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REGIONAL ECONOMIST | JANUARY 1998
https://www.stlouisfed.org/publications/regional-economist/january-1998/what-does-a-reserve-bank-president-do

President's Message: What Does a Reserve Bank
President Do?
John F. McDonnell
As you learned on this page last issue, the St. Louis Fed is currently seeking a new president, following Tom
Melzer's recent resignation. As chairman of the Bank's board of directors, I am responsible for directing the
nationwide search for a candidate to fill this important position. Which begs the question, what is it exactly that
a Reserve Bank president does? The answer is twofold.
First, the president has a broad range of responsibilities as chief executive officer since, in practice, Reserve
Banks are run much like private corporations. And, like the CEO of a private corporation, a Reserve Bank
president is responsible for establishing the organization's direction, achieving its short- and long-term
objectives and running an efficient operation. For these responsibilities, the president answers to a board of
directors.
Also like other CEOs, the Reserve Bank president represents the institution before its core constituencies:
bankers, business leaders, educators, community agencies, employees, the public. This largely involves
communicating the Bank's key messages at public or Fed-hosted forums, in columns like this one, in talks with
the media, at employee assemblies, in informal gatherings and so on.
The second area of responsibility for a Reserve Bank president is unique to the Fed: Presidents sit on the
Federal Open Market Committee (FOMC), the Federal Reserve's chief monetary policymaking body. At FOMC
meetings, members debate various prescriptions for monetary policy with the goal of achieving a stable,
growing economy. All 12 Reserve Bank presidents participate in FOMC discussions, though only five
presidents are voting members at any point in time. (The rest of the Committee consists of the seven-member
Federal Reserve Board of Governors.)
To ensure that their participation in FOMC policy debates is well informed, Reserve Bank presidents spend
much of their time studying the workings of the economy and becoming knowledgeable about their regions.
They are supported in this effort by a team of research economists. Not surprisingly, some Reserve Bank
presidents are economists themselves; others typically have banking or financial backgrounds.
Whatever their backgrounds, Reserve Bank presidents often make of their jobs what they will, emphasizing
areas in which they have expertise or interest and delegating other responsibilities to their staff.
As our search for a new president narrows, we hope to find a candidate who will extend the successes of the
past in both monetary policy and the efficient operation of the St. Louis Fed. Although I think we were
particularly lucky to have had Tom Melzer as our president and CEO for more than 12 years, I'm confident that
we will find an equally talented individual to perpetuate the fine tradition of this organization.

REGIONAL ECONOMIST | JANUARY 1998
https://www.stlouisfed.org/publications/regional-economist/january-1998/a-brave-new-economic-world-the-productivity-puzzle

A Brave New Economic World? The Productivity
Puzzle
Kevin L. Kliesen
To hear many economists and policymakers tell it, U.S. economic performance is currently the best it has been
in a generation—maybe even longer. Indeed, relatively low inflation, low unemployment and strong economic
growth is a combination rarely seen over the past three decades or so. In fact, some analysts go so far as to
insist that the U.S. economy has entered a new era. According to adherents of this view, businesses are finally
harvesting the fruits from technological advancements related to the computer microchip, laser technology and
fiber optic communications. Among the gains to the economy are better inventory management practices and
improved productivity. Despite all the hoopla this economic performance has generated—much of it deserved
—there are sound reasons to be concerned about future prospects for the U.S. economy. It all goes back to
fundamentals.

Miserable No More?
My, how times have changed. A little more than five years ago, many economists were downright worried
about the long-term prospects for increases in U.S. living standards.[1] Now, however, given the recent
performance of several important economic indicators, many economists are wondering whether higher growth
rates of real GDP and lower inflation rates are here to stay (see table). In fact, some believe that the current
economic environment is reminiscent of the heady years (1950-70) in the aftermath of World War II, when the
living standards of U.S. workers (real GDP per person) rose by almost 3.75 percent a year. This is more than
double the nearly 1.5 percent a year gains seen from 1930 to 1950.[2]

Table 1

The Best of Times?
How current economic statistics stack up against history
Performance/Level

Time Period

Best Performance
Since

Inflation (CPI)

2.2%

1996:Q3 1997:Q3

1986:Q1 - 1987:Q1

Unemployment Rate

4.7%

1997:Q4

1970:Q1

Misery Index

5.7%

1997:Q3

1973:Q1

Stock Market Returns (S&P 500)

40.8%

1996:Q3 1997:Q3

1982:Q3 - 1983:Q3

(millions of units at an annualized
rate)

824.0

1997:Q1

1978:Q4

Consumer Confidence (1985=100)

128.7

1997:Q4

1969:Q3

Unified Budget Deficit ($billions)

$22.6

Fiscal Year 1997

Fiscal Year 1974

Indicator

New Home Sales

NOTE: Inflation and growth of the S&P 500 are four-quarter percent changes; measures of the unemployment rate, the misery index, new
home sales and consumer confidence are quarterly averages of monthly rates.

Few comparisons between today's economic environment and that seen between 1950 and 1970 are as apt as
the absence of debilitating rates of price inflation and high and rising unemployment rates. These were the twin
maladies that plagued policymakers for much of the late 1960s to the early 1980s, when living standards
reverted to their prewar rates of growth. After averaging 5.4 percent a year from 1980 to 1991, inflation during
the current business expansion has been about half of that.
Low and stable inflation has been a boon for the economy, providing businesses with a solid foundation for
undertaking investment initiatives, expanding production and boosting employment. In fact, in the fourth
quarter of 1997, the civilian unemployment rate averaged 4.7 percent, its lowest level in more than 25 years.
Moreover, real GDP has grown at an exceptionally strong 3.3 percent annual rate over the past two years,
which is well above its 10-year average growth rate of 2.5 percent. With inflation and unemployment low, and
real GDP growth high, the misery index in the third quarter of 1997 was at its lowest point in nearly 25 years.[3]
Does the recent macroeconomic performance of the economy signal the beginning of a new economic era—
one whose operating paradigm is no longer rooted in the ebbs and flows of the traditional business cycle?
Moreover, what is the role for monetary policymakers in this new paradigm? Can they now show less vigilance
against inflation? At first glance, it would appear so, since the U.S. economy has experienced only three
quarters of negative real GDP growth in the past 15 years, and the flames of inflation appear to have been
extinguished for good—or at least sufficiently doused to be only marginally worrisome. But is there more to the
story?
The conventional view—the one held by most forecasters—is that the recent surge in economic activity is
typical of the increased production that normally accompanies the greater demand for goods and services
seen over the course of the business cycle. Those who believe that something more fundamental is taking
place, however, ask the following: With aggregate demand for goods and services exceptionally strong, why

