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REGIONAL ECONOMIST | APRIL 2000
https://www.stlouisfed.org/publications/regional-economist/april-2000/fed-challengebeyond-the-briefcase

President's Message: Fed Challenge—Beyond the
Briefcase
William Poole
Having spent a great deal of my professional life in academia, I'm a big fan of economic education. A lifelong
commitment to economic ed has only been heightened by my current position as a monetary policy-maker. If
citizens lack understanding about the benefits of the Fed's goal of price stability, as well as how we go about
pursuing it, the Fed can hardly expect support for its policy actions. While the media have at times focused—
albeit with tongue in cheek—on the condition of Alan Greenspan's briefcase as a clue to forthcoming Federal
Open Market Committee (FOMC) decisions, I believe the public needs better information than that.
One way the St. Louis Fed is working to dispel the briefcase mentality is to sponsor Fed Challenge, a realworld economics competition for high school students. Fed Challenge teams participate in a mock FOMC
meeting, presenting their analyses of current economic conditions and their recommendations for monetary
policy. A question and answer session with a panel of judges composed of business, academic and Fed
economists concludes each team's performance. This year, for the first time, Little Rock and Louisville area
schools will compete against their counterparts in St. Louis and Memphis, bringing all four Eighth District
offices into the Fed Challenge fold. As this issue of The Regional Economist goes to print, we will have
completed our District-wide competition and sent the winning team on to the nationals in Washington, D.C., on
May 1.
The first time I served as a judge for Fed Challenge, I was amazed at the students' level of understanding of
monetary policy. From several months of intense work, they accumulate knowledge of the Fed that few
students—even at the college level—can match. In my opinion, many of them would be quite comfortable
discussing the economy with Chairman Greenspan himself. Not only does the competition stir students'
interest in economics and related subjects as potential fields of further study, but it also helps them develop
research, cooperation, presentation and critical-thinking skills, giving them experience they can use in any
number of future endeavors. When they reach adulthood, these teen-agers will undoubtedly become spheres
of influence in their communities.
I am convinced that this competition raises the overall level of economic literacy in our nation's high schools by
motivating teachers and their students to really dig into the basics of monetary policy. So the next time you
want to know what interest rates are going to do—and, more important, why—forget about the Chairman's
briefcase. Ask a Fed Challenge competitor instead.

REGIONAL ECONOMIST | APRIL 2000
https://www.stlouisfed.org/publications/regional-economist/april-2000/how-reliable-are-federal-budget-projections

National and District Overview: How Reliable Are
Federal Budget Projections?
Kevin L. Kliesen
Current projections by the Congressional Budget Office (CBO) and the Office of Management and Budget
(OMB) show relatively large budget surpluses over the next decade. According to one scenario constructed by
the CBO, the federal budget surplus is expected to total just under $3.2 trillion between 2001 and 2010. The
OMB projects a 10-year cumulative surplus of $2.5 trillion.
Just a few short years ago, projections of rather large and rising budget deficits were the norm, making this
turnaround in the U.S. government's finances nothing short of stunning.

Some Budget Basics
The surpluses cited above refer to the "unified" surplus. This surplus, though, is just one of three that the
government reports. The other two, which combine to form the unified budget, are the off-budget and the onbudget. There is no particular economic or budget rationale for this arrangement--the budget's accounting
conventions tend to be driven by political expediency. The Social Security program makes up nearly all of the
off-budget account. In fiscal year (FY) 1999, the off-budget surplus was about $124 billion. The on-budget
account includes everything else, such as defense and highway spending; the on-budget surplus was less
than $1 billion in FY 1999. Of the projected $3.2 trillion in cumulative unified budget surpluses noted, nearly 75
percent come from the projected excess of Social Security revenues (taxes)--the off-budget side.

Mandatory Spending
In FY 1999, the federal government spent $1.703 trillion dollars. Of that amount, two-thirds, or a little more
than $1.1 trillion, was spent on mandatory government programs and net interest on government debt ($230
billion). The largest chunk of mandatory expenditures, not surprisingly, is government transfers to the elderly,
the poor and the disabled, as reflected in outlays for Social Security ($387 billion) and Medicare and Medicaid
($296 billion). The level of mandatory spending is determined by law. In other words, unless Congress and the
president agree to change the law, a huge portion of government expenditures does not change very much
from year to year--although significant changes in economic conditions can result in substantially different
outcomes from those initially projected a few years earlier.

Discretionary Spending
The remaining one-third of federal spending in the government's annual budget is called discretionary
spending. Unlike mandatory spending, discretionary spending is determined annually by Congress and the
president. Each year, after Congress receives the president's budget, it holds hearings and, ultimately, passes
13 appropriations bills that determine how much the government spends on such things as defense spending,
farm programs and the judicial system.

This process has been amended in recent years, as Congress has operated under discretionary spending
"caps" and "pay-as-you-go" legislation. Essentially, these laws, which can only be superseded by emergency
legislation, such as monies to help victims of natural disasters, force Congress to operate within preset
spending levels.

The Importance of Economic Assumptions
An important aspect of the budget process is the economic assumptions used by budget analysts. Putting
together the economic forecast is crucial because the economy's rate of growth ultimately determines the
amount of revenues collected and a substantial portion of the expenditures doled out. For example, if the
economy turns out stronger than expected, then, all else equal, the outlays for unemployment benefits and
other government assistance to the poor will turn out smaller than originally projected. Likewise, since faster
growth boosts individual and corporate incomes, the amount of individual and corporate tax revenues that flow
to the government will be greater than expected.
Indeed, this situation goes a long way in explaining the multi-trillion dollar budget surpluses projected by CBO
and OMB. Are these budget surplus projections too optimistic? If the past is any guide, one should view them
cautiously. For example, as recently as 1996, the CBO was projecting a $400 billion deficit by 2006; today,
under the most conservative scenario, it is projecting a $325 billion surplus in 2006. As even both the CBO and
the OMB acknowledge, the considerable difficulty of projecting economic outcomes, government programs and
tax rates years in advance ensures that future large surpluses are anything but guaranteed. And even if they
do materialize, policy-makers will still have to eventually deal with the larger unfunded liabilities (Social
Security and Medicare) that stem from the retirement of the baby boom generation.
Thomas A. Pollmann provided research assistance.

ABOUT THE AUTHOR
Kevin L. Kliesen
Kevin L. Kliesen is a business economist and research officer at the
Federal Reserve Bank of St. Louis. His research interests include
business economics, and monetary and fiscal policy analysis. He
joined the St. Louis Fed in 1988. Read more about the author and his
research.

