The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
REGIONAL ECONOMIST | JANUARY 2001 https://www.stlouisfed.org/publications/regional-economist/january-2001/predicting-the-fed President's Message: Predicting the Fed William Poole Financial markets have been getting better and better at predicting what Federal Reserve policy-makers will do. You can often tell this is true just by reading the daily newspaper. More rigorous examination than reading the newspaper, however, will lead you to the same conclusion. In research I've been conducting with my colleague Bob Rasche, we've discovered some hard evidence—in the federal funds futures market—that financial markets since 1994 have improved their ability to predict the actions of the Federal Open Market Committee. Today, this market frequently anticipates, sometimes weeks in advance of FOMC meetings, not only the direction of the Fed's change in its federal funds rate target—up or down—but also the magnitude of the change. (As we saw in early January, the market cannot always predict Fed policy actions. Still, that case is an exception to the rule.) Market success in forecasting Fed policy actions is good news for the economy, for the convergence of financial market expectations and Fed policy actions is at the heart of a successful transmission of monetary policy to the economy. How so? Through financial markets' effect on long-term interest rates. Simply put, if markets expect the Fed's policy actions to be restrictive, they will bid longer-term interest rates up in anticipation of these actions. If markets expect Fed policy actions to ease, they'll lower the rate of return they demand on long-term rates. Thus, the market's recent accuracy in predicting Fed actions means that the market and the Fed are working together to achieve the desired result for the economy. Some credit for this happy state of affairs must go to the central bank, which has communicated its decisions more openly than ever before. Indeed, after each meeting of the FOMC, the Fed now announces not only whether it is making a change in the intended federal funds rate, but also whether it is leaning in one direction or another in the near term. The rest of the credit must go to financial market participants, who have observed the Fed's behavior over time, divined its long-term goals and improved their ability to analyze incoming information about the economy as they believe the Fed would. The ultimate goal of the Federal Reserve is to achieve low and stable inflation. The market understands this goal and has become adept at judging what policy actions are warranted to achieve it. Can we do better? Probably. I'm convinced that the Fed can make its policy decisions and processes even more transparent. If the result will be better synchronization between financial markets and the Fed, it will be an effort well worth it. For the full text of two speeches on which this column was based, see http://fraser.stlouisfed.org/historicaldocs/wp2000/download/41166/20001130.pdf and http://fraser.stlouisfed.org/historicaldocs/wp2000/download/41167/20001128.pdf REGIONAL ECONOMIST | JANUARY 2001 https://www.stlouisfed.org/publications/regional-economist/january-2001/bricks-and-mortar-wood-and-shingles-are-real-estatemarkets-still-booming-in-the-eighth-district Bricks and Mortar, Wood and Shingles: Are Real Estate Markets Still Booming in the Eighth District? Adam M. Zaretsky National real estate markets have been booming for many years now. In fact, 1999 was the strongest year ever both for sales of existing homes and for new housing construction—almost 5.2 million existing singlefamily homes were sold, and more than 1.3 million new homes were built. Moreover, this stellar performance followed closely on the heels of what was a record year in 1998. By the third quarter of 2000, sales of existing homes and construction of new homes were both slightly behind their 1999 records, but still on pace to surpass the 1998 numbers. The Eighth Federal Reserve District's seven states also enjoyed a record year of residential construction and existing home sales in 1999.1 More than 150,000 new single-family homes were built, and more than 840,000 existing homes were sold. As at the national level, both of these numbers followed on the heels of a recordsetting 1998. By the third quarter of 2000, sales of existing homes in the seven District states appeared on track to set a new record, while new construction was off somewhat from a year earlier. National and District nonresidential real estate markets have mirrored residential markets pretty closely.2 A record amount of space—more than 1.8 billion square feet—was built nationwide in 1999. That's up from the slightly more than 1.2 billion square feet built in 1996—a 50 percent increase in three years. In the District, more than 263 million square feet of nonresidential space were built in 1999—up 23 percent from the 213 million square feet built in 1996. Since the beginning of 2000, however, the fevered pace of sales and building in both residential and nonresidential markets has waned. Lively Local Markets Healthy local economies, as well as a prosperous national economy, have been the driving forces behind the gains in real estate markets over the