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December 1990 m i: FEDERAL RESERM RANK o f SELO US Will GSEs Go the Way o f S&Ls? Rollin’ on the Mississippi: The Barge Industry The Business o f Services in the Eighth District THE EIGHTH FEDERAL RESERVE DISTRICT CONTENTS_____________________________________________________________________________ Banking and Finance Government-Sponsored Enterprises: Safe and S ound?........................................................................................... 1 Agriculture The Mississippi River System and Barge Industry..................................................................................................6 Business District Services: What They Are and Why They Have G row n........................................................................ 10 Statistics ........................................................................................................................................................... 14 Pieces of Eight—An Economic Perspective on the 8th District is a quarterly summary of agricultural, banking and business conditions in the Eighth Federal Reserve District. Single subscriptions are available free of charge by writing: Research and Public Information Department, Federal Reserve Bank of St. Louis, Post Office Box 442, St. Louis, MO 63166. The views expressed are not necessarily official positions of the Federal Reserve System. 1 %)vernmentSponsored Enterprises: Safe and Sound? by Michelle A. Clark Thomas A. Pollmann provided research assistance. the wake of the costly savings and loan (S&L) bailout, policymakers are assessing the like lihood that the federal government will have to make good on more of its contingent liabilities. As part of a comprehensive effort to assess the federal government’s exposure to losses from federally assisted credit and insurance programs, Congress and the Bush Administration are examining ways to bolster the safety and soundness of governmentsponsored enterprises (GSEs). Credit extended by ^ ^ S E s , private corporations chartered by Congress |^ « :h a n n e l funds to sectors of the economy deemed ^ ^ r t h y of special support, has been the fastestgrowing component of the almost $6 trillion in federal insurance programs, direct loans and loan guarantees outstanding. This article, the second in a two-part series, describes both the primary con cerns policymakers have about GSE operations and some preliminary recommendations to lessen the likelihood of another government, and hence, tax payer bailout.1 The Reform Effort A number of government agencies and private companies are involved in the effort to quantify the federal government’s potential exposure to losses from GSE operations. Because of the special ties GSEs have to the federal government, investors in GSE-guaranteed securities and debt issues assume the government will assist a financially troubled GSE and its debt holders. This well-founded assumption allows GSEs to borrow funds to finance their activities at much lower rates than private-sector corporations with similar risk Characteristics. Thus, the market discipline that Peeps borrowing costs consistent with expected returns and risks for private-sector corporations is generally absent in GSE operations, and that, most analysts agree, is the crux of the problem. As instructed under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), the Treasury Department and the Gov ernment Accounting Office (GAO) have issued reports outlining the various risks GSEs face and how these risks can be mitigated.2 The general reform proposals of both agencies are similar; more specific recommendations are expected from the agencies in 1991. Moody’s and Standard & Poor’s, two private bond rating agencies, are also involved in the debate about GSE reform, as some proposals would require GSE debt securities to qualify for the agencies’ highest ratings absent the government’s implicit guarantee (see shaded in sert). Congress is expected to tackle the issue of GSE reform after completing a review of the gov ernment’s deposit insurance schemes in early 1991. In addition to earning profits for their stock holders, GSEs, unlike purely private firms, are re quired to satisfy a public policy mandate. These objectives are achieved by taking risks. Like pure ly private financial firms, GSEs are confronted with four major types of risk: changes in market interest rates (interest rate risk); loan defaults and other credit problems (credit risk); external business conditions, such as natural disasters, industry com petition, changes in technology, demographics and legislation (business risk); and poor management decisions (management risk). The degree to which each GSE is subjected to these risks varies substantially. Fannie Mae, for example, faces much more interest rate risk in its operations than Freddie Mac because a large por tion of the mortgages Fannie Mae purchases are retained in its portfolio. Both the GAO and the Treasury Department studies indicated that each GSE has in place internal methods for evaluating the current levels of the various types of risk, although neither agency evaluated the adequacy of these internal controls.3 Both agencies concluded that, given the con tinued close ties between GSEs and the federal government and a history of government assistance to troubled GSEs as well as large banks, companies and municipalities, the federal government would today undoubtedly assist a financially strapped GSE.4 The GAO also suggests that closure, the only alternative to assisting a GSE, is not a viable option because a GSE failure would threaten its public policy mission and would possibly threaten the solvency of other financial institutions that in vest in GSE securities.5 Given this likely govern ment protection, various proposals are being con sidered to establish more control over GSE activi ties. In their initial studies, both the Treasury De partment and the GAO suggested two primary areas for reform: minimum (ideally risk-based) capital regulations and increased government supervision of GSE activities. 2 Rating the GSEs Of the various reform proposals outlined in the Treasury Department and GAO studies on GSEs, none has garnered more attention than the Treasury Department’s proposal to require GSEs to obtain the equivalent of a triple-A rating from at least two major credit rating agencies, ignoring the government’s implicit guarantee. The debt securities of the major GSEs are al ready rated by Moody’s and Standard & Poor’s (S&P); however, the current ratings are highly dependent on the implicit government guarantee underlying the debt issues. Given this guarantee, most GSE debt already is rated Aaa (Moody’s) or AAA (S&P). Analysts believe that under the new ratings proposal, only Sallie Mae and the Federal Home Loan Banks would get the agen cies’ top ratings. Fannie Mae’s and Freddie Mac’s debt securities would probably be rated at the lower end of investment grade, while Farm Credit System debt would be rated at the high end of speculative grade debt. In making its proposal, the Treasury Depart ment asserted that a triple-A rating is appropriate “ because it represents the most safe and sound level of credit quality, and thereby the best pro tection from potential risk.” The Treasury Department also believes the ratings requirement would provide