REGIONAL ECONOMIST | APRIL 2000
https://www.stlouisfed.org/publications/regional-economist/april-2000/a-new-universe-in-banking-after-financial-modernization

A New Universe In Banking: After Financial
Modernization
Adam M. Zaretsky
On March 11, 2000, the U.S. banking industry truly entered the new millennium because, on that date, many
provisions of the Gramm-Leach-Bliley (GLB) Act went into effect. GLB repeals those sections of the Banking
Act of 1933—commonly known as the Glass-Steagall Act—that separated commercial and investment banking
in the United States for nearly 70 years. Gramm-Leach-Bliley also allows affiliations between commercial
banks and insurance firms. Under GLB, the U.S. banking system is now much closer to the universal system
common in many European and Asian countries than to the specialized system most Americans have grown
up with.1
The removal of the wall between commercial and investment banking has essentially created one-stop
shopping for consumers' financial needs—banks can now do it all, so to speak. Need a loan? Go to the bank.
Want to buy securities? Go to the bank. Want life insurance? Go to the bank. Need batteries? Go to Wal-Mart.
(Okay, banks can almost do it all.) This new system will increase competition among the various types of
financial companies, which should result in better service, greater availability of all types of financial services
and, perhaps, lower prices.2 The combination of commercial and investment banking is not new territory for
the United States, however. Although most current generations cannot remember when the two were
combined, those alive in the 1920s and early 1930s (prior to Glass-Steagall) remember when commercial
banks regularly engaged in securities underwriting and transactions.

Why Divide in the First Place?
Historians and economists have long studied the events leading up to the passage of the Glass-Steagall Act in
1933. At the time—remember, this was during the Great Depression—popular belief held that one of the major
causes of the Depression was banks' engagement in risky ventures through securities underwriting—that is,
guaranteeing a firm a specified price for its debt or equity issuance. After the 1929 stock market crash, and
along with the severe economic downturn of the era, banks began to fail in record numbers. For example, the
number of U.S. commercial banks declined 43 percent between December 1929 and December 1933, as
reported by economist David Wheelock in a 1993 article. The securities affiliates of these commercial banks
then became the scapegoats for the failures. These failures in turn became the ammunition that Sen. Carter
Glass—who was already staunchly opposed to banks operating such affiliates—needed to push through
legislation separating the two.3 The rest, as they say, is history.
Today, however, economists widely reject the notion that commercial banks' engagement in forms of
investment banking led to their eventual failures. Rather, economists now point to poor Federal Reserve policy,
which contracted the money supply in a time of great need, and strict branching restrictions as the primary
reasons.4 Bank failures resulted more from illiquidity (or, in many cases, insolvency) and undiversified
portfolios than from mismanagement and shady dealings. That said, these facts were not known or not

understood in the 1930s, leading Congress to separate the two activities on the belief that doing so would
prevent similar economic episodes from occurring in the future.
The negative sentiment toward the commingling of investment and commercial banking—and the potential
conflict of interest that such a commingling could encourage—was not pervasive during the period, though. As
economist Eugene White wrote in a 1986 article, "[I]n the 1920s, some financial writers worried about the
[conflict of interest] within a bank to [both] promote the securities of its business customers and...give prudent
investment advice to its depositor-investors. Comments of this nature were a minor dissonant note while the
stock market was healthy (emphasis added)." Still, the concerns about conflicts of interest have resonated over
time, even to the most recent debate about the separation and its eventual repeal.

Unbiased Financial Advice?
The potential conflict of interest that arises from the intertwining of commercial and investment banking has
arguably been one of the most hotly debated issues—in both academia and Congress—when lawmakers were
deciding whether to combine the two practices under one roof. For example, commercial banks are supposed
to offer disinterested financial advice to their customers. Investment banks, though, might also play somewhat
of a promotional role for their clients, especially when underwriting securities. When commercial banks assume
both roles, the question is which will take precedence: promoting securities or proffering disinterested advice?
Although the two goals need not necessarily be contradictory, they may make the banking industry face
criticism similar to what the Federal Aviation Administration, which has the dual role of promoting air travel and
regulating its safety, recently had to fend off.
One difference from the FAA's situation is that, to stay in business, a bank must attract and keep customers. If,
for example, a bank were to engage in dishonest dealings, and customers were to become aware of them, the
bank would likely lose customers. This brings up a second difference in these situations: A bank has
shareholders to worry about. If shareholders become unhappy with either a bank's performance or the value of
its stock, they can replace the bank's management. But both of these differences exist whether banks
underwrite securities or not.
The potential exists, though, for a bank that offers both loan and underwriting services to not give objective
financial advice. One argument that has been made is that a bank might advise a business customer to issue
new securities to repay its poorly performing bank loans. A bank could, however, make such a
recommendation regardless of whether it has a securities affiliate or not. Another argument is that a bank, in
an attempt to support the prices of securities it has underwritten, might offer imprudent loans to unsuspecting
customers so that they would be able to buy these securities. This tactic would be foolhardy, though, since the
bank would receive only a portion of the gain from underwriting, while incurring the entire amount of the loss
from the defaulted loans.
Examples similar to these were also heard by the Senate Banking and Currency Committee when GlassSteagall was first being considered in 1933. Ferdinand Pecora, the committee's legal consultant, summarized
such stories by stating:
A bank [is] supposed to occupy a fiduciary relationship and to protect its clients, not lead them into dubious
ventures; to offer sound, conservative financial advice, not a salesman's puffing patter. . . . The introduction
and growth of the investment affiliate ha[s] corrupted the very heart of these old fashioned banking ethics.5
Some of these earlier claims were later disputed in a 1994 article by economists Randall Kroszner and
Raghuram Rajan, who investigated bank activities before the passage of Glass-Steagall. Kroszner and Rajan
concluded that allowing commercial and investment banking to occur under one roof did not lead to
widespread defrauding of investors. Instead, their findings indicate that, because markets and securities rating

agencies were aware of the potential for conflicts, banks shied away from questionable securities and primarily
underwrote securities for older, larger and better-known firms than investment banks did.
A similar concern was voiced last year when the issue of an all-in-one banking system arose. However,
economic research into the subject, like that conducted by Kroszner and Rajan, has overwhelmingly concluded
that Glass-Steagall was not justified.

All-In-One Banking vs. Separated Banking
Because all-in-one banking eliminates the distinctions between commercial banks, investment banks and
insurance companies, the all-in-one system allows banks to expand (or merge) into areas previously off-limits.
The U.S. financial market has already witnessed the start of this process with Citigroup, the company formed
in 1998 from the merger of Citibank and Travelers Group. Others will likely follow, leading to the creation of
what some might call banking behemoths. What will such a transformation do to the American financial
landscape? Will it be better or worse off? Will consumer choices be limited?
Economist George Benston tackled these very questions in a 1994 article—published five years before the
passage of GLB. Benston's conclusions were that, overall, all-in-one banking would offer many benefits and
few costs to U.S. consumers, despite worries that such banks might crowd out other financial institutions or
that the possible collapse of one of these banks could wreak financial chaos. While, at first glance, these
concerns might seem reasonable, the literature shows that, in fact, they are not well founded.

