs liberalize trade within the
bloc, by definition they discriminate against countries outside the trading area. The
World Trade Organization recognizes that world trade can be enhanced through RTAs
but states that the purpose of such agreements should be to facilitate trade within the
bloc and not to raise barriers to trade with countries outside the bloc.
Furthermore, trading blocs simultaneously create trade, which is considered welfareenhancing, and divert trade, which has a welfare cost. Trade creation takes place when
lower-cost producers within the bloc replace a higher-cost domestic producer while
trade diversion takes place when a lower-cost nonmember country is replaced by an
otherwise higher-cost domestic producer protected by the trading bloc’s barriers. If the
amount of trade creation exceeds the amount of trade diversion, the members of the
trading bloc are considered better off. If not, the members are worse off.
Economists are currently engaged in a debate over the merits of RTAs. Some argue
that RTAs are biased toward trade diversion and that the current trend toward
regionalism is creating obstacles to deepening global free trade. Others see RTAs
much more positively, arguing that they are part of a deeper process of structural
economic reform and a means through which countries undergoing economic
liberalization can enter into the global trading system.
As these debates rage on, RTAs continue to thrive. For example, trade within
Mercosur expanded by over 300 percent from 1990 through 1998, and Mercosur is
currently negotiating a trade agreement with the European Union.

Research Notes & News highlights recently published research as well as other news from the Federal
Reserve Bank of Atlanta. For complete text of summarized articles and publications, see the links
below.

Looking at social security reform in Mexico
Recent projections of a number of countries with pay-as-you-go pension systems have shown significant future
actuarial imbalances. As a consequence, several of these countries, including Mexico, are engaged in redesigning
their pension systems. From the U.S. perspective, Mexico’s reform is of particular interest because of the similarities
of its program to some proposals for the U.S. system. The Mexican government claims that it has started a move to a
fully funded system. As proof, it points out that since 1997 Mexico has adopted a privately managed definedcontribution system. However, a pension system can be privately administered without being fully funded. It is the
adoption of a fully funded system that would have the most significant macroeconomic effects in an economy: an
increase in domestic savings and a drop in interest rates.
In a recent article, Marco Espinosa-Vega and Tapen Sinha contend that after reviewing the new system, one cannot
tell whether the government is switching to a fully funded system. They review some potential gains and losses of
the change in style of the system. However, they argue that regardless of whether the reform is a change of style or
substance, additional information is required to effectively assess its net gains. They conclude that Mexico is in dire
need of further research to guide it through its decision of whether and how to switch to a fully funded pension
system.
Economic Review
First Quarter 2000

Atlanta Fed to publish Latin American research volume
The task of balancing public sector budgets and reducing debt burdens is paramount among the economic reforms
under way in Latin America. In pursuit of greater fiscal balance, policymakers have cut spending, raised taxes and
relied upon revenue from privatization. This goal has become all the more pressing as governments struggle with the
aftermath of the global economic crisis.
To offer a perspective on these issues, the Atlanta Fed sponsored the conference Sustainable Public Sector Finance
in Latin America in November 1999. Research discussed at the conference included papers and commentaries by
leading experts on the varied aspects of fiscal policy, including political constraints, administrative reform, social
spending, efforts to confront fiscal imbalances, deficit finance, and international lending and capital flows.

As a follow-up to the Atlanta Fed’s conference, the bank is preparing a volume of conference proceedings. The free
volume will be available in July. If you would like more information about the topics covered in this collection, visit
the Atlanta Fed's Web site at www.frbatlanta.org/research/larg/index.htm. You may also order the publication online.

Atlanta Fed updates currency and coin brochure
Have you ever wondered how U.S. currency is printed, how much money is in circulation or what the symbols on
your cash and coins stand for? These are just some of the topics covered in the Atlanta Fed’s new Dollars and Cents
brochure, which updates and replaces two discontinued brochures — Fundamental Facts about U.S. Money and
Counterfeit?