a useful measure of the value of the government’s implicit subsidy to each GSE. For instance, if a GSE were rated below triple-A absent the government’s implicit guarantee, the interest rate portion of the subsidy would be the difference between the rate the GSE actually borrows at and what a private corporation would have to pay with the same rating. Any GSE not meeting the triple-A requirement would be re quired to submit a business plan to its safety and soundness regulator outlining the actions it plans to take to achieve a triple-A rating rating GSE Capitalization In analyzing ways to improve the safety and soundness of GSEs, both agencies drew parallels to financial institution regulation because the gov ernment is exposed to similar risk characteristics with both types of entities. One of the major ele ments of bank (and thrift) regulation is minimum capital requirements. An organization’s capital usually consists of loan loss reserves and equity capital. Loan loss reserves include funds set aside to cover expected losses, while equity capital—the within five years. This regulator would also be authorized to levy sanctions such as a limit on GSE growth, restrictions on dividend payments and the withdrawal of benefits like the GSE’s federal charter or the exemption of GSE securities from SEC registration. Opponents of this proposal, which include a number of housing industry supporters, claim this ratings requirement will have an adverse ef fect on the markets GSEs are supposed to sup port, namely housing, education and agriculture. Mortgage lenders argue that borrowers would ultimately pay higher mortgage rates as the costs of meeting the requirement are passed from Fannie Mae and Freddie Mac to lenders. Some opponents argue that very few banks have triple-A ratings, and that requiring GSEs to meet a higher standard than other financial in stitutions would put them at a decided competi tive disadvantage. In its GSE study, the GAO did not specifically endorse the Treasury Department ratings proposal, stating only that it was an op tion worth considering. The House and Senate Banking Committees, which will be responsible for drafting legislation on GSE reform, have sought comment on the proposal from various groups, including the two ratings agencies. While Standard & Poor’s has stated it would be able to rate GSE debt ignoring the government guar antee, Moody’s has stated it cannot. In a letter to House Banking Committee Chairman Henry Gonzalez, Moody’s Director Thomas McGuire said, “ a rating formed on the basis of totally hypothetical and unrealistic assumptions would be a somewhat spurious product. . . (these ratings) would not, we believe, have the infor mation content or predictive value of real bond ratings.” The debate on this proposal, in addi tion to other private market mechanisms to eval uate GSE risk, will continue well into 1991. owners’ stake in the enterprise that includes stock, paid-in capital and retained earnings—is held to cover unexpected losses. For private firms without ties to the government, the amount of capital held is influenced by the credit markets; for example, firms with too little capital to cover their risks pay higher interest rates to borrow than well-capitalized firms. a The agencies believe, and most financial ana-® lysts concur, that equity capital represents the best measure of protection against loss. One of the ma jor goals of the recently implemented risk-based capital requirements for banks and thrifts was to 3 I increase the amount of equity capital these institu tions hold. Regulators have been concerned that the subsidy provided to financial institutions in the form of deposit insurance encourages excessive risk-taking; requiring banks to have more of their own equity at stake lessens the likelihood of in solvency, and hence the likelihood that FDIC funds will be used to pay off depositors. Commercial bank equity capital ratios are higher, however, than those of the major GSEs. As indicated in table 1, only the Federal Home Loan Banks (FHLBs) had average equity-to-assets ratios above that of commercial banks during the past five years. Both Freddie Mac and Fannie Mae have consistently recorded equity capital ratios significantly below what many analysts would con sider prudent levels. Although Fannie Mae, Fred die Mac, the Farm Credit System and the FHLBs all have minimum regulatory capital requirements, the GSEs are given wide latitude in deciding what to include in capital. Senior management within each GSE determines target capital levels based on various “ stress tests” run for the current level of credit and/or interest rate risk. The GAO concluded that Fannie Mae’s and Freddie Mac’s capital requirements, in particular, offer little protection against risk-taking. The two housing GSEs broadly define capital to include subordinated debt as well as loan loss reserves, so that equity capital is a minor portion of total capital. The GAO argues that GSE subordinated debt should be treated as a liability, not as equity, because it protects the government from losses on ly if the government responds to a GSE crisis by allowing subordinated debtholders to suffer losses. Moreover, these GSEs’ minimum capital re quirements do not incorporate the risk of their substantial off-balance sheet activities, their ex posure to interest rate risk or the different risks in volved in varying types of mortgage investments. Without outlining specifics, both agencies assert that requiring GSEs to boost capital levels— particularly equity capital—would give the GSEs stronger incentives to monitor and control their risk-taking. Government Supervision Both the Treasury Department and the GAO recommend a substantial increase in federal moni toring of GSE activities. One of the agencies’ pri mary concerns about GSE operations is the sheer size of the government’s implicit guarantee and the tremendous growth in this potential liability during the past 20 years. As indicated in table 2, GSE presence in U.S. credit markets has grown tremen dously since 1970. GSE debt issues increased at a 15.2 percent annual rate during the 1970s and at a 9.5 percent annual rate in the 1980s. Since 1987, the largest portion of outstanding GSE securities have been in the form of mortgage-backed securi ties (MBSs) issued by Fannie Mae and Freddie Mac. In 1985, MBSs represented almost 40 per- Table 1 Capitalization of the Major GSEs Equity capital as a percent of total assets1 1989 1988 1987 1986 Fannie M ae2 0 .8 8 % 0 .8 0 % 0 .7 6 % 0 .6 1 % 0 .6 6 % F re d d ie M a c2 0.62 0.61 0.50 0.50 0.67 S allie Mae 2.90 2.80 3.00 3.60 4.70 F H LB s 7.90 8.90 8.90 9.00 9.00 Farm C re d it S yste m 3 5.90 3.30 8.10 8.00 10.50 U .S. bank average 6.21 6.28 6.00 6.17 6.16 1985 1 Equity capital and total assets are as of December 31 of each year. 2 Total assets include mortgage-backed securities not on the balance sheet. 