Is There Still Room for Specialized Firms?
In the new era, smaller, community banks will likely not offer the variety of services that their larger
counterparts will. Whether these community banks will find their niche is discussed in Timothy Yeager's article
in the October 1999 issue of this publication. The question considered here is whether investment banks will
be able to survive alongside the banking behemoths. Evidence suggests that they will. Although banks might
engage in activities similar to traditional brokerage houses, brokerage houses have developed specialized
skills that would be difficult—short of a bank actually purchasing a brokerage firm—to duplicate quickly. For
example, brokerage houses devote substantial resources to researching and underwriting firms' equity and
debt offerings, whereas banks would generally rely on their established relationships with firms to acquire
information on them.
Relying on information from established relationships enables banks to exploit economies of scope.
Economies of scope exist when it is cheaper for one firm to offer a variety of services than it is for several
different firms to offer these same services individually. For example, someone buying a house needs not only
a mortgage, but also homeowner's insurance. Since the repeal of Glass-Steagall, a bank can bundle the two
together, perhaps offering both cheaper than two separate firms could because the information needed for one
is also needed for the other. In this situation, consumers would spend less time and money searching for these
services; that is, consumers' transaction costs would be lower. Another conceivable consequence, though, is
that the potentially fewer number of competitors in the market might give these banks some monopoly power,
which could lead to higher consumer costs overall.
Investment banks, on the other hand, would not be able to offer many of the services all-in-one banks could
unless they were willing to be supervised and regulated like banks. But this does not imply that investment
banks could not survive alongside all-in-one banks. Other, similar types of specialized financial companies
have been able to coexist and survive alongside commercial banks for years. For example, the current
financial landscape includes companies that specialize in mortgage lending, sales financing (such as General
Motors Acceptance Corp.), non-depository commercial lending (such as General Electric Credit Corp.), and

accounts receivable (such as Walter G. Heller & Co.). The mere existence of these types of firms indicates that
they are providing their customers desired—though perhaps higher-priced—products and services.

Too Big to Fail?
Because all-in-one banks tend to be large, another concern is that the failure of even one of them could wreak
havoc on the nation's financial and payments systems. It does not take all-in-one banks to raise this argument,
however. Similar arguments have been made for existing major commercial banks, any of which could
certainly disrupt markets if they fail.6 The concern since the repeal, though, is that the combination of
commercial banks and securities and insurance firms would increase the chances of a failure, and that that
failure would ripple through the economy faster than before. The evidence, however, shows that larger, more
diversified institutions are actually more secure than less diversified institutions. In his 1986 article, Eugene
White noted that:
While 26.3% of all national banks failed [between 1930 and 1933], only 6.5% of the 62 banks which had
[securities] affiliates in 1929 and 7.6% of the 145 banks which conducted large operations through their bond
departments closed their doors. This superior record may be partially explained by the fact that the typical
commercial bank involved in investment banking was far larger than average while most of the failures were
among smaller institutions.
The failure of the U.S. savings and loan industry in the 1980s provides a good, recent example of how a lack of
portfolio diversification can cripple such institutions. This almost $200 billion disaster occurred primarily
because S&Ls specialized in providing fixed-rate, long-term mortgages that were funded with short-term
savings. When interest rates rose sharply in the early 1980s, S&Ls found themselves in severe financial
trouble. These institutions were also hamstrung by regulations that prevented them from opening branches in
different states—or, in some cases, even within a state—a factor that also doomed many of the institutions
during the Great Depression. History has shown, though, that if even one of these anticipated behemoth
institutions were to fail, or to become illiquid, the Federal Reserve could pump liquidity into the market to
maintain market stability—as it did in October 1987 after the stock market crash.7
There also is no reason to believe that larger, all-in-one banks will engage in riskier ventures than their
commercial bank counterparts, although engaging in such ventures could make the behemoths more likely to
fail, according to some. But even with Glass-Steagall and its restrictions in place, commercial banks could not
be prevented from making risky investment decisions among their limited investment choices. In fact, White
argued that, although the intent of Glass-Steagall was to improve the soundness of banks by separating the
commercial and investment functions, this forced separation actually placed a burden on the financial industry
by disconnecting activities that, by their nature, are economic complements. Moreover, Kroszner and Rajan
found that the securities that banks underwrote before Glass-Steagall were of higher quality and performed
better than comparable security issues from independent investment banks.

Who Pays for Failure?
Deposit insurance has added a new dimension to the discussion, especially since it did not exist prior to
1933.8 As the United States experienced during the 1980s S&L debacle, the use of insured deposits for
speculative activity can cost taxpayers substantial sums of money. Deposit insurance creates a risk—a moral
hazard—in banking that would not exist otherwise. The moral hazard arises because the federal government
(a third party) guarantees depositors that their deposits will be repaid, up to a limit, if their bank fails. As such,
bank managers—who would not have to bear the cost of poorly invested deposits—might feel freer to use
these deposits in risky ventures.

If a bank used insured deposits to fund risky securities, or to cover insurance policies, a market aberration or
natural disaster could severely strain the bank's financial position. Because the federal government guarantees
depositors' funds, however, taxpayers—not bank managers—could end up footing the bill for the loss. Thus,
some have argued that all-in-one banking opens the door to more opportunities for such abuses, creating the
potential for an even bigger debacle. Gramm-Leach-Bliley addresses this issue by requiring the Federal
Reserve, the Comptroller of Currency and the Federal Deposit Insurance Corp. to restrict transactions between
insured depository institutions and their subsidiaries and affiliates.

Exploring the Rechartered Territory
The Gramm-Leach-Bliley Act of 1999 allows banks to explore the rechartered territory in the new millennium.
Despite what were believed to be good intentions when the Glass-Steagall Act of 1933 was passed, morecritical examinations of that period have demonstrated that the good intentions were misplaced. With the wall
between the two banking practices torn down, U.S. banks will be better able to compete with other domestic
financial institutions. As companies and customers adjust to the new landscape, most will no doubt come to
believe that the change shouldn't have taken so long to make.

The Nuts and Bolts of Financial Modernization
The Gramm-Leach-Bliley Act (GLB), signed into law Nov. 12, 1999, modernizes the U.S. financial
services sector by tearing down the legal barriers between commercial banking, investment banking
and insurance. Before GLB, commercial banks could only engage in the business of banking—for
example, taking deposits, making loans and offering checking accounts. Companies that own banks,
known as bank holding companies, were similarly limited to banking and businesses that are closely
related to banking, such as leasing, providing financial advice and providing trust services. On March
11, 2000, however, these barriers came tumbling down. New financial conglomerates can be formed.
Bank holding companies are now able to acquire or merge with securities firms or insurance
companies, and securities firms and insurance companies can acquire banks.
Furthermore, bank holding companies can now engage in any business that is "financial in nature."
Most notably, they are permitted to sell and underwrite securities (known as investment banking), sell
and underwrite insurance and engage in merchant banking. The Fed and the Treasury Department
have published a list of permissible businesses that are financial in nature, and in the future may
include additional activities, such as real estate development or investment. Some of these businesses
involve risks that are very different from traditional commercial banking services. In securities
underwriting, for example, the underwriter buys the securities from an issuing company and resells
them, taking on the risk of owning any of the securities that it cannot sell. Insurance underwriting
involves taking on the risk of paying the claims under insurance policies. Merchant banking involves
making stock investments in businesses—usually, venture capital investments in new businesses.
Regulators believe these risks are manageable and that the diversification will prove healthy.
To help insulate bank depositors—and taxpayers, who ultimately pay for any losses to the federal
deposit insurance fund—from the risks of new financial businesses, banks will not be allowed to engage
in these businesses directly. Instead, a bank can either set up a holding company that could own the
bank and non-bank financial companies, or it can purchase or set up financial subsidiaries of its own.
One big difference between these two options is that a bank holding company can conduct any financial
activity through its non-bank subsidiaries, whereas a bank's subsidiaries cannot take part in insurance
underwriting, merchant banking or real estate activities. Whichever structure a bank chooses, it is

eligible to enter the new financial businesses only if it is well capitalized and well managed, and has a
satisfactory record of lending in low- to moderate-income areas.