hasn't inflation accelerated as in previous expansions? Again, the conventional view holds that it eventually will
once certain temporary factors that have been restraining inflation fade from view.[4]
There is, however, an alternative view, which has been looked upon favorably by Federal Reserve Chairman
Alan Greenspan, among others.[5] At its core, this view holds that the considerable capital stock put into place
by businesses over the past two to three years—augmented with impressive technological advancements
related to the computer microchip—has boosted the economy's potential to grow over time. Strong growth and
low inflation is simply the byproduct of this development.
For monetary policymakers, these two competing views offer an extraordinary challenge. The former view
suggests that monetary policy, as in times past, has been perhaps too accommodating of this upsurge in
demand. If this is true, then inflation will eventually accelerate, thus threatening the sustainability of the
business expansion. The latter view, on the other hand, implies that the economy has entered a new economic
era where inflation is permanently low and the capacity for growth is much higher than most thought possible.
Why is the new paradigm story gaining sway with some very influential policymakers?

Know Your Fundamentals
Economists generally believe that economic growth can be measured by how fast living standards rise over
time, which is usually defined as year-to-year increases in GDP per person (or per worker). A country's per
capita GDP depends importantly on institutional factors that facilitate the production, distribution and sales of
goods and services, otherwise known as the economy's "infrastructure."[6] Although many factors can come
into play, a few crucial ones stand out—chief among them is the way a society organizes its form of
government: Does the government encourage private ownership of the means of production and respect for
the rule of law, including a willingness to stamp out corruption and enforce private contracts? Other crucial
components of a healthy economic infrastructure are: an independent central bank that is committed to
achieving price stability, an adherence to the principles of free trade, legal protection of copyrights and patents,
and a regulatory system that effectively balances the costs and benefits of government intervention in the
private sector. Economic infrastructure, then, appears to explain why per capita output in the United States is
roughly seven times greater than that of Mexico, and nearly 10 times that of China.
If a country's economic infrastructure goes a long way toward explaining why U.S. citizens are much wealthier
than those of Mexico or China—or every other country for that matter—it also directly influences those factors
that determine how fast an economy grows over time. Two basic factors—labor intensity and labor productivity
—determine this growth path over time, both of which can be affected by a wide variety of influences.[7] A
country's labor intensity is determined by the number of people who are entering the labor force, and thus
available to produce (and consume) goods and services. Labor intensity is mostly a function of population
growth—which generally changes slowly—although immigration can have some effect.
It would be difficult to overstate the importance of labor productivity growth in determining future increases in
living standards. Simply put, when economic resources (whether human beings, machines or land) are not
very productive, the economy's potential to grow over time is severely constrained. To use a sports analogy, a
running back who gains four yards per carry is much more productive than one who gains only two. Not
surprisingly, the former is also paid much more than the latter. Thus, the more productive an economy's
resources are, the more income they will produce, and the higher the nation's standard of living will be.
Labor productivity can be influenced by many factors. In general, though, it depends on a country's capital
intensity, which comes in two forms—investment and human knowledge, or, what economists call, respectively,
physical capital and human capital. The accumulation of physical capital (tangible investment) depends on
such factors as a nation's saving rate, the return to investment and expectations of future economic growth.
But capital intensity is also influenced by the accumulation of ideas, such as research and development (R&D)

efforts that both build upon previous discoveries and lead to inventions that can be copyrighted or patented.
The transfer of new ideas and technological advances in a free and open international trading environment is
also crucial. The U.S. auto industry, for example, benefited immeasurably from the competition offered by
Japanese-produced cars and trucks in the early 1980s.
The government can also play a positive role in spurring labor productivity. For instance, some economists
favor permanent R&D tax credits and/or lower capital gains taxes to spur increased saving and investment.
Government policy can play a key role in boosting human capital, too. Although it is very difficult to measure,
human capital depends crucially on educational attainment, which is why many economists favor universal
subsidies for higher education, or policies that would promote competition among private and public schools.
Others believe that human capital can be boosted by "technological spillovers," which occur when workers are
given specific knowledge and training that enables them to operate equipment and machinery which embodies
the latest technology, thereby leading to increased real wages and higher living standards.
In the final analysis, an economy grows over time because of tangible factors—what economists call "real
things." These real things influence a country's productivity growth and, ultimately, its standard of living.

What's Wrong with This Picture?
One way that a firm can offset increases in input costs is through greater labor productivity, namely by
producing more goods and services at a lower cost per unit. All other things equal, this would tend to increase
the firm's profits—thereby increasing the wealth of shareholders—and raise workers' real wages. If enough
firms were able to accomplish this to affect the aggregate economy, the result would generally be rising output
and falling rates of inflation—in other words, a pattern that is broadly consistent with the above-average
economic growth and falling inflation rates seen in the United States for the past couple of years.
The peak of labor productivity growth and increases in living standards during the postwar era occurred prior to
1973. Specifically, productivity growth averaged nearly 3 percent during the five business expansions from late
1949 to late 1973. At this rate, U.S. living standards doubled about every 24 years. Does the current economy
measure up to this impressive performance? Hardly. Labor productivity during the current expansion has risen
by a paltry 1.3 percent average annual rate (see chart). In fact, this growth rate is virtually identical to that seen
in the previous expansion. At this pace, it would take about 55 years for living standards to double.

Chart 1

Better Now than Before?

NOTE: The short (three-quarter) expansion of 1980 is omitted.

Glimmers of a potential increase in the trend rate of labor productivity growth have recently emerged in the
official statistics, however. For example, productivity grew at an impressive 2.7 percent rate through the first
three quarters of 1997. But is it credible to assume that this growth is part of a dynamic that will return the U.S.
economy to a time when labor productivity and living standards were roughly doubling every two generations?
Economists do not yet have a good sense whether, as some have suggested, a fundamental shift has truly
occurred, or, as others have claimed, that recent productivity gains are simply temporary developments
associated with a strong, cyclical upsurge in U.S. output growth. Either way, it seems unwise to attach a great
deal of importance to three quarters of—admittedly—exceptionally strong productivity growth. And, as
Chairman Greenspan suggests, there may be two very important reasons why analysts should look beyond
the productivity data as currently measured.
First, it is entirely possible that, despite their best efforts, government statistical agencies cannot adequately
capture the rapidly changing makeup of the U.S. economy. The content of economic output, as Greenspan has
noted, is becoming increasingly conceptual. That is, many firms—typically, service-oriented nonmanufacturing
firms—create value by manipulating ideas or collecting and transmitting information. Measuring productivity
improvements in these types of industries is difficult, to say the least. This problem is less acute in the
manufacturing sector, though, where measuring physical quantities like cars and tons of steel is fairly
straightforward. This is important because manufacturing productivity during this business cycle has increased
by a little more than 3.25 percent a year, a gain that is surpassed only by that in the 1970-73 expansion. At the
same time, though, productivity for the entire nonfarm business sector (manufacturing and nonmanufacturing)
has grown by only about 1.5 percent this expansion. This large difference implies that nonmanufacturing
productivity growth has been well below 1.5 percent.