3 Beginning in 1988, protected stock (stock redeemable at par value by borrower/stockholders) was not considered in calculations of equity capital. The FCS had $3.3 billion in protected capital in 1988 and $1.7 billion in 1989. SOURCE: "Government-Sponsored Enterprises: The Government’s Exposure to Risks,” GAO Report to Congress (August 1990); FFIEC Consolidated Reports of Condition and Income, 1985-1989. I Table 2 Outstanding GSE Credit Market Borrowing1 (End of Calendar Year, Dollar Amounts in Billions) Compounded annual rates 1970-80 1980-89 1970 1980 1986 1987 1988 1989 $15.2 $ 55.2 $ 93.6 $ 97.1 $105.5 $116.1 F reddie M ac * ★ ★ * 4.6 13.4 17.5 24.8 24.1 S allie M ae * * ★ ★ 12.2 16.5 22.0 28.6 F H LB s 10.5 37.3 88.8 116.4 136.5 136.1 13.5 15.5 Farm C re d it S ystem 13.2 63.0 62.3 55.2 54.6 56.6 16.9 -1 .2 38.9 160.1 270.3 302.7 343.4 361.5 15.2 9.5 D ebt Issues Fannie Mae T otal issues ★ ★ * * 1 3 .8 % ★ ★ ★ ★ * * ** 8 .6 % 20.2 * ★ ★ * M o rtg a g e Pools F annie Mae * ★ ★ ★ 17.1 169.2 212.6 226.4 272 .9 ★ ★ ★ ★ F reddie M ac ★ * ★ ★ ★ ★ * ★ 97.2 140.0 178.3 228.2 ★ ★ ★ ★ * it * it 17.1 266.4 352.6 404 .7 501.1 * ★ ★ ★ 38.9 177.2 536 .7 655.3 748.1 8 62.6 T otal pools T otal G SE S e cu ritie s 16.4 36.0 **** 45.6 19.2 ****GSE not generating credit market debt as of this date. 1From GSE balance sheets and Federal Reserve Board flow of funds data. SOURCE: “ Report of the Secretary of the Treasury on Government-Sponsored Enterprises.” (May 1990). cent of total GSE securities; by 1989, that portion had increased to almost 60 percent. Led by the spectacular growth in MBS issues, total GSE se curities outstanding more than doubled in the latter half of the 1980s, and stood at $863 billion at yearend 1989. GSE growth is not expected to slow any time soon: the Treasury Department projects that borrowing by GSEs will exceed federal govern ment borrowing in fiscal 1991. In evaluating the federal government’s supervi sion of GSE operations, the agencies agreed ade quate oversight was lacking. The GAO pointed out that many GSE regulatory bodies have not been enforcing their existing authorities and that some GSEs are not subject to any federal oversight. The Department of Housing and Urban Development (HUD), the regulatory authority for Fannie Mae (since 1968) and Freddie Mac (since 1989), has the authority to audit and examine the books of the two GSEs, but has never exercised this authority over Fannie Mae and has only asked for periodic reports from Freddie Mac. The only specific en forcement authority HUD has over the housing GSEs is the authority to limit dividend payments, which it has never exercised. In fact, no specific funds have ever been appropriated by HUD for regulatory purposes.6 Sallie Mae, on the other hand, has neither a federal regulator nor regulatory capital require ments. The Treasury Department does have audit authority over Sallie Mae, but like HUD, has not exercised this authority. Instead, Sallie Mae sub- 5 |nits a report of its annual audit of financial state ments to the Treasury Department, which in turn prepares a report for Congress and the Administra tion. The GAO concludes that the federal govern ment relies heavily on Sallie Mae’s owners and managers to avoid undue risk-taking and set appropriate capital levels. The most specific recommendation the two agencies made regarding GSE supervision concerns the separation of the GSE financial oversight func tion from the public policy oversight function. Both agencies cited the thrift crisis as a case where a conflict erupted between the two functions; the Federal Home Loan Bank Board (FHLBB) was both the financial regulator and the promoter of the thrift industry, and it appears as if the latter function took precedence in the Board’s operations. The Treasury Department recommends that the current program regulators continue to oversee the GSEs’ “ fulfillment of purpose,” and that other federal entities (new or existing) ensure GSEs are operating in a safe and sound manner. The GAO concurs with the Treasury recommendation, and has suggested several possibilities for financial oversight entities, including placing additional su pervisory authority with the Treasury Department, which already has responsibility for approving GSE debt issues. Conclusion In establishing GSEs, the federal government sought to influence the flow of credit in private capital markets. Given the tremendous growth in GSEs and the popularity of products such as MBSs, it appears that GSEs are fulfilling their public policy missions. At the same time, however, the failure of one or more GSEs would lead to huge losses, borne ultimately by taxpayers. Based on the initial studies of GSE operations by the Treasury Department and the GAO, it does not appear as if any GSE is in danger of financial collapse. Nonetheless, both agencies suggested that a number of measures should be taken to reduce the potential for large-scale losses as experienced with the S&L crisis. While they differ somewhat in their assess ments of GSE risk and ways to avoid another thriftlike crisis, the two agencies agree on three central principles that should guide policymakers tackling GSE reform. First, GSEs should meet credit and operations standards that are not based solely on their federal ties. Second, GSEs should have a significant amount of their own capital at risk so that the institutions absorb losses first; having more owner equity at stake will increase the incen tives for GSEs to monitor and control their risks. Third, GSEs should receive effective federal super vision, which implies enforcement of existing regulatory authorities in addition to some changes in the structure of the regulatory functions. The safety and soundness of GSEs will be more likely if reform is properly undertaken.*123456 FOOTNOTES 1See Michelle A. Clark, “ Government-Sponsored Enter prises: A Profile,” Pieces of Eight (September 1990), pp. 1-5, for a discussion of the various ways the major GSEs channel credit into the housing, agricultural and educational markets. 2See United States Department of Treasury, Report of the Secretary of the Treasury on Government Sponsored Enterprises (May 1990) and United States General Ac counting Office Report to Congress, GovernmentSponsored Enterprises: The Government’s Exposure to Risks (August 1990). 3The GSEs’ responses to the GAO’s initial evaluation were printed in an appendix to the GAO report. Most GSEs defended their internal risk evaluation procedures. 4The GAO study cites assistance given to Fannie Mae and the Farm Credit System at various times during the 1980s, in addition to the government assistance provided to Continental Illinois, Chrysler, Lockheed, Conrail and the City of New York, to support this assertion. 5Federally insured national and state Fed member banks as well as thrifts are allowed to hold unlimited amounts of GSE debt and securities in their portfolios; a GSE failure might imperil the depost insurance fund in addi tion to causing losses for private investors. 