Functional Regulation
Before Gramm-Leach-Bliley, banks were already subject to overlapping regulation. The Fed regulates
bank holding companies. The Office of the Comptroller of the Currency, which is part of the Treasury
Department, regulates national banks and their subsidiaries. State banks and their subsidiaries are
regulated by both the state in which they are headquartered and by the Fed (if they elect to be
members of the Federal Reserve System) or the FDIC (if they are not members of the Federal Reserve
System).
As banks and bank holding companies begin to engage in insurance and securities activities, they will
also become subject to regulation by state insurance regulators and the Securities and Exchange
Commission. To minimize overlapping regulatory burdens and potentially inconsistent requirements,
GLB imposes a functional approach to regulating these diverse organizations. GLB calls for each
regulator to largely defer to the regulator with expertise over a particular function—banking, insurance
or securities. For example, banking regulators will not normally be allowed to examine or require reports
from an insurance subsidiary.
That said, GLB also preserves the Fed's central role as the umbrella regulator of all companies that own
banks. As these companies diversify, it is critical for a single regulator to be responsible for the entire
company to help ensure the safety and soundness of the organization as a whole and to prevent losses
in a securities or insurance business from jeopardizing the health of an insured bank.
Tearing down the barriers between commercial banking, investment banking and insurance was the
main purpose of GLB, but it also has many other important and wide-ranging provisions. It is a historic
law that promises to fundamentally alter the U.S. financial services industry.
A summary of GLB can be found on the Senate Banking Committee's web site,
www.senate.gov/~banking/conf/index.htm.

Adam Zaretsky wrote the article. W. Scott McBride wrote the sidebar. Paige M. Skiba provided research
assistance. W. Scott McBride was a lawyer and an officer at the Federal Reserve Bank of St. Louis.
Endnotes
1. True universal banking, as typified by the German or Swiss banking systems, still does not exist in the
United States because banks here cannot hold equity positions in commercial companies. [back to text]
2. Increased competition does not necessarily imply lower prices, as improved or new services might be
offered that customers would be willing to pay for. [back to text]
3. Sen. Glass chaired the subcommittee that heard testimony about the alleged abuses of commercial
banks and their securities affiliates. [back to text]
4. See Friedman and Schwartz (1963), Chapter 7. [back to text]
5. Pecora, quoted in White (1986). [back to text]
6. See Goodhart (1995) for such an argument. [back to text]
7. See Zaretsky (1996) for a description of this episode and the Fed's responsibility as the lender of last
resort. [back to text]
8. Deposit insurance was also created in 1933. [back to text]

References
Benston, George J. "Universal Banking," Journal of Economic Perspectives (Summer 1994), pp. 121-43.
Friedman, Milton, and Anna J. Schwartz. A Monetary History of the United States 1867-1960, Princeton
University Press (1963).
Goodhart, C. A. E. The Central Bank and the Financial System, The MIT Press (1995).
Kroszner, Randall S., and Raghuram G. Rajan. "Is the Glass-Steagall Act Justified? A Study of the U.S.
Experience with Universal Banking Before 1933," The American Economic Review (September 1994), pp. 81032.
Wheelock, David C. "Is the Banking Industry in Decline? Recent Trends and Future Prospects from a Historical
Perspective," Review, Federal Reserve Bank of St. Louis (September/October 1993), pp. 3-22.
White, Eugene Nelson. "Before the Glass-Steagall Act: An Analysis of the Investment Banking Activities of
National Banks," Explorations in Economic History (January 1986), pp. 33-55.
Yeager, Timothy J. "Down, But Not Out: The Future of Community Banks," The Regional Economist, Federal
Reserve Bank of St. Louis (October 1999), pp. 5-9.
Zaretsky, Adam M. "Learning the Lessons of History: The Federal Reserve and the Payments System," The
Regional Economist, Federal Reserve Bank of St. Louis (July 1996), pp. 10-11.

REGIONAL ECONOMIST | APRIL 2000
https://www.stlouisfed.org/publications/regional-economist/april-2000/now-and-forever-nafta

Now And Forever NAFTA
Howard J. Wall
When the North American Free Trade Agreement (NAFTA) was being debated prior to its 1994
implementation, much was said and written about the potential consequences for U.S. exports. One noted
doomsayer famously predicted that NAFTA would create a "giant sucking sound" as manufacturing jobs
headed south to Mexico. Such doomsaying has since been proved wrong: A study by the U.S. International
Trade Commission found that because of NAFTA, 13 U.S. industries increased their exports to Mexico,
whereas none had reduced them. The study also found that because of NAFTA, 10 industries increased their
exports to Canada, and eight industries reduced them.
Although most of the pre-NAFTA rancor was over the consequences of free trade with Mexico, its effects on
U.S. trade with Canada were potentially far more significant. This is particularly true at the state level because
Canada is the more important export destination for all but a handful of states. For example, in 1997 only the
four states that border Mexico—Arizona, California, New Mexico and Texas—exported more manufactured
goods to Mexico than to Canada. In contrast, 30 states had manufactured exports to Canada that were more
than five times those to Mexico, and the United States as a whole exported more than twice as much to
Canada. Also, manufactured exports to Mexico were highly concentrated, with Texas and California alone
accounting for 61 percent of the U.S. 1997 total. It took nine states to account for 61 percent of manufactured
exports to Canada.1
Because Mexico is a recent convert to free trade and has only recently begun liberalizing its internal markets,
there might have been more room for exports to Mexico to expand. This is not to say that there was no room
for exports to Canada to expand. Several studies have shown that, even after years of trade liberalization, the
Canadian border is still a barrier to trade.2

Exports Booming Since NAFTA
Between 1993 and 1997, combined real U.S. manufactured exports to its NAFTA partners rose by 40 percent,
with 34 percent and 54 percent increases to Canada and Mexico, respectively.3 Of course, such exports would
have risen along with the countries' Gross Domestic Products (GDPs) anyway. Because of this, the more
interesting numbers are the GDP-adjusted changes in exports, which subtract the effects of GDP growth.4
After this adjustment, the increase in U.S. exports to its NAFTA partners between 1993 and 1997 was still
impressive: The GDP-adjusted increase in combined real U.S. exports to Canada and Mexico was 35 percent,
with a 29 percent increase to Canada, and a 51 percent increase to Mexico.