Common sense would suggest that the manufacturing sector has seen its productivity improve considerably
due to improved production processes brought about by technological gains. But if the manufacturing sector
has been able to make better use of these advances, why hasn't the nonmanufacturing (services) sector been
able to do the same? After all, both sectors have access to the same technology, and should therefore have
equal opportunity to profit from these technologies. One reason why productivity gains may be underestimated
in the nonmanufacturing sector is that it is very difficult to accurately measure the output of many services,
which comprise roughly three-quarters of the U.S. economy. If output is mismeasured, then productivity is also
mismeasured because productivity is simply output divided by inputs.
Many economists believe that current productivity data understate growth significantly because it is difficult to
disentangle quality improvements captured within price changes. The technological advancements embedded
within new automobiles or revolutionary medical procedures are good examples of this. This is important
because a quality improvement should boost output (GDP), and thus productivity, while a price change should
not. For example, if the CPI overstates the inflation rate by 1 percentage point a year, then, all other things
equal, productivity growth would be biased downward by about 1 percentage point a year.8
Current productivity growth may be understated by that amount, or it may not. In short, it is anybody's guess as
to how much current labor productivity growth is underestimated. Statistically speaking, though, an increasing
share of output produced by the (hard-to-measure) nonmanufacturing sector may be biasing our estimates of
economic growth and, as a result, the pace at which U.S. living standards are increasing. A recent Federal
Reserve study provides some support for this view, concluding that the stagnant productivity growth measured
in several service-oriented sectors is not consistent with the measures of profitability, output prices and wages
in these sectors.9
The second reason why measured productivity gains may be elusive-despite the substantial amount of capital
put in place by businesses in recent years-relates to the transition between technological eras. Stanford
professor Paul David maintains that the productivity gains associated with the widespread use of electrical
power that began in the late 1800s were very long in coming.10 David argues that significant productivity gains
from the invention of the electric dynamo did not begin to emerge until the 1920s since old technologies, such
as steam and water power, were not immediately discarded when electricity arrived on the scene. Moreover,
new and innovative ways of using electricity in the manufacturing and production of goods also took time to
develop.
The economy may currently be experiencing the same transition with the computer. As a share of GDP,
investment in high-technology equipment is approaching 5 percent—a far cry from the approximately 1.75
percent from a decade earlier. It is just a matter of time, according to David and others, before firms learn how
to fully adapt these technological advances to the production of goods and services.

Some Caveats
Measurement issues—which are admittedly important—aside, it is possible that the growth of worker
productivity has slowed considerably over the past 25 years or so for more fundamental reasons. To begin
with, the accumulation of physical capital over time largely depends on the saving behavior of a country's
citizens. Simply put, the more a country saves, the more it invests. The more it invests, the more capital its
workers have at their disposal and, in general, the more productive they will become. The end result is a higher
standard of living. Perhaps one reason why recent productivity trends have been sorely disappointing is that
the U.S. saving rate averaged just over 2 percent between 1983 and 1996, which pales in comparison to the
more than 6 percent saving rate seen between 1946 and 1982.
Because ideas are important in promoting the technological process, R&D efforts can play a critical role in
determining long-term increases in living standards. Another possible reason, then, why current productivity

growth does not measure up to previous periods is that there has been a significant drop in the amount of
resources devoted to R&D. Spending on R&D fell from just under 3 percent of GDP in the early 1960s to about
2 percent in the late 1970s. Although it recovered strongly, rising to nearly 2.75 percent by 1985, it has started
to wane once again, averaging about 2.5 percent of GDP in 1996.
Human capital is a key component of the production process—especially in a knowledge-based economy.
Therefore, a final reason why worker productivity growth has slowed could be the performance of our
education system, particularly at the elementary and secondary levels. According to a recent survey, U.S.
students registered the lowest average test score from the Third International Mathematics and Science
Study.11

And the Verdict Is...
As nearly all economists recognize, measuring productivity accurately is a difficult task. Still, a cursory look at
economic fundamentals suggests there are reasons to believe that things are not as rosy as many insist. At
the same time, there are also solid reasons to believe that technological improvements related to the computer
microchip have changed the U.S. economy in fundamentally important ways—improved labor productivity
growth and slowing rates of inflation, among them. Although signs of faster productivity growth have begun to
emerge in the official statistics, it is too early to determine whether these gains are permanent, or, as others
have claimed, simply temporary. Thus, while greater gains in labor productivity would be a welcome
development for monetary policymakers, it remains true that inflation is ultimately determined by how fast the
central bank creates money. By itself, therefore, faster productivity growth—if that is what is occurring—is not
enough to keep inflation low and stable.
Daniel R. Steiner provided research assistance.
Endnotes
1. See Federal Reserve Bank of Kansas City (1992). [back to text]
2. See Mankiw (1997). [back to text]
3. The misery index is the sum of: the unemployment rate, the inflation rate, and the quarterly change in
the long-term Treasury interest rate, less the deviation of quarterly real GDP growth from its 10-year
average. [back to text]
4. The most commonly cited factor in this regard is the recent effort of businesses to rein in benefit costs
(and in particular, health care costs). [back to text]
5. See Greenspan (1997). [back to text]
6. See Hall and Jones (1997). The term infrastructure, as used here, does not refer to a nation's roads,
bridges, highways, tunnels or other structures. [back to text]
7. Broadly speaking, growth of per capita GDP (living standards) is the sum of output per hour (labor
productivity) and the number of hours worked per capita (labor intensity). By this formula, the U.S.
economy's potential growth rate appears to be between 2 percent and 2.5 percent, with labor intensity
contributing about 1 percent of this growth and labor productivity contributing roughly 1 percent to 1.5
percent. A good discussion of this topic can be found in the Minneapolis Fed's 1996 Annual Report.
[back to text]
8. See Kliesen (1996). [back to text]
9. See Slifman and Corrado (1996). [back to text]
10. See David (1990). [back to text]
11. U.S. students were compared with those from the other Group of Seven (G-7) countries: Canada,
France, Germany, Italy, Japan and the United Kingdom [back to text] .

