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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  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  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  94 95 96 97 98 99 00 (Feb.)