North American Trade On the Rise

Between 1993 and 1997, combined real U.S. manufactured exports to Canada and Mexico, adjusted for increases in GDP, rose by 35
percent. State by state, however, the numbers varied a great deal. In the Eighth District, all states but Mississippi saw substantial
increases in their exports to Canada and Mexico.
SOURCES: Massachusetts Institute for Social and Economic Research, Bureau of Economic Analysis

The map above illustrates the states' GDP-adjusted changes in combined real manufactured exports to
Canada and Mexico, including the actual percent changes for the seven states of the Eighth District. (A
complete list of the state-by-state results is shown in Table 1.) Fifteen states showed GDP-adjusted exports
that rose by more than 48 percent. While they started from very low initial levels, the states with the biggest
gains were Wyoming and Alaska, with increases of 202 and 201 percent. Alabama (111 percent) and Kentucky
(100 percent) were the next biggest, with most of Alabama's change going to Mexico, and most of Kentucky's
going to Canada.
Of the 18 states with the smallest changes in combined exports, five actually saw decreases: Maryland (–19
percent), Hawaii (–13 percent), New Mexico (–8 percent), New Hampshire (–4 percent) and Vermont (–2
percent). Regionally, all of New England except for Maine, and the southern Mountain States had GDPadjusted exports that either had decreased or had increased very little.
Some states had somewhat anomalous changes in their export patterns: Delaware, Michigan and Colorado all
saw large increases—greater than 75 percent—in their exports to Mexico. Moderate drops in exports to
Canada meant that their combined exports increased relatively little. On the other hand, Washington and
Nevada saw moderately large gains in combined exports, even though their exports to Mexico fell.

Eighth District Leading the Pack
Of the seven states in the Eighth District, all but Mississippi saw substantial increases in their combined
manufactured exports to Canada and Mexico. Leading the way was Kentucky, which, as mentioned, had the
fourth-largest increase of any state in the country. Kentucky's exports are strongly oriented toward Canada—its
exports to Canada were almost 11 times its exports to Mexico—and its doubling of combined exports was
driven by a 108 percent increase in exports to Canada. Even so, its 36 percent increase in exports to Mexico
was still substantial.
Arkansas and Missouri saw very large increases in combined exports, with Arkansas' gain driven by a huge
(165 percent) increase in exports to Mexico. Missouri's gain, on the other hand, largely reflected increased
exports to Canada. Both states began and ended the period oriented toward Canada: In 1997, Arkansas
exported nine times more to Canada than to Mexico, while Missouri exported five times more.
Illinois, Indiana and Tennessee saw substantial increases in combined exports, and all three were more
oriented toward Canada than was the United States as a whole. In 1997, their exports to Canada were,
respectively, six, 10 and four times their exports to Mexico. Export growth in all three states was fairly
balanced, with similar percentage increases in exports to Canada and Mexico.
Although Mississippi experienced growth in exports to both countries, it found itself 13th from the bottom in
terms of the combined change. Mississippi is much closer to Mexico geographically, but it tends to export more
than four times as much to Canada.

Sucking Sound—What Sucking Sound?
It's safe to say that those who predicted that NAFTA would harm U.S. manufacturing exports have turned out
to be spectacularly wrong. Far from the disaster scenario predicted by various pundits and doomsayers, U.S.
manufactured exports to Mexico and Canada have boomed since the implementation of NAFTA. This export
boom has been widely distributed geographically, with 46 states seeing increases in their GDP-adjusted
manufacturing exports to Mexico and Canada. Every state in the Eighth District has been a part of the boom,
with all but Mississippi seeing increases of more than 40 percent.

Table 1

U.S. States' Exports to Canada and Mexico Since NAFTA
GDP-Corrected Percentage Changes, 1993-97
To Canada To Mexico

Total

United States

28.7%

50.9%

35.3%

Alabama

53.7

336.9

110.8

Alaska

188.3

395.8

201.4

Arizona

68.9

-10.5

5.8

Arkansas

40.8

165.0

62.7

California

29.9

66.2

46.2

Colorado

-10.2

77.7

6.8

Connecticut

10.7

4.1

10.0

Delaware

-15.3

109.1

2.7

Dist. of Columbia 41.3

23.2

38.3

Florida

7.4

0.5

5.3

Georgia

44.6

70.0

50.1

Hawaii

-15.9

14.8

-13.4

Idaho

48.8

-27.5

35.2

Illinois

46.1

24.1

42.8

Indiana

42.7

33.9

42.6

Iowa

48.0

62.1

50.4

Kansas

66.5

28.8

55.6

Kentucky

107.9

36.1

99.7

Louisiana

92.3

56.7

72.9

Maine

47.3

8.7

46.4

Maryland

-20.8

-8.3

-19.3

Massachusetts

14.2

30.3

16.4

Michigan

-5.8

322.5

18.0

Minnesota

13.7

-5.3

12.3

Mississippi

10.5

19.5

12.7

Missouri

72.0

35.4

65.3

Montana

34.4

47.8

36.1

Nebraska

41.7

65.2

47.6

Nevada

65.6

-51.2

48.3

New Hampshire

-10.9

58.9

-4.2

New Jersey

34.1

54.1

37.8

New Mexico

-11.8

-4.0

-7.7

New York

28.8

51.3

31.7

North Carolina

39.5

109.9

51.3

North Dakota

21.4

224.9

32.3

Ohio

35.2

24.8

35.0

Oklahoma

16.9

-4.5

13.3

Oregon

9.1

8.7

9.7

Pennsylvania

37.0

47.1

39.0

Rhode Island

1.8

91.1

10.5

South Carolina

43.5

271.5

69.5

South Dakota

38.6

479.8

54.8

Tennessee

35.1

77.3

43.2

Texas

86.5

27.2

36.2

Utah

28.7

50.9

35.3

Vermont

8.7

47.7

14.2

Virginia

-3.0

5.5

-2.0

Washington

25.4

88.6

36.0

West Virginia

31.4

-23.1

24.8

Wisconsin

67.6

-5.3

59.7

Wyoming

25.9

49.2

29.0

Source: MISER and Bureau of Economic Analysis.

Ling Wang provided research assistance.
Endnotes
1. These states were California, Illinois, Indiana, Michigan, New York, North Carolina, Ohio, Pennsylvania
and Texas. [back to text]
2. See Engel and Rogers (1996), McCallum (1995) and Wall (1999) for discussions of this. [back to text]
3. Data on state manufactured exports are from the Census Bureau's Origin of Movement series, adjusted
and distributed by the Massachusetts Institute for Social and Economic Research (MISER). [back to
text]
4. The changes in GDP for Canada and Mexico are measured in U.S. dollars at current market value.
[back to text]

References
Engel, Charles, and John H. Rogers. "How Wide is the Border?" American Economic Review (December
1996), pp. 1112-25.
McCallum, John. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic
Review (June 1995), pp. 615-23.

United States Trade Commission. "The Impact of the North American Free Trade Agreement on the U.S.
Economy and Industries: A Three-Year Review." Investigation No. 332-81 (1997).
Wall, Howard J. "How Important is the U.S.-Canada Border?" International Economic Trends, Federal Reserve
Bank of St. Louis (August 1999), p. 1.