References
David, Paul A. "The Dynamo and the Computer: An Historical Perspective on the Modern Productivity
Paradox," The American Economic Review (May 1990), pp. 355-61.
Greenspan, Alan. "Remarks at the University of Connecticut," Storrs, Conn., October 14, 1997.
Federal Reserve Bank of Kansas City. Policies For Long-Run Economic Growth, A Symposium Sponsored by
the Federal Reserve Bank of Kansas City (1992).
Federal Reserve Bank of Minneapolis. Breaking Down the Barriers to Technological Progress: How U.S. Policy
Can Promote Higher Growth, 1996 Annual Report.
Hall, Robert E. and Charles I. Jones. "Levels of Economic Activity Across Countries," The American Economic
Review (May 1997), pp. 173-77.
Kliesen, Kevin L. "Critiquing the Consumer Price Index," The Regional Economist, Federal Reserve Bank of
St. Louis (July 1997), pp. 10-11.
Mankiw, N. Gregory. Principles of Economics (Fort Worth, Tex.: The Dryden Press, 1997).
Slifman, Larry and Carol Corrado. "Decomposition of Productivity and Unit Costs," Mimeo, Board of Governors
of the Federal Reserve System (November 18, 1996).

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 | JANUARY 1998
https://www.stlouisfed.org/publications/regional-economist/january-1998/going-once-going-twice-sold-auctions-and-thesuccess-of-economic-theory

Going Once, Going Twice, Sold: Auctions and the
Success of Economic Theory
Adam M. Zaretsky
In 1994, the Federal Communications Commission (FCC) began auctioning electromagnetic spectrum
bandwidth to firms interested in using it for personal communications services (PCS). Before that time,
spectrum bandwidth had been given away to broadcasters through administrative hearings or lotteries—
procedures that were not only inefficient, but also costly. According to the Commerce Department, the federal
government in the 1980s gave away cellular phone licenses valued at $46 billion.1 Realizing the revenue
potential, Congress turned to auctions as a way to both allocate spectrum more efficiently than it had in the
past and to reap revenue that could be used to help offset the budget deficit. Economists were called upon to
aid in the design and implementation of these auctions, which have proven quite successful.

Why Auctions Are Better
In a word, auctions are better at allocating spectrum than administrative hearings or lotteries because auctions
enable market forces to designate who will receive how much of the resource. As with all other resources in
the economy, there is a limited amount of spectrum bandwidth; thus, scarcity exists. And like other scarce
goods and services in the economy, prices are the best allocator.2
But unlike many other goods in the economy, which are abundantly available and frequently purchased,
spectrum bandwidth is difficult to price because, until 1994, it hadn't been sold before. Auctions overcome the
pricing problem through their bidding mechanisms, which let potential buyers reveal their individual values of
an item. Moreover, because sellers can set the rules of the selling process and announce them upfront, all
auction participants know exactly what is expected of themselves and others. In other words, auctions are
orderly, organized mechanisms through which market-clearing prices can be determined.

So Why Were Economists Involved?
In many ways, bidding for an item at an auction is a lot like playing poker. With each hand, a player has to
decide whether to call, raise or fold. He bases this decision on two factors: the cards in his own hand and his
best guess as to the cards in the other players' hands. At the same time, he must also try to figure out how the
other players might react to his decisions. The understanding and explanation of this behavior is called game
theory.
Game theory examines the strategic interaction and decision-making behavior of players in a game,
accounting for what they know, what they think others know, and how they think others will act on this
knowledge. A well-known example of the theory is the simple two-person game called the Prisoners' Dilemma.
In this game, Bud and Lou commit a crime. Although there is little evidence against them, they are still
arrested. The two are separated and told their options. If both confess, each will get four years in prison. If
neither confesses, each will be charged with a lesser crime and get a two-year sentence. But if, for instance,

Bud cooperates and rats on Lou, who says nothing, Bud will get one year, while Lou will get eight. If Lou rats
on Bud, and Bud keeps quiet, the sentences will be reversed.
What should Bud and Lou do? The best option would be for them to agree not to confess so both can get off
with only two years in prison. But this strategy requires Bud and Lou to collude and trust each other to uphold
their end of the bargain. The trust is tested, though, once the two are separated.
If Bud truly believes that Lou will keep quiet, he can cut his sentence from two years to one by taking the deal
and confessing. If Lou is thinking exactly the same thing, though, both will end up confessing and, therefore,
each will get four years.
As the accompanying table shows, Bud's best strategy is actually to confess irrespective of which strategy Lou
chooses (confessing or keeping quiet).3 Why? Because if Lou chooses to confess, Bud's options are either to
also confess and serve four years, or to keep quiet and serve eight. If Lou chooses to keep quiet, then Bud's
options are either to confess and serve one year, or to also keep quiet and serve two. The choice is obvious:
Always confess. In this game, confessing is the dominant strategy because it prevails over all other choices.
Neither player becomes better off by switching strategies and keeping quiet.

Table 1

What Should Bud and Lou Do? The Prisoners' Dilemma
Bud's Strategies
Confess

Keep Quiet

Bud: 4 years
Lou: 4 years

Bud: 8 years
Lou: 1 year

Keep Quiet Bud: 1 year
Lou: 8 years

Bud: 2 years
Lou: 2 years

Confess
Lou's Strategies

Game theory, then, models players' best responses to opponents' actions, assuming that each player always
acts in his own best interest. The models also assume that any action taken by a player is the best strategy
available, given the anticipated action of his opponent.
Understanding this type of strategic interaction was important for the FCC because it needed to know how
bidders would behave during the spectrum auction. Moreover, the commission also needed to design a set of
auction rules that would accomplish Congress' goals. Therefore, the FCC called upon game theorists to aid in
the design of the auction rules, giving economists a chance to test their theories in a real-world setting.

Economics in Action—Designing an Auction
Every auction suffers from a number of potential problems. By defining a proper set of rules for all participants
to follow, however, such problems can be minimized. For example, a common problem in an English auction—
in which an auctioneer invites oral bids until the last bid made goes unchallenged—is that participants can
collude, thereby reducing the final price of the item. Agreements can be made beforehand, determining who
will win and at what price. Cheating (breaking the agreement) is checked because others in the pact will see it
occur.