6Since the agencies released their reports, HUD has assembled a team of executives to oversee its GSE financial regulatory responsibilities. HUD has also an nounced plans to conduct banklike examinations of Fan nie Mae and Freddie Mac. 6 The Mississippi River System and Barge Industry ■0 so they can be navigated safely by tows and bargi The Corps accomplishes this task by dredging an' using dikes and a system of locks and dams. Most of the tributaries of the Mississippi River, and the Mississippi River itself north of St. Louis, contain a series of locks and dams to maintain 9 feet of water in the channels. by Jeffrey D. Karrenbrock David H. Kelly provided research assistance. T he vast Midwestern river network played a key role in the settlement and subsequent develop ment of many U.S. cities.1 Because of mountainous terrain and poorly developed trails, water was often the only practical means of transporting people and goods until as late as the mid-1800s. Since that time, however, river transportation has been forced to share its once-dominant role with rail, highway and air transportation. Despite its decline in relative importance, water transportation still accounts for a significant portion of U.S. freight traffic, about 15 percent in 1988. Much of the river system, ports and barge lines that serve today’s waterborne commerce is located in Eighth Federal Reserve District states. This article describes the Mississippi River system and the barge industry, and concludes with a brief outlook for the inland waterways system. The Inland Waterways The United States has more than 25,500 miles of navigable rivers, harbors and intracoastal water ways. The Mississippi River basin, which more than encompasses the Eighth Federal Reserve Dis trict, has about 8,900 miles of navigable water.2 As the map at right shows, the major rivers in cluded in the basin are the Mississippi, Missouri, Illinois, Ohio, Cumberland, Tennessee and Arkan sas. Table 1 indicates that the Mississippi River has the largest amount of navigable water in the basin, stretching more than 1,800 miles from Min neapolis, Minnesota, to the Gulf of Mexico. The Ohio River contains the second-largest amount of navigable water, followed by the Missouri. Many U.S. waterways would not be navigable without the continuing efforts of the U.S. Army Corps of Engineers. In 1824, the Corps was as signed the responsibility for improving rivers and harbors in this country. Today, the Corps builds, maintains and operates federal river and harbor projects. The Corps attempts to maintain at least 9 feet of water in designated inland waterway rivers Commodity Movement Most of the goods moved on the inland water ways are bulky commodities, such as petroleum products, coal, gravel and grain. In addition, goods that are too large or too heavy to be moved by rail or highway move on barges. At times, heavy mili tary equipment is moved via the rivers. These heavy goods move by barge primarily because this mode of transit offers a relative advantage in fuel efficiency. A small barge can move 1,500 tons or more than 450,000 gallons of a commodity, which is about 15 times greater than one rail car and 60 times greater than one semi-truck. In terms of fuel efficiency, one gallon of fuel can move one ton of a commodity by water 2.5 times farther than by rail and almost 9 times farther than by highway. H o ^ « ever, movement of goods by barge is often slow^B than other means of transportation. N o n e th e le ss,^ for commodities that are largely stockpiled, such as coal, petroleum products and fertilizers, the timing of shipments is not always crucial. The amount of freight traffic moved on the major segments of the Mississippi River system is shown in table 1. The Mississippi River carries the largest amount of commodities, with farm pro ducts, coal, and petroleum and coal products ac counting for most of its freight. The Ohio, Cumber land and Tennessee Rivers derive much of their freight from the vast coal fields on their banks. Although the Missouri River is the third-longest in the system, it carries the least amount of freight of all system rivers. The Missouri’s importance, however, stems from the fact that it provides a large portion of the total water flow of the Missis sippi River. For example, in 1988, 60 to 80 per cent of the total water flow of the Mississippi River at St. Louis came from the Missouri River. The Barge and Towing Industry The amount of cargo handled by the barge mem towing industry is dependent on both domestic ah! international economic activity. Between 1960 and 1979, freight traffic on the Mississippi River system grew steadily at an average annual rate of 3.6 per- I Figure 1 Mississippi River System 9 FEET OR MORE UNDER 9 FEET AUTHORIZED EXTENSIONS cent. This strong growth on the Mississippi River system and other waterways was expected to con tinue throughout the 1980s and 1990s. For exam ple, some forecasts were calling for tonnage towed on U.S. waterways to double or triple by the year 2000. The expected increase in demand for barge services, in conjunction with favorable tax shelter laws, resulted in a rapid expansion of barge and tow production. The number of dry cargo barges in the United States’ fleet grew 25.4 percent be tween 1975 and 1980, while the number of tank barges grew 18.2 percent. The towboat-tugboat fleet grew 14.5 percent during this period. The anticipated boom in demand never material ized, however, as agricultural and coal exports fell and the U.S. economy entered a recession in the early 1980s. For various reasons, including the grain embargo of the Soviet Union and slow eco nomic growth abroad, U.S. agricultural and coal exports fell 20 percent and 30 percent, respective ly, between 1981 and 1983. This was particularly hard on Mississippi River system barge firms be cause more than 60 percent of all U.S. export grain goes through New Orleans and 80 percent of all U.S. export steam coal moves through the Lower Mississippi Valley. 8 Table 1 Selected Mississippi River System Statistics Navigable length1 (miles) 1988 freight traffic (million tons) 445 381 327 1,811 735 981 652 6,934 6.7 14.0 37.8 4 41.6 6.7 192.6 47.1 601.6 A rka n sa s W a te rw a y C u m b e rla n d R iver Illin o is W a te rw a y M ississip p i R iver M issouri R ive r2 O h io R iver T e n n e sse e R iver M ississip p i R iver S ystem Percent of 1988 Freight Traffic Accounted for by Farm products 24% 1 36 27 10 4 7 14 Coal 1% 44 16 14 0 57 50 35 NonChemicals Petroleum & allied and coal metallic minerals products products 26% 32 6 5 67 13 15 11 24% 3 11 10 9 6 7 8 8% 5 14 16 5 9 7 14 1Channel depth of at least 9 feet. 2Channel depth less than 9 feet. SOURCES: Lengths and information on freight traffic are the author’s estimates based on information provided in the Coastguard Light List, Vol. 5, Mississippi River System, 1986, and the U.S. Army Corps of Engineers’ Water borne Commerce of the United States, 1988. In addition to facing contracting demand from international markets, the barge industry also had to deal with a domestic economy that was entering a recession. Partially as a result of the economic slowdown, domestic demand for petroleum pro ducts and the associated transportation services slowed. The demand for internal shipments of other heavy commodities slowed as well. As a result, freight traffic on the Mississippi River system fell in 1982 and 1983 and grew at an average annual rate of 0.46 percent between 1980 and 1988, much slower than the 3.6 percent rate of the 1960 to 1979 period. The consequence of the rapid construction period followed by declining freight traffic volume was an overbuilt industry. Once the industry realized that the expected demand boom was not materializing, barge building nearly ceased. For example, hopper barge construction reached nearly 2,500 units in 1981, but sank to fewer than 250 units in 1984. Tank barge construction peaked at 146 in 1981, but plunged to fewer than five per year from 1984 to 1988.3 Even though the U.S. economy and exports resumed their growth in the late 1980s, helping to revive the industry, the drought of 1988 was a set back to the industry. Low water levels