REGIONAL ECONOMIST | APRIL 2000
https://www.stlouisfed.org/publications/regional-economist/april-2000/potosi-mo-tries-to-keep-head-above-water

Community Profile: Potosi, Mo., Tries to Keep Head
Above Water
Stephen P. Greene
With the United States enjoying its longest period of economic growth in history, the days of 10 percent
unemployment rates seem as difficult to remember as life without the Internet. Twenty percent unemployment
is even harder to recollect. Thirty percent? Unfathomable. During the Great Depression maybe, but surely not
anytime recently.
One place where the harshest of economic times is not a distant memory is Potosi, Mo. Even residents without
graying hair remember the devastating conditions that peaked in early 1983 with a 34.1 percent unemployment
rate in Washington County, where Potosi is the government seat. Although the unemployment rate in the
county had dropped to 7.2 percent by the third quarter of 1999, it was still greater than twice the state average.
For this small town 60 miles southwest of St. Louis, climbing out of a hole has been a struggle, but some
progress has been made thanks to an effort to attract and grow a manufacturing base. The Potosi/Washington
County Industrial Development Authorities is the main organization in the county promoting and facilitating
economic development. The area's attempt to rebound is best summarized by the group's executive director,
Emory Oliver, who says: "We're not distance swimmers, but we're doing a little more than treading water now."

Drowning
In the 1960s and '70s, the principal source of employment in Washington County was mining. Some large and
several small companies dotted the county and hired people to mine for lead, iron ore and barite. By the
mid'70s, about 3,000 miners were working in the area and making good salaries, some as high as $50,000 a
year.
The downturn came late in the decade. In 1977, the Pea Ridge iron ore mine laid off about 1,000 people. What
remained was a skeletal staff. Layoffs at the Indian Creek lead mine and other smaller mines all but obliterated
the industry in the area. The primary reason for the layoffs? Mined materials were being acquired much more
cheaply from foreign sources like China, where barite, for example, is available in abundance.
Mining wasn't the only industry in Potosi affected by cheaper foreign competition. Brown Shoe operated a
factory in Potosi for nearly 40 years before packing up and moving its operations offshore in 1986. The result
was the loss of more than 400 jobs. On the heels of Brown Shoe's departure, the Trimfoot Shoe Co. moved
into the same building a year later but left town in 1992 for the same reasons that Brown did.
Potosi is not the only small town in Missouri to experience the effects of companies shutting down domestic
operations in favor of foreign suppliers. Just recently in neighboring Farmington, the Huffy Bicycle Co. closed a
factory that in 1998 employed 830 people, including more than 100 from Washington County. The company
announced it will now contract with companies in China, Taiwan and Mexico to make all its bikes.

Oliver's goal for Washington County is to avoid a repeat of these scenarios: "We want the companies we talk
with to look at us as a home, not just as a pit stop," he says. "We don't want them to leave when the special
incentives and programs are gone. There has to be a long-term commitment to the community."
In the case of Huffy, that company's commitment to Farmington ended when the special incentives did. Huffy
peeled out of town just two weeks before it would have had to begin repaying some of the $2.15 million in aid
the state and city gave the company. Instead, Huffy left without paying back a thing.

Staying Afloat
After bottoming out in the 1980s, Potosi's reversal of fortune began when the area won a bid to be the home of
Missouri's new maximum security prison. Belgrade State Bank Chairman Harold Turner said that landing the
prison, which opened in 1989, gave Potosi a more positive attitude about its economic future.
"If there was anything to stop the downward spiral, it was the correctional center," Turner says. "Usually,
people don't want a prison in their town. But the county here was reaching for anything for employment."
The community's next coup came in 1994 when a third shoe company moved into the building that Brown and
Trimfoot had previously abandoned. The Redwing Shoe Co. Inc., whose product line includes steel-toed work
shoes and hiking boots, at first employed only 21 people at its Potosi factory, which the company leases from
the Industrial Development Authorities. Six years and several expansions later, about 300 are on staff at
Redwing, and the company plans to lease additional space in a next-door building.
So why would a shoe company expand domestically when competitors are relying on cheaper labor in foreign
markets?
"Redwing is a traditional shoe company, and our marketing told us that
there is a need for shoes made in the United States," says Jim Lands,
general operations manager at the factory. The company chose Potosi after
learning that the town could supply not just available space, but also a pool
of labor familiar with manufacturing shoes.

Red Wing Shoe employs about 300
people at its Potosi plant and plans to
expand to a next-door building. The
company's product line includes steeltoed industrial work shoes and hiking
boots.

Manufacturing, rather than services, is the key to the area's economic future, local officials say. They want to
change Washington County from being an exporter of labor to being an importer of jobs. About half of the
residents leave the county every day to go to work, most traveling to St. Louis.
But a few companies in Potosi have given workers a reason to stay home. One is Sure Seal Inc., which
supplies butterfly valves and related products for nearly all tanker trailers in the United States. The company
began operations in Potosi in 1991 and now employs 53 people. In 1998, Inc. Magazine named Sure Seal one
of the fastest-growing private companies in the United States, measured in terms of sales growth percentage
from 1993 to 1997. The company never has trouble hiring qualified people from the local population, says Jim
Bright, vice president and controller at Sure Seal.
Other business leaders in Potosi express that same sentiment. Ron Stephens, president of Unico Bank, says,
"I think our labor force is used to manufacturing. We have, for example, a lot of experienced welders who
commute to places in St. Louis like Boeing and Chrysler. If given the opportunity, most of them would rather
work back here in Potosi."
"There is a tradeoff," says Rick Ramos, chief financial officer at Purcell Tire and Rubber Company. "You might
be able to make more money working in St. Louis, but a lot of people would give that up for the time and
convenience they gain by working here in town." Locally, Potosi-based Purcell employs about 150 people in
the corporate office and retreading plant.

One Stroke at a Time
Oliver has no delusions about Potosi. The potential for economic growth is there, but it may be a while before
the town lives up to the meaning of its South American Indian name--"place of much noise."
"I wish I could tell you we have companies that are coming in here and hiring thousands of employees, but that
sort of thing just doesn't exist," Oliver says. "We try to recruit companies that will pay competitive wages and
benefits and offer good working conditions in the manufacturing sector."
Oliver says it is not realistic to expect companies to come to town offering jobs that pay $20 an hour. He shoots
for those that pay in the area of $12 an hour, though he says he knows he can't dictate what a company will
pay its employees.
Taking a measured approach to growth, Oliver says his office aims to help generate about 80 new jobs each
year and has been consistently reaching that target in recent years. Signs of hope are evident in the Redwing
expansion, a 1,000-foot runway expansion at the Washington County municipal airport, and the agreement of a
landfill equipment manufacturer to move into the 260-acre Potosi industrial park, where current tenants include
Sure Seal and an AmerenUE regional service center. Growth in the service industry has also occurred. Within
the past five years, fast food establishments and a new motel have opened.
After going through some very dark and troubled times, it remains to be seen to what extent Potosi and
Washington County will be able to profit from the current strong U.S. economy. But at least for now, the waters
here are a lot smoother and more inviting than they once were.