Dollars and Cents includes all the historical information from
the Fundamental Facts about U.S. Money brochure, which,
since its introduction in the 1980s, has been the Atlanta Fed’s
most popular publication and the most visited page on its
Internet site. In addition to an updated look, Dollars and Cents
features the new U.S. currency and coin designs, including the
new state quarters, the golden dollar coin and the new $5 and
$10 bills.
Other topics include the types of U.S. money, currency features,
coin information, the circulation of money, tips for spotting
counterfeit currency and rules about reproducing money. Dollars
and Cents is also available on the bank’s Web site at
www.frbatlanta.org/publica/brochure/fundfac/money.htm.
To order copies of this brochure (1–50 copies free), contact the
Atlanta Fed’s Public Affairs Department, 104 Marietta Street,
N.W., Atlanta, Georgia 30303-2713; call 404-521-8020; or use
the online order form.

ATLANTA FED DOLLAR INDEX

After declining slightly in January, the dollar rebounded
somewhat in February and remained unchanged in March
versus the 15 major currencies tracked by the Atlanta Fed.
During the three-month period, the dollar’s performance
versus the currencies in most of the subindexes was mixed,
but its net gains were strongest against currencies in the
European subindex, which includes the European Monetary
Union, Switzerland and the United Kingdom.
Note: For more detailed, monthly updates and historical data on the
dollar index, see the Atlanta Fed's World Wide Web site at
www.frbatlanta.org/publica/dol_index/index.html.

New video on the Federal Reserve
“Money — it certainly does make the world go around. And the reason it’s able to do so is that we trust these little
pieces of paper,” says well-known radio and television commentator Charles Osgood, holding up a $20 bill. Thus
begins a new video that tells the story of how the Federal Reserve System does its work.
Building on this theme of trusting our money, The Fed Today explains that the Federal Reserve System was created
by an act of Congress in 1913 to establish and maintain the public’s confidence in the U.S. monetary and banking
system. That mission has grown over time to include responsibility for providing a stable, healthy and growing
economy.
The video also discusses the Fed’s public/private structure as a decentralized central bank, with the Board of
Governors representing the public side and the 12 Federal Reserve Banks representing the private sector.
The Fed’s three main functions — setting monetary policy, supervising and regulating banks, and providing payment
services for financial institutions and the government — are also addressed. The discussion of monetary policy
includes a look at the Federal Open Market Committee and how it guides open market operations. The video also
examines the Fed’s role in the payments system and how that system has evolved through technological advances.
The Fed Today was commissioned by the Federal Reserve System to serve as an educational tool for teachers and the
general public. To order the free 15-minute video from the Atlanta Fed, call 404-521-8020.

THE STATE OF THE STATES
Recent events and trends from the six states of the Sixth Federal Reserve District

Alabama
• Fiat of Turin, Italy, announced that it will open a new automotive

•
•

parts plant to be located in Sylacauga, Ala. The new facility will
produce engine parts for Ford, General Motors and Daimler
Chrysler and employ about 400 workers when operations begin in
2002.
Honda Motor Co. recently announced a decision to build sport
utility vehicles at its new $400 million plant in Lincoln. Production
is slated to begin in 2001.
Strong demand for prescription drugs is benefiting some regional
drug manufacturers. Vintage Pharmaceuticals Inc. announced
that the company will expand its Huntsville plant and hire more
than 300 additional employees. Capital investment for the project
is $56 million. The plant will manufacture tablet and capsule
medicines.

Florida
• Exports to Brazil, Florida’s top export market, are up 7 percent

•

this year as the country emerges from a business slump. Florida
officials have recently signed 30 firms for a trade show in São
Paulo this summer. Officials estimate that exports to Brazil this
year could top $6 billion, matching the peak level of the early
1990s. Among the products expected to sell well in Brazil are
high-tech goods, pharmaceuticals, medical supplies and sports
equipment.
Bookings for south Florida hotel and motel rooms may result in a
record summer season, according to some reports. Miami posted
the highest occupancy rates and the third-highest room rates in
the nation for the first quarter. About 7,900 new hotel rooms
valued at $1.4 billion are being planned for Miami, most of which
are in the luxury category, according to the Greater Miami
Convention and Visitors Bureau.