past several years. Despite all the claims about increased globalization and its effect on the domestic economy, local influences continue to dominate movements in real estate markets. This is so because housing and other buildings are immovable goods—a house cannot be moved from an area with a weaker economy to an area with a stronger economy. That said, District local economies continue to experience low levels of unemployment, notable job growth and better-than-average personal income growth.3 Much of the slowing in real estate markets has occurred because of the recent upward movements in interest rates. The average rate charged on a conventional 30-year fixed-rate mortgage recently bottomed out in October 1998 at around 6.7 percent. By August 1999, this rate had increased to slightly more than 7.9 percent —a jump of 1.2 percentage points in less than a year. The rate peaked in May 2000 at slightly more than 8.5 percent—another 0.6 percentage-point jump. In approximately a year and a half, then, the rate on a 30-year fixed mortgage rose 1.8 percentage points. Consequently, buying a home became a more expensive and, therefore, a more difficult achievement for some households. A simple example helps illustrate the difference. By the third quarter of 2000, the average interest rate charged on a conventional 30-year fixed mortgage had dropped to around 8 percent. At this rate, the monthly mortgage payment for principal and interest on a $100,000 loan would be $734. To qualify for this loan, a household would typically need an annual income of about $31,500.4 The same loan at an interest rate of 6.75 percent (near the 1998 low) would have cost only $649 a month and required an annual household income of just $27,900—about 13 percent less. It's not surprising, then, that housing markets have slowed somewhat over the past year. Location, Location, Location The District still contains some of the most affordable housing markets in the nation. According to the National Association of Home Builders (NAHB), housing affordability was down in the second quarter of 2000 when compared with a year earlier, which is not surprising given the rise in interest rates. Still, affordability is much better in smaller metropolitan areas and cities—especially in the Midwest—than in the larger coastal cities. The NAHB computes its quarterly Housing Opportunity Index (HOI) by measuring the share of homes sold in a specific market that a household earning the median income in that market could afford to buy (see footnote on table below). The index uses a national, weighted average of mortgage rates from adjustable- and fixed-rate loans and accounts for differences in house prices by market area. Table 1 How Affordable Is Housing? In District cities, pretty affordable. HOI* Median Price Metro Area 2000 2nd Quarter 1999 2nd Quarter 2000 2nd Quarter St. Louis 70.5 72.5 Memphis 68.9 70.8 113,000 Louisville 67.5 73.4 United States 58.4 67.0 Median Income 1999 2nd Quarter 2000 2000 Annual 1999 1999 Annual $120,000 $114,000 $56,500 $52,000 112,000 52,400 48,600 119,000 112,000 52,400 48,400 147,000 138,000 50,200 47,800 *The Housing Opportunity Index is a measure of the share of homes sold in a market that a household in that market with the median income could afford to buy. For example, a household in St. Louis with an annual income of $56,500 could have afforded to buy 70.5 percent of the homes that were sold in St. Louis during the second quarter of 2000. SOURCE: National Association of Home Builders As the table shows, housing is cheaper and more affordable in the District's major metropolitan areas than in the rest of the nation, with the St. Louis area being the most affordable.5 As the table also shows, this affordability has declined over the past year in all three District metro areas—a trend mimicked by the nation. In each of the District metro areas, income between the second quarters of 1999 and 2000 grew faster than the national average, while housing prices grew more slowly. Thus, the drop in housing affordability has not been as dramatic in the District as in the rest of the country. By the same token, real estate values haven't appreciated as quickly here as in other regions. Building Where We Live... New residential construction in District metro areas hit an all-time high in 1999. By the third quarter of 2000, however, new construction in all but two District metro areas—Owensboro, Ken., and Texarkana, Ark.—was down from a year earlier. The declines in other areas not only reflect higher interest rates, which have slowed housing markets in general, but could also be an artifact of the data: Making comparisons with the strongest housing year on record almost guarantees that "slowing" will appear if even a bit of the market's steam has been lost. ...And Where We Work Although nonresidential construction in the four major District metro areas has ridden the wave of the recent real estate boom, it too has felt the bite of higher interest rates, making such projects more expensive to finance and, therefore, less profitable and attractive. Through the third quarter of 2000, slightly more than 31 million square feet had been built in Little Rock, Louisville, Memphis and St. Louis combined. Over the same