A simple solution to collusion is to hold an auction in which all participants submit sealed, written bids, and the
highest bid wins. With sealed bids, effective collusion cannot occur because breaking the pact is now easy.
This type of auction, however, can lead to the winner's curse—a situation in which a winning bidder pays more
for an item than he thinks it's worth because he has no information about what others might think it's worth. If
bidders are aware of this possibility, they might lower their offers, thereby reducing the seller's revenue.
To avoid the winner's curse, a Vickrey auction—a sealed-bid auction in which the highest bidder wins, but pays
the amount of the second-highest bid—could be used.4 This type of auction eliminates the winner's curse
because bidders are now motivated to reveal their true valuations of the item at hand through their bids. Why?
If a player bids less than his valuation, he risks losing the item; if he bids more, however, he may end up
paying too much. The player's incentive, therefore, is to bid his valuation.
In practice, however, Vickrey auctions don't always go as planned. In 1990, for example, a New Zealand firm
that bid NZ$100,000 for spectrum ended up paying the second-highest bid, NZ$6. And in another case, a firm
that bid NZ$7 million paid NZ$5,000. These situations occurred because New Zealand's government failed to
require a minimum bid. Not surprisingly, the government has since amended its auction rules.
The FCC had to plan for other considerations as well: for instance, the likelihood that firms bidding on
spectrum would want to aggregate licenses in certain areas. In other words, the company bidding on the Los
Angeles license would most likely also want to own the licenses for the city's surrounding communities
because of economies of scale. If the firm could not secure the Los Angeles license, the other licenses would
be worth less to it, prompting the firm to reduce its bid and, hence, the government's revenue. With this in
mind, the FCC decided to auction all licenses simultaneously in multiple rounds, enabling firms both to
aggregate as they chose and to withdraw from regions in which bids were getting too large.5 Auctions end
when no new bids are submitted for any license on the block.

An Overwhelming Success
The proof of game theory's success is in the pudding. By carefully designing rules to avoid the potential pitfalls
of auctions, economists have helped the FCC raise more than $23 billion since 1994, far exceeding the $10
billion in revenue the Office of Management and Budget had originally projected.6 But this success needn't be
limited to spectrum or the FCC. Oil and mineral rights, foreclosed homes, and even landing rights at airports
are just a few examples of other potential candidates for auctions. And if the overall success enjoyed by the
FCC can be repeated in some of these other areas, the potential economic gains to everyone could truly be
large.
Gilberto Espinoza provided research assistance.
Endnotes
1. See U.S. Department of Commerce (1991). [back to text]
2. See Zaretsky (1997) for another example of market solutions to scarcity. [back to text]
3. Because Bud's and Lou's strategies and options are identical, the following analysis also holds true for
Lou. [back to text]
4. The Vickrey auction was named for Nobel laureate William Vickrey, who introduced the concept in
1961. [back to text]
5. If a high bidding firm withdraws its bid during the auction, and the final bid is lower, the withdrawing firm
has to pay the difference between the two, which both guarantees revenue to the FCC and prevents
superfluous bids. For more information about the details of the FCC spectrum auctions, see McMillan
(1994) or McAfee and McMillan (1996). [back to text]
6. See McAfee and McMillan (1996). [back to text]

References
Binmore, Ken. Fun and Games: A Text on Game Theory (Lexington, Mass.: D.C. Heath and Company, 1992).
McAfee, R. Preston, and John McMillan. "Analyzing the Airwaves Auction," Journal of Economic Perspectives
(Winter 1996), pp. 159-75.
McMillan, John. "Selling Spectrum Rights," Journal of Economic Perspectives (Summer 1994), pp. 145-62.
________. "Why Auction the Spectrum?" Telecommunications Policy 19:3 (1995), pp. 191-99.
"Revenge of the Nerds," The Economist (July 23, 1994), p. 70.
U.S. Department of Commerce. U.S. Spectrum Management Policy: Agenda for the Future. Washington, D.C.,
NTIA Special Publication 91-23 (February 1991).
Zaretsky, Adam M. "Rush-Hour Horrors: How Economics Tackles Congestion," The Regional Economist,
Federal Reserve Bank of St. Louis (April 1997), pp. 10-11.

REGIONAL ECONOMIST | JANUARY 1998
https://www.stlouisfed.org/publications/regional-economist/january-1998/both-a-lender-and-a-borrower-be-banks-cope-with-adeposit-shortage

Both a Lender and a Borrower Be: Banks Cope
with a Deposit Shortage
Michelle Clark Neely
Over the course of the current U.S. economic expansion, commercial banks have prospered by significantly
increasing loans to businesses and consumers. Indeed, since mid-1994, loans outstanding at U.S. commercial
banks have risen almost 29 percent. Eighth District loan growth has been even stronger over the period, rising
almost 35 percent.1 And the growth shows little sign of tailing off: Anecdotal reports from bankers around the
District indicate that loan demand remains fairly strong.
That said, bankers—especially community bankers—also report that they are having increasing difficulty
obtaining deposits, traditionally the major source of loan funding. Indeed, over the last three years, deposits
have risen about 19 percent—roughly half the growth of loans—at both U.S. and District banks. Moreover,
most of the growth occurred early in the period; deposit growth has been anemic and even negative for many
banks in recent quarters. To meet loan demand in the absence of strong deposit growth, District banks have
had to turn to both traditional and newer funding sources, namely investment securities, fed funds and
borrowings from Federal Home Loan Banks.

All Loaned Up
A strong economy and healthy bank balance sheets can be credited with much of the increase in loans during
the past three years. Loans have performed so well lately that banks have been able to dramatically reduce
the amount of reserves they set aside to cover possible defaults. And record earnings have led to large
increases in bank capitalization, further increasing banks' ability to make loans.
As a result of these favorable developments, the loan to deposit ratio at District banks rose from 73 percent in
mid-1994 to 82 percent in mid-1997. The growth in loans has been broadly based, with all major loan
categories showing substantial gains over the past three years. In the District, for example, commercial and
industrial loans have risen 30.8 percent, real estate loans have jumped 42.2 percent, and consumer loans
have increased 18.2 percent.
Deposit growth has failed to keep up with the torrid pace of loan growth. Several explanations have been
offered to account for this disparity, particularly the notion that retail depositors are leaving the banking system
in search of higher yields—a phenomenon termed disintermediation. Some analysts believe this is just a
cyclical trend, and that deposits will come back when retail deposit interest rates start rising. Others, however,
believe the slowdown is part of a long-term trend, as small investors become increasingly comfortable with
putting their money into the stock market and other assets. On the supply side, a number of banks have grown
less aggressive in trying to attract deposits, refusing to compete in CD rate wars with other financial
institutions, for example. Some analysts have interpreted this behavior by banks as price discrimination in their
funding activities, saying that banks have a strategy of paying low rates on retail deposits, exploiting the small

depositors who put a high value on federal deposit insurance, and attracting the rest of their funds in other
markets.2