slowed delivery times, tows were required to carry fewer barges than usual, and temporary groundings tied up shipping channels. Some firms were hurt finan cially because they had contracted earlier in the year to carry freight at fixed rates and the extra costs associated with greater travel time between ports could not be passed along. The stressful period of the 1980s stimulated considerable consolidation in the industry. The American Waterways Operators estimate that the number of inland waterway operators fell from 1,800 in 1980 to about 800 in 1989. In 1989, these barge and towing firms employed more than 175,000 workers and operated more than 5,000 tugboats and towboats and more than 30,000 barges on the U.S. inland waterways system. Turning the Bend Several factors suggest that the 1990s will be a less-stressful period than the mid-1980s for the barge industry. First, cargo carried on the inland waterways system is expected to slowly increase through 2000. The expected average annual growth of tonnage to be carried on different segments of the system between 1986 and 2000 is shown in table 2. Traffic projections for the Mississippi River are broken into three segments. The most rapid traffic growth on the Mississippi is expected to occur in the upper segment, with the lower segments expected to grow slightly slower. None theless, the Arkansas River has the highest poten tial traffic growth at 4.5 percent per annum. On the other hand, freight traffic on the Missouri could decline at an annual rate of 0.9 percent. All other rivers’ expected traffic growth is bracketed by these values, indicating slow but steady growth throughout the Mississippi River system. Com modities expected to grow the fastest, in terms of 9 ble 2 .S. Internal Waterway Traffic Projections % (average annual growth rate: 1986 to 2000) Selected waterway segments U p p e r M is s is s ip p i*1 M id d le M ississip p i2 M issouri R iver Low er M ississip p i3 A rka n sa s R iver Illinois W a te rw a y O hio R iver S ystem O hio R ive r— M ainstem C u m b e rla n d R iver T e n n e sse e R iver Low 1.7% 1.5 -0 .9 1.4 1.0 1.2 1.3 1.3 1.2 1.2 High 3.1% 2.9 2.1 2.9 4.5 2.5 2.8 2.8 3.5 2.6 SOURCE: Derived from the U.S. Army Corps of Engineers, The 1988 Inland Waterway Review, November 1988, Table 2.4, p. 50. 1 From Minneapolis to the mouth of the Missouri River. 2 Includes the Mississippi River from the mouth of the Missouri to the mouth of the Ohio, the Missouri River from Sioux City, Iowa, to its mouth, and theKaskaskia River from Fayetteville, Illinois, to its mouth. Traffic from all three rivers is included in the Middle Mississippi forecast. 3 Extends from the mouth of the Ohio to Baton Rouge. JThe segment also includes the Arkansas River and ither waterways. All of these segments are included in he Lower Mississippi projections. volumes shipped, are industrial and agricultural chemicals, farm products and coal. In addition to expected increases in freight traffic, a second factor that will help the long-term outlook of the barge industry is the ongoing im provement of the system’s locks and dams. The In land Waterways Trust Fund (IWTF) was authorized by the Inland Waterways Revenue Act of 1978 and amended by the Water Resources Development Act of 1986. These laws established a trust fund funded by fuel taxes on tows operating on 27 waterways. The fuel tax was originally set at 4 cents per gallon, but is currently at 11 cents per gallon and will reach 20 cents per gallon in 1995. The laws state that monies from the trust fund will be available for construction and rehabilitation expenditures for navigation on the inland and coastal waterways. The fuel tax revenues collected in the trust fund are allocated to projects on a 50/50 cost sharing basis with the federal government. Cur rently, nine projects are being funded by the IWTF to improve or replace locks and dams on the in land waterway system. These improvements will reduce traffic delays and lower the cost of WaterB ay transportation. W Thus far, new construction funded by trust fund money has been relatively small, but outlays are expected to increase significantly through the end of the century. Tax revenue collection did not start until 1981 and the first trust fund appropriations occurred in 1985. Thus far, $71.8 million from the Inland Waterways Trust Fund has been used in con struction. Between 1980 and 1988, construction spending on inland waterways navigation projects fell from $432 million in 1982 to $218 million in 1987, before jumping to $317 million in 1988. Total federal and IWTF expenditures of $262.8 million are expected for the nine scheduled projects in fiscal year 1990. Total construction expenditures on these projects are expected to remain at or slightly above $200 million per year through fiscal year 1998, when expenditures will start to trail off. Several new projects that would require addi tional funding, however, are under consideration. While the trust fund can currently provide for partial funding of the nine scheduled projects, its resources are limited. With federal budget reduc tions likely, the amount of money available for matching trust fund money may fall. At the same time, more areas will need repair as many of the locks and dams on the system are more than 50 years old and are inadequate for handling today’s freight volumes. This implies that the Corps and industry will have to make some tough choices and, hopefully, will allocate scarce funds to the projects providing the highest expected return. An alternative is to initiate user fees or increase fuel taxes to make up for potential federal government expenditure cut-backs. Conclusion Although often overlooked by those not direct ly involved in the industry, the inland waterways system serves as a vital method of shipping bulky commodities at a relatively low cost. Almost half of the freight traffic on the Mississippi River system is accounted for by energy-related products. As the domestic economy expands and industries become more internationally oriented in the 1990s, the inland waterways system will play an important role in serving these markets. Like any type of in frastructure, the system needs constant repair and maintenance to remain cost effective. Current work on the system will help maintain efficiency, but more work will be needed for the industry to main tain its role in freight transportation. FOOTNOTES 1See this Bank’s 1989 Annual Report. 2This figure includes the lengths of all navigable chan nels, including those with depths of less than 9 feet. The figures in table 1 are for channels with at least 9 feet of water, except for the Missouri River. 