Potosi, Mo., by the numbers
Population

23,354

Labor Force

9,652

Unemployment Rate

7.2%

Per Capita Personal Income

$14,140

Top Five Employers
Potosi Correctional Center

400

Red Wing Shoe Company Inc.

300

Potosi Public School District

300

Purcell Tire and Rubber Company

150

Pea Ridge Iron Ore Mining

110

NOTES: Figures listed are for all of Washington County. Per capita personal income is from 1997. Employee counts are based on
estimates.

REGIONAL ECONOMIST | APRIL 2000
https://www.stlouisfed.org/publications/regional-economist/april-2000/the-us-trade-deficit-sideshow-to-the-new-economy

The U.S. Trade Deficit: Sideshow To The "New
Economy"?
Michael R. Pakko
The performance of the U.S. economy during the past decade has been universally hailed as stellar. Economic
growth has been strong, unemployment has reached its lowest rate in over a generation, and inflation has
remained relatively low. Many have gone so far as to declare that current conditions and future prospects
represent a "new economy," in which these favorable trends might continue indefinitely.
One economic indicator that is often viewed with alarm, however, is the nation's growing trade deficit. In 1999,
the U.S. trade deficit reached a record level. More important, it has been increasing as a share of the
economy's total output. The broadest measure of the nation's trade balance, known as the current account,
rose from 1.4 percent of GDP in 1990 to 3.7 percent in 1999.1
In both the media and popular opinion, trade deficits are often portrayed negatively, being blamed on either the
unfair trading practices of our trading partners or a lack of U.S. competitiveness in world markets. Some have
even suggested that the growing deficit of the late 1990s is so threatening that it forebodes the ultimate demise
of the current economic expansion.
Under certain circumstances, growing trade imbalances might indeed be cause for concern. In the context of
current economic conditions, however, there is reason to be more sanguine—the underlying causes of recent
increases in the U.S. trade deficit can be traced to developments in technology and productivity trends that
otherwise bode well for the future.
In fact, far from being a bellwether of doom, recent trade deficits can be interpreted as part of an important
transition phase of the new economy.

The Determinants of Deficits
Deficits often are cited as either a cause or a symptom of economic weakness. The underlying implication of
such a position is that selling is good, while buying is bad. When stated this starkly, the assumption loses much
of its common-sense appeal.
In truth, deficits are neither causes nor symptoms of weakness, but are among the many economic indicators
that are determined jointly by the decisions and interactions of households, firms and governments in the
United States and abroad.
In fact, one of the fundamental forces behind the recent widening of our trade deficit has been the strength of
the U.S. expansion compared with the growth rates of our major trading partners. As U.S. income growth
outpaces growth abroad, our demand for both domestic goods and imports rises, while foreign demand for our
exports languishes. This is one way in which a current account deficit reflects underlying strength in the U.S.
economy.

Even more fundamentally, the trade balance reflects the outcome of the collective saving and investment
decisions in an economy. When the residents of one country are buying more from abroad than they are
selling, then they must also be borrowing to finance the shortfall. This basic accounting relationship means that
a country's trade deficit is equal to its accumulation of debt to foreigners. In other words, a trade deficit
emerges when there is an excess of domestic investment demand over available national savings.
To understand this relationship more intuitively, it is helpful to bear in mind that a trade deficit reflects an
excess of purchases over sales. Just as is the case for a household or business that has current expenses that
exceed current income, the difference must be financed through borrowing. Whether this borrowing is wise
depends on what is being purchased. For example, a household that is continually running up credit card debt
to finance current consumption, or a firm that is accumulating debt to cover operating losses, might well be
following an unwise and unsustainable practice. On the other hand, when borrowing is undertaken to finance
investments that will yield a flow of profits or services into the future, it can be a perfectly sound policy. The
question of whether our trade deficit is good or bad similarly hinges on the questions of why we are borrowing
from the rest of the world and what we are doing with the resources we are borrowing.

Deficits and the New Economy
With this analysis in mind, what can we say about the relationship between the widening trade deficit of the
1990s and the new economy?
Most explanations of the new economy are attributed, at least in part, to recent advances in technology. The
notion is that these advances will yield productivity gains far into the future, raising the rate of economic
growth.
As these new technologies are adopted and integrated into production processes, we would expect a period of
increased investment spending. This is particularly true when the technological improvement is embodied in
new types of capital goods, as is the case with many of the recent advances in computer and communications
technology. This type of technological advance is likely to be associated with a sustained increase in
investment as new equipment replaces old.
On the other side of the equation, the anticipation of continued strong economic growth might be expected to
lower aggregate national savings. That is, higher growth prospects for the future create a wealth effect that
boosts consumption demand at the expense of savings. After all, with the outlook so bright, there is less of an
incentive to set aside a portion of income for the future.
These two implications of technological advance—a period of booming investment spending and sluggish
savings—are consistent with the present situation in the U.S. economy. The rising trade deficit of the past
decade has been accompanied by a sharp decline in savings and a surge in investment spending. Between
1992 and 1999, personal savings as a share of GDP fell from 8.7 percent to only 2.4 percent. Over the same
period, real investment spending as a percent of GDP surged to an unprecedented rate of more than 18
percent, far exceeding the scale of previous investment booms.
As shown in Figure 1, there is a clear tendency for large upswings in investment to be associated with
widening trade deficits, and for troughs to be associated with surpluses, or at least smaller deficits. This is
particularly true for the 1990s.

Figure 1

Borrowing from the Rest of the World to Finance Investment for
the Future

Investment spending and the trade balance (measured here as net exports and fixed investment from the U.S. National Income Accounts)
tend to move in opposite directions over time. As was particularly true during the 1990s, periods of rapid investment are associated with
widening trade deficits. Larger trade deficits represent a source of financing for investment.
SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis

The change in the composition of investment has also been remarkable: The share of investment in
information processing equipment as a fraction of total equipment investment has been rising steadily since
the mid-1970s and has increased dramatically during the latter half of the 1990s. By the end of the decade,
this ratio was more than 40 percent.