Georgia
• Strong orders continue to boost the bottom line for Norcross, Ga.-

•

based Scientific Atlanta, the second-largest manufacturer of
television set-top boxes for cable. The company is ramping up
production because of strong demand.
Savannah has been selected as a new import distribution center
for Dollar Tree Stores Inc. The company’s $35 million investment
will join other distribution giants in Savannah, such as Pier 1
Imports and Home Depot.
Travel and tourism officials are confident that a newly opened
convention center in Savannah will attract more visitors to the

city. The $100 million funding for the center, located on
Hutchinson Island, came from federal, state and local
governments and covers development of the island’s
infrastructure and ferries to take visitors to the city’s historic
district across the Savannah River.

Louisiana
• Jazzland theme park opened this spring. The $100 million

•

project, located near New Orleans, features Louisiana themes.
The 140-acre park features 31 rides and specific theme areas
including a music hall, gardens and Mardi Gras simulation.
Jazzland officials expect about 1.5 million visitors for the park’s
first season. Opened by Ogden Entertainment, Jazzland was sold
to Alfa Alfa Holdings, S.A., of Greece at the end of May.
The oil industry in the state continues its recent improvement. As
a result, Louisiana’s rig count rose for the eighth consecutive
month to 180 in April from 176 in March. The rig count a year ago
was 135. Some reports have indicated that smaller drilling
companies are having problems keeping their rigs running
because of a labor crew shortage.

Mississippi
• Mississippi’s legislature approved a multiyear teacher pay raise

•

package that commits the state to a six-year program to raise the
average teacher salaries to the regional average by the year
2006.
More hotel rooms, increased marketing and additional flights to
the Gulfport-Biloxi Airport helped produce record-setting casino
revenue figures for the first quarter in Mississippi. Revenues were
up 14 percent for the first three months of the year over the
record set for the first quarter of 1999. New hotels are slated to
continue to come on line on the coast in the near future.
Litton Ingalls Shipbuilding in Pascagoula announced the largest
expansion of the shipyard since it was built in 1968. The
company has an agreement to design and likely build at least two
1,000-passenger cruise ships. A new ship systems service center
will employ 700.

Tennessee
• High fuel prices appear to be affecting some manufacturers.

•

Orders are reportedly soft for new truck tractors for Nashville’s
Peterbilt Corp. The company is reducing production of new
tractors and is laying off an undisclosed number of workers.
Stanley Tools, a manufacturer of items such as hammers and
saws, will close its Shelbyville, Tenn., facility, idling 185 workers.
The production lines are being moved to Mexico so that the
company can compete with low-cost producers.
Nissan North America’s facility in Smyrna has increased its
factory workweek, including Saturday work, to keep up with
demand for the Xterra sport utility vehicle and the Frontier, a fourdoor pickup truck. General Motors will invest $1.5 billion in
Saturn’s Spring Hill plant to launch a Saturn sport utility vehicle.
Production is expected to begin next year.