3Figures on barge construction were derived from Jack Lambert and Leeper, Cambridge & Campbell, Inc.’s Barge Fleet Profile of Inland River Equipment, March 1990. St. Paul, MN. usrness 10 District Services: What They Are and Why They Have Grown by Thomas B. Mandelbaum Table 1 Percent of Total Output, 1963 and 1986 S e rv ic e -p ro d u c in g s e c to rs T o ta l O th e r se rv ic e s G o o d s -p ro d u c in g s e c to rs T o ta l M fg. u. s. 60.0% 67.4 11.7% 15.3 40.0% 32.6 21.3% 22.1 Eighth Dist. 1963 1986 59.5 63.4 10.8 13.3 40.5 36.6 21.7 26.2 Arkansas 1963 1986 55.8 59.2 10.2 11.1 44.2 40.8 15.7 26.5 Kentucky 1963 1986 51.6 57.9 8.7 10.9 48.4 42.1 25.6 25.7 Missouri 1963 1986 63.1 67.6 11.7 15.0 36.9 32.4 21.0 24.7 Tennessee 1963 1986 63.4 64.7 12.0 14.1 36.6 35.3 21.6 28.2 1963 1986 Thomas A. Pollmann provided research assistance. T . jB L h e economy of the Eighth Federal Reserve District, mirroring the nation, has experienced more rapid employment growth in the services sec tor than in other sectors, such as manufacturing.1 This shift to services has generated considerable controversy in recent years.2 Some analysts, for example, suggest that the United States is losing its industrial base, becoming a nation of fast-food restaurants and laundries. Prior to examining rea sons for the expansion of services, the specific ser vice sectors that are important in the Eighth District are identified. SOURCE: U.S. Department of Commerce (1988) What Are Services? Some of the controversy about services stems from confusion about definitions. The service sec tor often is used to refer to all industrial sectors other than those producing goods—in other words —all sectors but agriculture, mining, construction and manufacturing. In most government publica tions, these sectors are referred to as “ serviceproducing” sectors and include retail and whole sale trade; finance, insurance, and real estate; government; transportation, communication and public utilities; and a group simply called “ ser vices.” To avoid confusion, “ services” will be referred to as “ other services” in this article. Table 1 shows that the share of U.S. output accounted for by service-producing sectors rose from 60 percent in 1963 to 67.4 percent in 1986, while other services’ share rose from 11.7 percent to 15.3 percent. Although other services accounted for less than one-fifth of all service-producing sec tor output in 1963, its rapid growth caused it to account for almost half of the 1963-86 rise in the service-producing sector’s share. In the Eighth District, the shift toward services was not quite as dramatic as at the national level. The output share of service-producing sectors rose between 1963 and 1986 from 59.5 percent to 63.4 percent while the other services sector’s share rose from 10.8 per cent to 13.3 percent. Table 2 shows that in both the United States and the Eighth District, health services and business services were the two largest industries in the other services sector and were responsible for most of the sector’s growth. Health services ac counted for 4.8 percent of the District’s 1986 total output, up from 2.6 percent in 1963. Almost half of health services employees work in hospitals. Business services, comprising 2.6 percent of Dis trict output in 1986, played a smaller role in the economy of each District state than in the U.S. economy. The largest business services industries in the country, in descending order of employment, are personnel supply services, services to buildings (mostly cleaning and maintenance), computer and data processing services, management and public relations, detective and protective services, equip ment rental and advertising. As output has risen in service sectors, so has employment. Employment in services generally refers only to workers in industrial sectors that produce services rather than to workers in occupa tions providing services. A janitor working for a manufacturer, for instance, is not classified as a service worker, but as a manufacturing employee. 11 table 2 Other Services Industries as a Percent of Total Output, 1963 and 1986 United States Industry Other services Health services Business services Miscellaneous services1 Legal services Social services Auto repair, garages Personal services Hotels and lodging Educational services Amusement and recreation Miscellaneous repair Private households Motion pictures District 1963 1986 1963 1986 11.7% 2.7 15.3% 4.5 10.8% 2.6 13.3% 4.8 1.6 3.5 1.1 2.6 0.9 1.0 0.9 1.5 1.0 0.9 0.7 0.9 1.1 0.9 0.7 0.7 0.5 0.8 0.6 0.9 1.1 0.7 1.1 0.8 0.7 0.6 0.6 0.5 0.6 0.6 0.5 0.5 0.5 0.5 0.4 0.4 0.3 0.3 0.3 0.2 0.8 0.2 0.2 0.2 0.9 0.1 0.2 0.1 SOURCE: U.S. Department of Commerce (1988) Mncludes engineering and architectural services; noncom mercial research organizations; accounting, auditing and bookkeeping; and museums and botanical and zoological gardens. In the nation, the District and each state, other ser vices’ job growth in the last decade has been the most rapid of any major sector. As shown in table 3, other services employment in the District grew at a 4.4 percent annual rate between 1979 and 1989. In comparison, the broader serviceproducing sector employment rose at a 2.4 percent rate, while total nonfarm employment rose at a 1.6 percent rate. Although other services accounted for less than one-fifth of total nonfarm employment in 1979, it generated more than half of the new non farm jobs during the decade in both the District and the nation. The Shift to Services: A Sign of Deindustrialization ? The share of the nation’s and the District’s employment accounted for by manufacturing has declined at the same time that the share of the service-producing sectors, and particularly the other services sector, has risen (see figure 1). While these relative shifts have actually taken place throughout the postwar period, they have attracted considerable attention since 1979, after which not only manufacturing’s share of employment, but also the absolute number of manufacturing workers, declined. This has led some observers to suggest that other services’ rising share is a symptom of the eroding U.S. industrial base, or as some have described it, the “ deindustrialization” of America. In terms of output rather than employment, however, manufacturing’s share has not declined in the postwar period, fluctuating around a 21 percent average. In 1987, U.S. manufacturing’s share of real output was 21.8 percent. Table 1 reveals that, in the Eighth District, manufacturing’s share of real output has actually expanded, rising from 21.7 percent in 1963 to 26.2 percent in 1986.3 Manu facturing’s share of real output rose in Arkansas, Missouri and Tennessee, while there was little change in Kentucky. The contrasting trends of employment and out put shares in manufacturing are indicative of the relatively rapid productivity growth in that sector, which has allowed a smaller share of workers to produce a constant share of the national output. Productivity growth in manufacturing, as well as in agriculture, and to a lesser extent serviceproducing sectors, has contributed to the rising af fluence enjoyed by U.S. consumers. As their in comes have risen, consumers have chosen to spend a higher proportion of their budgets on services. Rather than a sign of deindustrialization, the rising share of economic activity devoted to ser vices reflects the rising affluence of U.S. con sumers, made possible, in part, by the success of manufacturers in increasing labor productivity. Without enhancing labor productivity, manufactur ing could not have maintained its constant share of U.S. output and enjoyed the rapid expansion in ex ports during the last few years. Productivity gains in manufacturing and throughout the economy allowed American consumers to enjoy a rising af fluence which enabled them to purchase an in creasing quantity of services. Economic Development and Pur chases o f Other Services Some research indicates that as nations develop, they move through stages characterized by changing spending and production patterns. When incomes are