Shedding Securities
Banks do, however, have a number of options besides deposits to fund loan demand. One ready source of
liquidity is a bank's investment portfolio. Investment securities and loans are substitutes among bank assets;
banks can easily sell or decide not to renew most of the securities they tend to purchase to fund loan demand.
Since mid-1994, the securities portfolio at District banks that have average assets of less than $1 billion has
shrunk 10 percent.
In addition to shrinking the size of the overall portfolio, these banks have also altered its composition, reducing
substantially their holdings of both Treasury securities (–38.4 percent) and mortgage-backed securities (–16.9
percent), and replacing them with other types of government and government-backed securities (+28.5
percent), such as debt securities issued by the Small Business Administration and Fannie Mae and Freddie
Mac. These composition changes can be explained by a number of factors, including: a need to fund loan
demand with liquid securities (those from the Treasury tend to be the most liquid); a desire to increase portfolio
returns (Treasury securities tend to yield less than other types of securities); strength in the real estate sector,
which heavily influences the return on many government-backed securities; and a low interest rate
environment, which made mortgage-backed securities less attractive since low rates tend to increase
prepayment of mortgages, thereby lowering returns.

Borrowing from Peter to Lend to Paul
Banks can also create nondeposit liabilities to fund loans and other assets. One of the more popular sources of
liquid funds is the fed funds market, in which banks with excess funds on hand lend them to other banks. The
funds are generally sought and received on the same day and must be repaid the next at a rate determined
daily in the money market. The bulk of loans made in the fed funds market are designed to meet banks'
reserve requirements, though many banks also borrow longer-term funds from this market (called term fed
funds) to meet loan demand.
Another source of ready liabilities that is available to an increasing number of banks is the Federal Home Loan
Bank (FHLB) System. Banks first became eligible to join this previous thrift-only, government-sponsored
enterprise in 1989. In the past several years, commercial bank membership has soared, with commercial
banks currently making up about two-thirds of the system's 6,000 plus members. Through the 12 FHLBs,
member institutions can obtain either overnight, short-term (one week to six months) or longer-term loans—all
of which are called advances—to meet a variety of funding needs. Long-term advances, available in maturities
of up to 20 years, are used by many banks to fund residential mortgages. Advances are available at both fixed
and adjustable rates and are almost always cheaper than other wholesale funding sources.3
District banks have clearly become big fans of the FHLB System: District-wide, almost 50 percent of them are
members (see table).4 Within the District's borders, FHLB membership ranges from 37.9 percent in Illinois to
71.9 percent in Indiana. Overall, almost two-thirds of District member banks had outstanding FHLB advances
as of June 30, 1997, and in Kentucky and Tennessee, all District member banks were borrowing at mid-year
1997. In several District states, especially Mississippi (34.7 percent) and Indiana (25.7 percent), FHLB
advances make up a significant portion of banks' total nondeposit liabilities, indicating how much banks—
especially community banks that have experienced actual declines in deposits—have come to rely on other
funding sources.

Table 1

Federal Home Loan Banks Advance in the District
(Data as of June 30, 1997)
District
Portion of
State

Number of
FHLB
Members

FHLB Members as a
Percent of Total
Banks

Percent of FHLB
Members
Borrowing

FHLB Advances as a
Percent of Nondeposit
Liabilities

Arkansas

124

53.2%

50.8%

15.6%

Ilinois

72

37.9

50.0

4.4

Indiana

41

71.9

43.9

25.7

Kentucky

97

59.5

100.0

12.8

Mississippi

24

45.3

79.2

34.7

Missouri

100

42.6

48.0

10.6

Tennessee

47

56.0

100.0

16.3

District
Total

505

49.8

65.0

13.8

SOURCES: Federal Home Loan Banks of Chicago, Cincinnati, Dallas, Des Moines and Indianapolis; and FFIEC Reports of Condition

The bulk of FHLB loans made to District banks are longer term in nature, with almost three-quarters of total
District borrowings carrying maturities of a year or more. There is quite a bit of variance across states,
however. In Missouri and Indiana, for example, more than 50 percent of borrowings are for terms of less than
one year, compared with the District-wide average of 27.3 percent.

Liquidity Trap?
To date, District bankers have been able to satisfy a surprisingly sustained level of loan demand, despite a
significant amount of disintermediation. Although many banks continue to maintain flexibility by holding large
amounts of liquid securities that can be sold to meet loan demand, an increasing number are also finding that
they can gain "instant liquidity" through wholesale funding sources, like the Federal Home Loan Banks.
Although this strategy has certainly helped banks post record profit levels in recent years, it's not without risks.
So far, loans have performed extremely well, and loan losses have been minimal. However, if credit quality
deteriorates unexpectedly, and loan portfolio returns start to fall, the burden of interest payments from FHLB
advances and other borrowings could pinch earnings significantly. In a worst-case scenario, a significant
downgrading of a bank by supervisors could force it to immediately pay back all FHLB advances and halt all
further borrowing, potentially causing a liquidity crisis. Although the industry is exceedingly well-capitalized at
this time, and liquidity is readily available, there may be more than a few District banks that will wish they
hadn't made that last loan when the next economic downturn arrives.
Thomas A. Pollmann provided research assistance.
Endnotes
1. District loan and deposit figures for 1994 through 1997 exclude the former Boatmen's banks, which
were merged into NationsBank of Charlotte, N.C., in mid-June 1997. [back to text]
2. See Gilbert (1997). [back to text]

3. See Newkirk (1996) and Faulstitch (1997) for further detail on the operation of FHLBs, membership
requirements and program offerings. [back to text]
4. Banks in Missouri are eligible to join the FHLB of Des Moines; banks in Kentucky and Tennessee
belong to the FHLB of Cincinnati; banks in Arkansas and Mississippi join the FHLB of Dallas; banks in
Illinois belong to the FHLB of Chicago; and banks in Indiana join the FHLB of Indianapolis. [back to text]

References
Faulstitch, James R. "Banks Get More Adept at Using Home Loan Bank Funding," ABA Banking Journal (June
1997), pp. 79-80.
Gilbert, R. Alton. "Banks Profit From Low Rates on Time and Savings Deposits," Monetary Trends, Federal
Reserve Bank of St. Louis (June 1997).
Newkirk, Kristine M. "Discovering a New Funding Partner," Independent Banker (June 1996), pp. 17-22.
Rose, Peter S. Commercial Bank Management, 3rd edition (Chicago: Richard D. Irwin, 1996), chapters 8, 9
and 12.