Where Will It Lead?
A rising U.S. trade deficit is perfectly compatible with the notion that strong investment spending on new
technologies is raising future growth prospects, suppressing domestic saving. The resulting "weakness" of the
U.S. current account balance is, therefore, a reflection of an economy that is strong, but in transition.
The rising share of the U.S. deficit in the overall economy will eventually be reversed. The question of whether
that reversal takes place as an orderly adjustment, or as a "crash and burn" scenario is crucial in evaluating
the prospects for a continuing economic expansion.
Recalling the analogy to individual households or businesses, borrowing to finance frivolous consumption is a
recipe for disaster, while borrowing to invest in assets that will pay off in the future is more likely to be a

prudent course. The decline in the U.S. savings rate suggests that consumers are quite optimistic about the
future, presumably because they expect that current investment will, in fact, pay off.
The ultimate benefits of adopting new technologies will become apparent only over the long term. Once the
initial surge in investment demand subsides, it is likely that the rising U.S. trade deficit will show signs of
reversal, suggesting that the economic expansion related to this transition has reached a more mature stage.
If these investments do pay off in future higher productivity and output growth, we will no doubt look back on
this period as one in which the stage was set for a truly new economy.
Rachel Mandal provided research assistance.
Endnotes
1. The current account includes the balance of trade in goods and services, net interest payments and
unilateral transfer payments, such as foreign aid. [back to text]

National and District Data

Selected indicators of the national economy
and banking, agricultural and business conditions in the Eighth Federal Reserve District

Commercial Bank Performance Ratios
fourth quarter 1999

U.S. Banks
by Asset Size

$100
million$300
million

less than
$300
million

$300
million$1 billion

less
than
$1 billion

$1billion$15
billion

1.36

1.22

1.15

1.46

1.26

1.70

1.50

1.28

4.13

4.69

4.63

4.63

4.63

4.73

4.68

3.76

0.94

0.81

0.83

0.69

0.78

1.00

0.90

0.97

1.67

1.40

1.40

1.49

1.43

1.96

1.72

1.64

ALL

Return on Average Assets*
Net Interest Margin*
Nonperforming Loan Ratio
Loan Loss Reserve Ratio

Net Interest Margin*

Return on Average Assets *
1.26
1.37

Eighth District

4.22

Arkansas

4.24
4.27

1.11
1.23
0.96
1.07

0

.25

.50

.75

1

1.25

1.50

1.65

Indiana
4.04
4.15

Kentucky

4.57

Mississippi
3.91

Missouri
Tennessee
1.75

2

3

percent

3.50

Arkansas
Illinois

0.60

Indiana
0.80

Kentucky

0.69

Mississippi

0.72

Missouri

0.80
1.10

.5

.6

.7

.8

.9

1

1.1

Tennessee

1.20

1.2

1.3

4.29
4.39

5.31

4.50

5

5.50

6

1.34
1.35
1.28
1.26
1.25
1.32
1.22
1.32
1.27
1.35
1.37
1.43
1.33
1.37
1.43
1.35

Eighth District

1.06
1.01
1.07

0.60

4

4.93

Loan Loss Reserve Ratio

0.87
0.90
0.94

0.60

5.55

4.87

Nonperforming Loan Ratio

0.52

4.55

3.90
4.09

Illinois

1.37
1.27
1.32
1.24
1.29
1.15
1.49
1.43
1.47

less
More
than
than
$15 billion $15 billion

1.4

1.5

percent

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

Fourth Quarter 1998

Fourth Quarter 1999
NOTE: Data include only that portion of the state within Eighth District boundaries.
SOURCE: FFIEC Reports of Condition and Income for all Insured U.S. Commercial Banks
*Annualized data

[16]

For additional banking and regional data, visit our web site at:
http://www.stls.frb.org/fred/data/regional.html.

1.8

1.9

2

The Regional Economist April 2000
■

www.stls.frb.org

Regional Economic Indicators
Nonfarm Employment Growth

year-over-year percent change

fourth quarter 1999
Goods Producing

United States
Arkansas
Illinois
Indiana
Kentucky
Mississippi
Missouri
Tennessee

total

mfg

cons

2.2%
2.1
0.7
1.6
2.5
1.6
1.5
1.3

–1.5%
0.6
–1.3
0.7
0.5
–1.4
–2.2
–0.1

4.2%
5.1
2.9
0.3
4.5
–0.1
7.9
2.8

2

tpu

fire3

services

trade

2.9%
1.9
–0.6
0.1
3.2
4.2
3.0
3.4

2.1%
3.2
0.2
1.5
2.0
–0.4
1.4
0.4

3.9%
2.5
1.5
2.3
4.6
3.7
1.9
2.0

2.2%
2.9
0.8
2.6
2.4
2.2
1.8
1.3

govt

1.6%
1.2
1.5
0.7
1.5
2.2
1.7
0.7

Eighth District Payroll Employment
by Industry–1999

Unemployment Rates
percent
IV/1999

III/1999

IV/1998

4.1%
4.2
4.2
3.0
4.1
5.1
2.9
3.8

4.2%
4.4
4.4
3.0
4.4
5.0
3.4
4.0

4.4%
5.2
4.3
3.1
4.6
5.3
3.9
4.1

United States
Arkansas
Illinois
Indiana
Kentucky
Mississippi
Missouri
Tennessee

Service Producing
1

Manufacturing
18.4%

Trade

Government

27.3%

TPU 2
Services

5.8%

third quarter

Housing Permits

Real Personal Income

year-over-year percent change
in year-to-date levels

year-over-year percent change

2.2

25.3

0.2

–5

0

2.6

1999
Construction

2

15

20

25

Mississippi

30 percent

1998

Transportation and Public Utilities

Finance, Insurance and Real Estate

[17]

4.0
4.5

2.2

2.6
2.9

0

1

2

1999
3

3.9

1.6

Tennessee
10

3.7

2.2

Missouri

5.1

5

2.0

Kentucky

– 4.6
1.1

3.3

Indiana
15.0

4.3

2.7

Illinois

12.0

– 1.9

1.6

Arkansas

11.2

0.8
0.5

3.3

United States

11.2
14.1

–7.1

1

5.5%

15.0%

23.1%

fourth quarter

–10

Construction/
Mining 4.9%
FIRE 3

3

4.0

4

5

1998
All data are seasonally adjusted.

Major Macroeconomic Indicators
Real GDP Growth

Consumer Price Inflation

percent

percent

8

3.5

7

all items, less
food and energy

3.0

6
5
4
3
2
1

2.5
2.0

all items
1.5

0
1995

96

97

98

99

1.0
1995

00

NOTE: Each bar is a one-quarter growth rate (annualized); the green line is the
10-year growth rate.

96

97

98

99

00 (Feb.)

NOTE: Percent change from a year earlier

Civilian Unemployment Rate

Interest Rates

percent
6.5

percent
8
10-year

6.0

t-bond

7

5.5

fed funds
target

6

5.0
5

4.5

three-month
t-bill

4

4.0
3.0
1995

96

97

98

99

00 (Feb.)

3
1995

96

97

98

00 (Feb.)

99

NOTE: Except for the fed funds target, which is end-of-period, data are
monthly averages of daily data.

Farm Sector Indicators
U.S. Agricultural Trade

Farming Cash Receipts

billions of dollars
40

billions of dollars
115

35

110

exports

30

crops

105

25

100

imports

20

95

15

90

10

trade balance

5
0
1995

96

97

livestock

85
98

99

00 (Jan.)

NOTE: Data are aggregated over the past 12 months.

80
1995

96

97

98

99

(Dec.) 00

NOTE: Data are aggregated over the past 12 months.

U.S. Crop and Livestock Prices
index 1990-92=100
145
135

crops

125
115
105
95

livestock

85
75
1986

87

88

89

90

91

92

93

[18]

94

95

96

97

98

99

00 (Feb.)