low, consumers devote most of their budgets to necessities, such as food, but as incomes rise, a larger proportion is spent on manu factured goods. Finally, in the mature stages of development, consumption shifts more to services- 12 Table 3 Compounded Annual Rate of Change of Employment, 1979-89 U.S. 1.9% 2.7 4.7 -0 .4 -0 .8 N o n a g ric u ltu ra l e m p lo ym e n t S e rvice -p ro d u cin g O th e r services G o o d s-p ro d u cin g M a n u fa ctu rin g District Arkansas Kentucky 1.6 % 2.4 4.4 -0 .3 -0 .2 1.7 % 2.6 4.8 0.1 0.5 Missouri Tennessee 1.4% 2.4 4.3 -0 .9 -0 .5 1.4% 2.0 3.7 -0 .4 -0 .6 1.9 % 2.8 5.0 0.1 0.0 F igure 1 Manufacturing and Other Services’ Employment Shares Percent of Nonagricultural Employment 1970 72 74 76 78 producing sectors.4 To the extent one can make in ferences regarding changes over time from crosssectional comparisons, evidence suggests such a pattern of development also can be found for other services among U.S. states: states with higher per capita incomes tend to have higher proportions of their workforce producing other services.5 Since other services tend to be consumed where they are produced, this relationship between per capita in come and employment in other services reflects the purchasing patterns of the state’s consumers. Such a correspondence exists between per capita income and other services’ employment share in District states. Each state’s rank in per capita income among all states is close to its rank in other services’ employment share. In 1986, for example, Arkansas and Kentucky ranked 48 and 43 in per capita income and ranked 47 and 43 in the size of their other services employment share. 80 82 84 86 88 1990 Tennessee ranked 39 in per capita income and 38 in other services’ employment share. Missouri’s per capita income was substantially higher, ranking 24, while its employment share accounted for by other services ranked 17. Why the Rapid Growth in Pro ducer Services? It is easy to see how rising affluence would increase the demand for some industries within other services, like personal services and health services, which are mostly purchased directly by consumers. (The expansion of health services was also fueled by the growing number of elderly con sumers and the myriad of technological advances 13 iking new treatments available.) One of the the test growing segments, however, has been “ producer” services, which are primarily sold to other businesses rather than to consumers. This group is usually defined to include business ser vices, legal services and miscellaneous professional services. Employment in U.S. producer services rose at a rapid 6.2 percent rate between 1959 and 1982 and accelerated to a 7.5 percent rate of increase be tween 1982 and 1989. In comparison, the growth rate of total nonagricultural employment was below 3 percent in both periods. As table 1 shows, out put growth of business services, which accounts for most of producer services, has been rapid in the District as well; this sector’s output share more than doubled to 2.6 percent between 1963 and 1986. One frequently mentioned cause for the growth of producer services is “ unbundling.” This refers to the practice of companies increasingly contrac ting for services rather than generating them inter nally. For example, a manufacturer may have pre viously used its own employees for legal, account ing and data processing services, but finds it more cost-effective to dismiss service employees and purchase these services from firms in the producer service industry. If such unbundling were wide spread, the rapid rise in producer services employ^M en t might reflect nothing more than the shifting ^^B w orkers in service occupations from non-service industries like manufacturing to services sectors with no net increase in service activity in the economy. Research indicates, however, that unbundling accounts for only a negligible proportion of the growth in producer services. For example, one study found that unbundling has been only a “ very small factor” in the 1972-85 employment growth of producer services.6 Of the 6 percent annual rate of increase in producer services during the 1972-85 period, 2.6 percentage points were found to be due to the overall expansion of the U.S. economy, while 3.3 percentage points of the growth were due to changing business practices. Specifically, businesses have chosen to use services to a greater extent in their production processes. Rather than replacing internally generated services with pur chased services as implied by the unbundling no tion, businesses are purchasing additional services. To a small extent, rising affluence and the associated shift to luxury goods, which require more producer services such as advertising, may be responsible for the rapid growth of producer services. More likely, the increased demand stems from technological changes that have allowed firms specialize in particular services and, by spreading ^ ^ H t s among many customers, provide their ser^ ^ c e s at a low cost. Data processing firms, for in stance, allow the cost of computer-related technolo gy to be divided among many users. This is espe cially helpful for small businesses that have pro • vided much of the economy’s growth in the last decade. Telecommunications innovations have per mitted the delivery of some services, like data pro cessing, to increasingly distant markets. Summary The nation and Eighth District have increas ingly used more of their resources to produce ser vices because, as consumers have become wealthier, they have chosen to purchase proportionately more services. This rising affluence, in part, stems from relatively rapid productivity gains in the manufac turing sector that have allowed it to produce a stable share of the nation’s output with a declining share of the nation’s workers. Rather than a sign of a deteriorating industrial base, these develop ments appear to be a response to the evolving demands of consumers. To a surprising extent, the rapid job growth in service-producing sectors reflects growth in the single sector referred to as other services. Much of the growth of this sector is accounted for by the growth in health services and business services. To varying degrees, rising consumer affluence and technological innovations have contributed to the growth of these sectors.*123456 FOOTNOTES 1See Thomas B. Mandelbaum, “ In Search of a Regional Economic Identity,” Pieces of Eight - An Economic Perspective on the Eighth District (September 1989). Due to data limitations, data for Arkansas, Kentucky, Missouri and Tennessee are used to represent the Eighth District, which actually includes Arkansas and portions of six other states, as depicted on the inside front cover of this publication. 2Concerns about the relatively low level and unequal distribution of earnings in Eighth District service sectors will be discussed in a forthcoming article in this publica tion. Earnings in U.S. services are discussed in Lynn Browne, “ Taking in Each Other’s Laundry — The Ser vice Economy,” New England Economic Review, Federal Reserve Bank of Boston (July/August 1986), pp. 20-31. 3The increase of both the District manufacturing and service-producing shares was possible because of a substantial contraction in nonmanufacturing goodsproducing sectors: agriculture, forestry, fisheries, mining and construction. 