Compiled by the regional section of the Atlanta Fed’s research department

Southeastern Economic Indicators
United
States

1,159.4

2,702.7

18,753.1

130,462.7

–0.1

0.1

0.5

0.7

4.1

0.3

1.2

1.5

2.9

2.2

605.4

186.8

243.6

507.2

2,396.7

18,367.7

Georgia Louisiana Mississippi

2000Q1

1,945.5

7,059.9

3,981.0

1,904.7

% change from

1999Q4

0.4

1.0

% change from

1999Q1

1.7

4.2

2000Q1

366.2

487.5

% change from

1999Q4

–0.1

0.4

0.9

–0.3

0.2

–0.5

0.2

0.0

% change from

1999Q1

–1.4

–0.8

1.2

–1.5

–0.9

–0.1

–0.3

–0.9

2000Q1

4.6

3.7

3.5

4.9

5.4

3.5

4.0

4.1

Rate as of

1999Q4

4.7

3.8

3.7

4.5

5.1

3.8

4.0

4.1

Rate as of

1999Q1

4.6

4.0

4.2

5.7

5.1

4.2

4.4

4.3

Manufacturing Payroll Employment
(thousands)a

Civilian Unemployment Rate

Single-Family Building Permits (units)b

2000Q1

17,402

108,073

69,965

14,054

9,339

28,177

247,010

1,276,555

% change from

1999Q4

4.1

1.2

–2.6

7.1

7.6

–7.2

–0.2

4.9

% change from

1999Q1

9.2

0.5

–2.2

–3.9

–10.6

–7.1

–1.4

0.3

2000Q1

3,287

39,905

27,632

1,474

1,190

9,519

83,008

444,438

1999Q4

37.8

–38.3

–1.6

–33.2

–69.5

1.6

–24.9

1.7

1999Q1

–43.1

–39.4

–68.9

–62.0

–48.9

98.0

–16.1

–5.0

1999Q4

101.9

434.4

217.4

101.2

58.1

143.5

1,056.5

7,959.0

% change from

1999Q3

1.2

2.1

2.2

1.9

2.0

1.6

1.9

% change from

1998Q4

4.0

6.1

6.7

3.1

4.3

5.7

5.6

5.8

Atlanta Birmingham Jacksonville

Miami

Nashville

New
Orleans

Orlando

Tampa

Multifamily Building Permits (units)b
% change from
% change from
Personal Income ($ billions)

Total Payroll Employment (thousands)a

2000Q1

2,210.6

490.9

548.2

1,004.3

678.5

622.6

911.8

1,192.3

% change from

1999Q4

0.8

0.9

0.8

0.1

1.1

0.3

1.3

1.4

% change from

1999Q1

5.1

2.8

3.0

2.3

2.5

–0.1

5.9

4.7

2000Q1

2.9

3.1

5.6

2.5

4.5

2.6

2.8

Rate as of

1999Q4

2.9

3.0

3.2

5.6

2.6

4.4

2.8

2.9

Rate as of

1999Q1

3.3

2.7

3.0

6.7

2.8

4.4

3.0

2.9

Civilian Unemployment Rate

6th
District

Florida

Total Payroll Employment (thousands)a

Tennessee

Alabama

Seasonally adjusted
Seasonally adjusted annual rate

SOURCES: Payroll employment and civilian unemployment rate: U.S. Department of Labor, Bureau of Labor Statistics. Initial unemployment
claims: U.S. Department of Labor, Employment and Training Administration. Single- and multifamily building permits: U.S. Bureau of the
Census, Construction Statistics Division. Personal income: Bureau of Economic Analysis. Quarterly estimates of all construction data reflect
annual benchmark revisions. All the data were obtained and seasonally adjusted by Regional Financial Associates. Small differences from
previously published data reflect revisions of seasonal factors.
For more extensive information on the data series shown here, see the Southeastern Economic Indicators.

Total Payroll Employment

Manufacturing Payroll Employment

Civilian Unemployment Rate

Single-Family Building Permits

Multifamily Building Permits

Personal Income

Southeastern Manufacturing Survey
Below are highlights from the monthly survey of Southeastern manufacturers conducted by
the Federal Reserve Bank of Atlanta in April.
•Current indicators of manufacturing activity in the region remained soft in March, continuing a pattern
observed since the end of 1999.
•The current production index posted a moderate rise to 10.4 after a dip of nearly equal magnitude to 6.8
in February. Other current activity indexes were soft.
•Most of the outlook indexes declined in March following some weakening in February, but levels
generally remained in the moderate range. The outlook index for production fell to 23.4 from 35.9 in
February. Outlook indexes for shipments and new orders posted similar declines but remained
moderately strong. Southeastern manufacturers still anticipate maintaining a close watch on inventory
levels even though outlook inventories were up marginally. The outlook index for capital expenditures fell
sharply to its second-lowest level for the series but remained slightly positive.
•Current price indexes rose somewhat, continuing a recent trend of relatively firm price indexes. The
prices paid index was at its highest level since April 1995. The outlook indexes for prices received and
prices paid were down somewhat after high levels in January and February.

SOUTHEASTERN MANUFACTURING INDICATORS
(through April 2000)

For more complete, monthly information see the Southeastern Manufacturing Survey index.

Full text of EconSouth : Second Quarter 2000, Volume 2, Number 2

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