REGIONAL ECONOMIST | JANUARY 1998
https://www.stlouisfed.org/publications/regional-economist/january-1998/news-bulletins-from-the-eighth-federal-reserve-district

Pieces of Eight: News Bulletins from the Eighth
Federal Reserve District
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via the St. Louis Fed's web site (www.stls.frb.org). All of the publication's features are there—the three articles,
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To get directly to The Regional Economist online, set your browser for
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North and South: Unions Divide District (1996)

District State

Rank among 50 States % of Workers Covered by Unions

Illinois

8

21.5%

Missouri

21

16.8

Indiana

23

16.1

Kentucky

25

14.1

Tennessee*

34

11.1

Arkansas*

44

8.4

Mississippi*

45

8.1

National Average

16.2

*right-to-work state
SOURCE: Bureau of National Affairs, based on data from the 1997 Current Population Survey

New Year Brings New Format for Monetary Trends
Monetary Trends, a St. Louis Fed publication that reports monthly data on the money supply, interest rates and
commercial bank loans and investments, now boasts an expanded format. The revamped publication features
both a broader selection of data and additional charts, making the information easier to comprehend and
interpret.
The changes to Monetary Trends are similar to those made last year to its sister publication, National
Economic Trends. For a free subscription to either publication, contact Debbie Dawe of the St. Louis Fed's
Public Affairs Department by phone at (314) 444-8809 or by e-mail at Debbie.J.Dawe@stls.frb.org.
The publications, as well as their underlying data, are also available electronically through the St. Louis Fed's
home page, which is at www.stls.frb.org.

District
Data

The

Regional Economist - January 1998

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

Commercial Bank Performance Ratios
U.S., District and State
All
U.S.

U.S.
District
<$15B ]

IL

AR

IN

KY

MS

MO

TN

Return on Average
Assets (Annualized)
3rd quarter 1997

1.30%

1.38%

1.34%

1.32%

1.14%

1.36%

1.29%

1.46%

1.28%

1.60%

2nd quarter 1997

1.31

1.34

1.33

1.30

1.27

1.34

1.27

1.48

1.27

1.53

3rd quarter 1996

1.24

1.33

1.31

1.34

1.03

1.29

1.26

1.50

1.32

1.45

Return on Average
Equity (Annualized)
3rd quarter 1997

15.75% 14.82% 15.11% 13.99% 12.92% 15.19% 14.85% 15.26% 15.42%

2nd quarter 1997

15.86

14.46

14.55

12.15

14.40

15.09

14.69

15.66

14.18

17.38

3rd quarter 1996

15.24

14.68

14.80

14.07

10.22

14.25

14.36

15.62

15.90

17.33

3rd quarter 1997

4.36%

4.89%

4.46%

4.44%

4.35%

4.34%

4.38%

5.00%

4.48%

4.46%

2nd quarter 1997

4.36

4.85

4.43

4.43

4.34

4.36

4.34

5.09

4.39

4.46

3rd quarter 1996

4.38

4.81

4.39

4.51

4.23

4.41

4.53

4.97

4.15

4.41

3rd quarter 1997

0.98%

1.06%

1.00%

0.99%

1.04%

0.60%

0.70%

0.59%

0.83%

1.96%

2nd quarter 1997

0.99

1.06

1.01

0.93

0.94

0.53

0.71

0.58

0.98

1.93

3rd quarter 1996

1.10

1.11

0.78

0.81

1.15

0.71

0.74

0.73

0.72

0.77

3rd quarter 1997

0.64%

0.80%

0.37%

0.20%

0.54%

0.15%

0.33%

0.28%

0.31%

0.63%

2nd quarter 1997

0.62

0.77

0.37

0.20

0.53

0.17

0.34

0.26

0.35

0.59

3rd quarter 1996

0.57

0.70

0.31

0.20

0.39

0.23

0.39

0.29

0.27

0.40

3rd quarter 1997

1.88%

1.88%

1.42%

1.35%

1.43%

1.30%

1.51%

1.47%

1.38%

1.43%

2nd quarter 1997

1.90

1.88

1.46

1.38

1.44

1.28

1.53

1.50

1.52

1.41

3rd quarter 1996

1.96

1.84

1.51

1.34

1.56

1.35

1.51

1.54

1.62

1.50

17.85%

Net Interest Margin
(Annualized)

Nonperforming Loans2
-r Total Loans

Net Loan Losses 4Average Total Loans
(Annualized)

Loan Loss Reserve 4Total Loans

1

2

U.S. banks with average assets of less than $15 billion are shown
separately to make comparisons with District banks more
meaningful, as there are no District banks with average assets
greater than $15 billion.

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

Includes loans 90 days or more past due and nonaccrual loans

IS

Commercial Bank Performance Ratios
by Asset Size

3rd Quarter 1997
Earnings

Asset Quality
Net Loan Loss Ratio1

Return on Average Assets

D

US

D

US

D

US

D US

Return on Average Equity

Nonperforming Loan Ratio

Net Interest Margin3

Loan Loss Reserve Ratio

Percent

Annualized

D = District

<$100 Million

$300 Million - $1 Billion

US = United States

$100 Million-$300 Million

$1 Billion-$15 Billion

1

Loan losses are adjusted for recoveries.

NOTE: Asset quality ratios are calculated as a percent of total loans.

2

Includes loans 90 days or more past due and nonaccrual loans

SOURCE: FFIEC Reports of Condition and Income for all Insured

3

Interest income less interest expense as a percent of average
earning assets

U.S. Commercial Banks

16

The Regional Economist - January 1998

Agricultural Bank Performance Ratios
AR

IL

IN

KY

MS

MO

TN

1.42%

1.31%

1.26%

1.46%

1.55%

1.31%

1.36%

1.27

1.47

1.55

1.31

1.38

U.S.
Return on average assets (annualized)
3rd quarter 1997

1.33%

2nd quarter 1997

1.32

1.41

1.32

3rd quarter 1996

1.30

1.43

1.25

1.31

1.49

1.65

1.33

1.40

3rd quarter 1997

12.70%

13.13%

11.83%

12.57%

13.62%

16.53%

12.36%

13.58%

2nd quarter 1997

12.53

12.71

12.00

12.99

13.84

16.62

12.45

12.56

3rd quarter 1996

12.64

13.25

11.44

14.08

14.36

18.02

12.91

13.27

Return on average equity (annualized)