4For 47 countries, for example, the correlation coefficient between 1982 per capita GNP and the 1980 proportion of workers in service-producing industries was 0.62. See Browne (July/August 1986) op. cit., p. 31. The relation ship between economic development and changing pat terns of industrial composition is discussed by Colin Clark in Conditions of Economic Progress (1940). 5Browne (1986) op. cit., p. 26. 6See John Tschetter, “ Producer Services Industries: Why Are They Growing So Rapidly?,” Monthly Labor Review, (December 1987), pp. 31-40. Bobbie H. McCrackin, “ Why Are Business and Professional Services Growing So Rapidly?” Federal Reserve Bank of Atlanta, Economic Review (August 1985), pp. 14-28 also finds un bundling is not a major reason for the growth of pro ducer services. 14 Eighth District Business Level 111/1990 Payroll Employment (thousands) United States District Arkansas Little Rock Kentucky Louisville Missouri St. Louis Tennessee Memphis M anufacturing Employment (thousands) United States District Arkansas Kentucky Missouri Tennessee District Nonmanufacturing Employment (thousands) Mining Construction FIRE2 Transportation3 Services Trades Government Unemployment Rate United States District Arkansas Little Rock Kentucky Louisville Missouri St. Louis Tennessee Memphis 111/1989111/1990 19891 19881 110,638.0 6,894.7 918.0 248.4 1,477.5 485.0 2,323.7 1,183.0 2,175.5 466.2 0.4% 0.9 1.2 -0 .7 4.4 4.6 -0 .6 -0 .5 0.2 1.0 1.8% 1.1 2.7 1.2 2.3 3.2 0.4 0.6 0.5 1.6 2.7% 2.9 3.0 3.0 3.8 4.1 2.2 2.3 3.0 1.5 3.3% 3.5 3.5 3.5 4.0 3.1 2.8 2.3 4.0 7.3 19,077.0 1,470.0 232.6 285.3 432.5 519.5 - 1 .9 % -1 .0 2.7 0.1 -4 .0 -0 .6 - 1 .7 % -0 .7 1.1 0.4 - 1 .5 -1 .3 0.4% 1.9 1.6 3.6 1.2 1.9 1.7% 3.2 3.1 4.5 2.3 3.4 - 1 .2 % 0.0 0.1 -0 .5 3.1 0.9 2.5 - 4 .8 % 1.0 0.3 3.5 5.1 3.0 2.2 - 5.3% 0.3 0.5 4.3 6.3 3.7 2.4 19891 19881 2.7% 1.9 1.6 2.5 1.8 1.7 3.9% 2.8 2.5 2.8 1.7 4.4 1988 1987 5.5% 6.5 7.7 6.4 7.9 6.3 5.7 5.9 5.8 5.2 6.2% 7.2 8.1 7.1 8.8 6.9 6.3 6.5 6.6 5.7 49.2 295.0 337.7 397.5 1.555.3 1.648.3 1.139.4 11/1990 Real Personal Income4 (billions) United States District Arkansas Kentucky Missouri Tennessee Compounded Annual Rates of Change N/1990111/1990 - 4 .0 % -0 .1 - 0 .4 - 0 .7 2.3 0.8 3.3 1/199011/1990 11/198911/1990 1.5% -0 .2 -3 .1 0.0 0.6 0.0 1.2% 1.1 2.0 2.2 0.4 0.7 Levels 111/1990 11/1990 1989 5.6% 5.8 7.0 6.0 5.5 5.0 6.1 6.4 5.1 4.6 5.3% 5.3 6.8 5.9 5.7 4.9 4.8 5.1 5.0 4.6 $3,556.5 194.2 25.5 42.0 67.9 58.8 5.3% 5.8 7.2 6.3 6.2 5.6 5.5 5.5 5.1 4.7 Note: All data are seasonally adjusted. On this page only, the sum of data from Arkansas, Kentucky, Missouri and Tennessee is used to represent the District. 1Figures are simple rates of change comparing year-to-year data. 2Finance, Insurance and Real Estate ^Transportation, Communications and Public Utilities 4Annual rate. Data deflated by CPI-U, 1982-84=100. 15 fl. S. Prices Level Compounded Annual Rates of Change 11/1990111/1990 111/1989111/1990 19891 1988' 131.1 133.1 7.0% 5.0 5.5% 5.7 4.7% 5.8 4.0% 4.1 150.3 173.3 126.3 - 4.4% 3.1 -14.4 3.7% 8.8 -3 .1 6.8% 6.8 6.9 9.0% 2.6 18.6 170.0 184.0 2.4% 2.2 1.2% 3.4 6.2% 4.4 6.9% 4.4 111/1990 Consumer Price Index (1982-84 = 10 0 ) Nonfood Food Prices Received by Farmers (1 9 7 7 = 100 ) All Products Livestock Crops Prices Paid by Farmers (1 9 7 7 = 100 ) Production items Other items2 Note: Data not seasonally adjusted except for Consumer Price Index. 1Figures are simple rates of change comparing year-to-year data. 2Other items include farmers’ costs for commodities, services, interest, wages and taxes. Eighth District Banking Wianges in Financial Position for the year ending June 30, 1990 (by Asset Size) Less than $100 million SELECTED ASSETS Securities U.S. Treasury & agency securities Other securities1 Loans & Leases Real estate Commercial2 Consumer Agriculture Loan loss reserve Total Assets SELECTED LIABILITIES Deposits Nontransaction accounts MMDAs $100,000 CDs Demand deposits Other transaction accounts3 Total Liabilities Total Equity Capital - 1 .3 % 5.2 - 1 0 .4 0.5 3.0 - 6 .9 -0 .7 6.1 -0 .4 0.5 0.6% 1.5 - 7 .3 5.3 - 6 .0 1.7 0.5 0.2 $100 million $300 million 15.2% $300 million $1 billion More than $1 billion 7.8% 20.1 3.1 8.9 13.2 0.4 6.4 13.2 11.1 11.3 13.4 -5 .1 5.5 14.0 -6 .1 10.3 21.4 -1 .5 5.0 12.5% 14.4 6.4 8.2 2.4 12.0 11.4 10.6 5.9% 8.0 2.2 -6 .0 -6 .0 10.9 5.0 5.0 e: All figures are simple rates of change comparing year-to-year data. Data are not seasonally adjusted. includes state, foreign and other domestic, and equity securities includes banker’s acceptances and nonfinancial commercial paper includes NOW, ATS and telephone and preauthorized transfers 17.0% 28.3 - 7 .0 5.3 17.2 0.1 4.6 - 1 2 .0 19.2 3.9 6.0% 8.8 29.8 9.5 - 1 .9 4.3 3.6 26.3 16 Performance Ratios (by Asset Size) Eighth District EARNINGS AND RETURNS Annualized R eturn on Average Assets Less than $100 million $100 million - $300 million $300 million - $1 billion $1 billion - $10 billion More than $10 billion Agricultural banks Annualized R eturn on Average Equity Less than $100 million $100 million - $300 million $300 million - $1 billion $1 billion - $10 billion More than $10 billion Agricultural banks Net Interest M argin1 Less than $100 million $100 million - $300 million $300 million - $1 billion $1 billion - $10 billion More than $10 billion Agricultural banks ASSET QUALITY2 Nonperforming Loans3 Less than $100 million $100 million - $300 million $300 million - $1 billion $1 billion - $10 billion More than $10 billion Agricultural banks Loan Loss Reserves Less than $100 million $100 million - $300 million $300 million - $1 billion $1 billion - $10 billion More than $10 billion Agricultural banks Net Loan Losses4 Less than $100 million $100 million - $300 million $300 million - $1 billion $1 billion - $10 billion More than $10 billion Agricultural banks United States 11/90 11/89 11/88 11/90 11/89 11/88 1.070/o 1.06 1.03 .80 1.13% 1.08 1.03 .74 1.06% 1.04 1.04 .84 1.22 1.23 1.14 .820/0 .95 .81 .66 .60 1.04 .88% .98 .91 .85 .93 1.14 .710/0 .85 .65 .69 .64 1.00 11.51% 12.80 12.93 12.13 12.220/0 13.08 13.01 11.21 11.66% 12.66 13.13 12.74 8.940/o 11.73 10.68 10.04 12.06 10.76 9.640/0 12.28 12.56 13.00 17.83 11.71 8 .O30/0 10.89 9.44 10.87 14.03 10.56 3.920/0 3.92 3.98 3.67 — 3.83 4.10% 4.34 4.32 4.19 3.24 4.01 4.390/0 4.54 4.47 4.20 3.42 4.17 4.22o/o 4.20 4.13 4.03 3.34 4.03 1.95% 1.98 2.31 2.68 4.58 2.03 2.18% 1.95 2.55 2.06 4.78 2.29 2.49o/o 2.07 2.28 2.23 5.12 2.84 1.51% 1.48 1.69 2.04 3.34 1.99 1.58o/o 1.48 1.63 1.73 3.32 2.08 1.630/0 1.50 1.63 1.78 4.25 2.09 .230/o .28 .36 .66 1.09 .19 .29o/o .28 .32 .41 .55 .22 .36% .31 .39 .56 .54 .32 — 12.38 3.98% 3.90 4.03 3.70 — — 12.45 4.04% 4.06 4.13 3.65 — 3.89 3.96 1.63o/o 1.75 1.39 1.84 1.66% 1.76 1.49 2.18 — 11.85 1.79 1.87 1.99o/o 1.78 1.48 2.29 — 2.26 1.44% 1.49 1.36 1.75 1.45% 1.47 1.48 1.72 1.490/o 1.33 1.32 1.93 — — 1.65 .16% .19 .23 .37 — — 1.82 .140/o .21 .17 .33 — 1.80 .18% .18 .19 .56 — — — .10 .12 .16 Note: Agricultural banks are defined as those with 25 percent or more of their total loan portfolio in agriculture loans. interest income less interest expense as a percent of average earning assets 2Asset quality ratios are calculated as a percent of total loans. 3Nonperforming loans include loans past due more than 89 days, nonaccrual, and restructured loans. 4Loan losses are adjusted for recoveries.
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