Net interest margin (annualized)
3rd quarter 1997

4.62%

4.46%

4.16%

4.56%

4.60%

5.08%

4.48%

4.43%

2nd quarter 1997

4.59

4.42

4.18

4.44

4.56

5.03

4.47

4.63

3rd quarter 1996

4.53

4.40

4.14

4.55

4.62

5.32

4.53

4.55

0.15%

0.08%

-0.05%

-0.61%

0.15%

0.24%

0.11%

0.02%

2nd quarter 1997

0.15

0.05

-0.04

-1.00

0.17

0.32

0.24

-0.03

3rd quarter 1996

0.30

0.07

0.14

0.12

0.24

0.79

0.32

0.23

Ag loan losses -r average ag loans (annualized)
3rd quarter 1997

1

Ag nonperforming loans -•• total ag loans

1

3rd quarter 1997

1.33%

0.68%

0.71%

3.43%

1.70%

0.89%

1.65%

0.34%

2nd quarter 1997

1.59

0.97

0.77

0.21

1.64

1.16

1.59

0.42

3rd quarter 1996

1.63

0.54

1.06

2.22

1.26

1.87

0.85

0.04

Includes loans 90 days or more past due and nonaccrual loans

NOTE: Agricultural banks are defined as those banks with a greater than average share of agricultural loans to total loans.
Data include only that portion of the state within Eighth District boundaries.
SOURCE: FFIEC Reports of Condition and Income for Insured U.S. Commercial Banks

U.S. Agricultural Exports*

U.S. Agricultural Exports by Commodity
Commodity

Jul

Aug

Sep

Livestock & products

.94

.99

.92

Dollar a m o u n t s in billions
Year-to-date

Change from year ago

10.89

-0.7%

Corn

.29

.42

.42

6.11

-27.0

Cotton

.19

.17

.11

2.74

-10.0

Rice

.06

.05

.05

.96

-4.0

Soybeans

.20

.31

.34

6.95

10.0

Tobacco

.06

.07

.09

1.61

16.0

Wheat

.38

.50

.50

4.12

-40.0

4.00

4.43

4.49

57.37

-4.0

TOTAL1

Includes commodities not listed here

U.S. Crop and Livestock
Prices

Indexes of Food and Agricultural Prices
Growth 1

Level
111/97

11/97

111/96

107

107

117

Arkansas

141

143

143

-5.5

-1.4

Illinois

113

120

144

-21.4

-21.5

Indiana

112

122

144

-29.7

-22.0

Missouri

107

111

119

-13.7

-10.1

Tennessee

N.A.

N.A.

143

N.A.

N.A.

Production items

116

117

116

-3.4

0.0

Other items

116

117

115

-3.4

0.6

Consumer food prices

158

157

154

3.6

2.4

Consumer nonfood prices

161

161

158

1.8

2.2

Prices received by U.S. farmers

2

II/97-III/97
0.0%

III/96-III/97
-8.5%

Prices received by District farmers3

Prices paid by U.S. farmers

1
2
3
4

Compounded annual rates of change are computed from unrounded data.
Index of prices received for all farm products and prices paid (1990-92=100)
Indexes for Kentucky and Mississippi are unavailable.
N.A. —Not Available

NOTE: Data not seasonally adjusted except for consumer food prices and nonfood prices.

17

Selected U.S. and State Business Indicators
Compounded Annual Rates of Change in
Nonagricultural Employment

United States
III/1997 11/1997 HI/1996
Labor force
(in thousands)
136,412 136,157 134,118
Total nonagricultural
employment
(in thousands)
122,575 121,854 119,898
Unemployment rate
4.9%
4.9% 5.3%
11/1997

1/1997 11/1996

Real personal income*
(in billions)
$4,264.6 $4,224.3 $4,130.4

Arkansas
IH/1997 11/1997 HI/1996
Labor force
(in thousands)
1,246.0
Total nonagricultural
employment
(in thousands)
1,096.8
Unemployment rate
5.3%
11/1997
Real personal income*
(in billions)
$31.3

1,241.5 1,237.8
1,097.6 1,086.7
4.8% 5.6%
1/1997 11/1996
$30.7

$30.4

Illinois
HI/1997 H/1997 III/1996
Labor force
(in thousands)
6,141.1
Total nonagricultural
employment
(in thousands)
5,757.5
Unemployment rate
4.6%
11/1997
Real personal income*
(in billions)
$208.8

6,126.1

6,105.6

5,742.9
4.5%

5,697.5
5.3%

1/1997 11/1996
$206.5

$202.2

Indiana
HI/1997 H/1997 III/1996
Labor force
(in thousands)
3,121.5 3,104.2 3,062.6
Total nonagricultural
employment
(in thousands)
2,847.1 2,848.8 2,815.4
Unemployment rate
3.4%
3.2% 4.0%
11/1997
Real personal income*
(in billions)
$86.2

1/1997 11/1996
$85.3

$84.0

IS

Kentucky
HI/1997 11/1997 HI/1996
Labor force
(in thousands)
1,926.4
Total nonagricultural
employment
(in thousands)
1,710.9
Unemployment rate
5.3%

1,707.6 1,674.9
5.2%
5.6%

11/1997

1/1997 11/1996

Real personal income*
(in billions)
$50.5

1,921.6 1,867.2

$50.0

$48.9

Mississippi
HI/1997 11/1997 III/1996
Labor force
(in thousands)
Total nonagricultural
employment
(in thousands)
Unemployment rate

1,276.6

1,270.4 1,260.5

1,103.1
5.5%

1,099.5 1,095.8
5.0%
6.0%

11/1997

1/1997 11/1996

Real personal income*
(in billions)
$31.1

$30.8

$30.4

••••••••••••••••••••••••••••••••••••••••••••••••••••i

Missouri
HI/1997 11/1997 III/1996
Labor force
(in thousands)
2,857.4
Total nonagricultural
employment
(in thousands)
2,607.8
Unemployment rate
3.7%
11/1997
Real personal income*
(in billions)
$81.1

2,860.7

2,900.8

2,606.3
4.1%

2,559.0
4.6%

1/1997 11/1996
$80.4

$78.5

Tennessee
HI/1997 11/1997 III/1996
Labor force
(in thousands)
2,764.4
Total nonagricultural
employment
(in thousands)
2,552.4
Unemployment rate
5.3%
11/1997
Real personal income*
(in billions)
$76.8
Total
Manufacturing

2,757.9

2,754.1

2,552.5
5.1%

2,533.5
5.0%

1/1997 11/1996
$76.0

$74.3

Construction

Government
General Services

Finance, Insurance
and Real Estate

Transportation, Communication
and Public Utilities
I Wholesale/Retail Trade

NOTE: All data are seasonally adjusted. The nonagricultural employment data reflect the most current benchmark revision.
* Annual rate. Data deflated by CPI, 1982-84=100.

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