three quarters in 1999, that figure hovered around 42 million square feet. Total square footage built in 2000, therefore, has so far been off by more than 25 percent. This decline has hit all District metro areas, but has been sharpest in Louisville, where square footage is down by more than 40 percent. Memphis, on the other hand, has experienced the smallest year-over-year decline—only 7 percent. In all instances, the total amount of square footage being built today is much greater than it was three or four years ago. Closing the Deal Real estate markets were (and generally are) some of the first markets to experience the effects of rising interest rates. With the District and national economies remaining healthy, however, part of the recent slowing can likely be attributed to growth rates returning to more-sustainable, long-run trends. Does this imply a continued slowing in housing markets? Potentially. While the boom that real estate markets experienced in 1998 and 1999 probably won't be repeated in the near future, all indications are that sales and new construction in 2000—although not likely to break the records set in 1999—appear on track to run a close second. Paige M. Skiba provided research assistance. Endnotes 1. The numbers that follow were compiled from statewide data, which include large and vibrant regions outside the Eighth District. The map on the back cover of this publication shows the seven states and the regions of those states that make up the District. [back to text] 2. Nonresidential real estate includes commercial, industrial, educational, hospital, dormitory, religious and public buildings. [back to text] 3. See Zaretsky (2000a,b) for a description of recent economic conditions in the District and the nation. The data pages at the back of this publication present a snapshot of both the District and national economies. [back to text] 4. According to current Federal National Mortgage Association (Fannie Mae) underwriting guidelines, the monthly mortgage payment on a standard loan can be as much as 28 percent of monthly income. The annual income stated is based on this figure. Other financial and credit information, however, is also used when lenders underwrite mortgages. [back to text] 5. Because of size and sampling problems, the Little Rock area has been dropped from the Housing Opportunity Index. Therefore, the table shows only the other three major metropolitan areas in the District. [back to text] References Zaretsky, Adam M. "The District Economy: Still the Front Runner or Just Part of the Pack?" The Regional Economist, Federal Reserve Bank of St. Louis (October 2000a), pp. 12-13. __________. "Was That a Soft Landing, or Have We Not Touched Down Yet?" The Regional Economist, Federal Reserve Bank of St. Louis (October 2000b), p. 19. REGIONAL ECONOMIST | JANUARY 2001 https://www.stlouisfed.org/publications/regional-economist/january-2001/divestiture-a-prescription-for-healthy-competition Divestiture: A Prescription for Healthy Competition Robert L. Webb In September 1999, the Federal Reserve Board approved the merger of Fleet Financial Group, Inc. and BankBoston Corp.—two of the largest bank holding companies in New England. The two organizations had total deposits of $69.7 billion and $48.5 billion and were direct competitors in 18 local markets. The nation's antitrust laws prohibit mergers that substantially lessen competition in any banking market, so how could a merger of this magnitude have been approved? To maintain healthy competition, regulators will often require merging banks to sell some offices in markets where they compete directly. This is known as divestiture. In this case, Fleet agreed to the largest divestiture in U.S. banking history (see table). Just What the Doctor Ordered The FIve Largest Banking Divestiture Cases Approval Date Number of Offices Divested Amount of Deposits Divested Percentage of Acquired Deposits Divested Fleet Financial Group/ BankBoston Corp. Sept. 7, 1999 306 $13.2 billion 27% BankAmerica Corp./ Security Pacific Corp. March 23, 1992 213 $8.5 billion 15% NationsBank Corp./ Barnett Banks Inc. Dec. 10, 1997 124 $4.1 billion 12% Fleet Financial Group/ Shawmut National Corp. Nov. 14, 1995 64 $3.0 billion 15% Wells Fargo & Co./First Interstate Bancorp March 6, 1996 61 $2.5 billion 5% Merging Banks If proposed bank mergers have the potential for serious anti-competitive effects in local markets, regulators will often require the banks to sell, or divest, offices in those markets. This remedies the antitrust violations while still allowing the merger to proceed. Many of the large bank mergers of the past 20 years would not have been possible without the significant amount of divestiture that took place. SOURCES: Board of Governors of the Federal Reserve System; U.S. Department of Justice Divestiture has become an important antitrust remedy in banking over the past 20 years.1 One development that promoted divestiture was the Fed's decision in the 1980s to adopt the merger guidelines developed by the Department of Justice (DOJ).2 This reduced uncertainty and gave banks a clear indication of what was acceptable under the antitrust laws. Banks discovered that, in many cases, divestiture of a relatively small number of offices could bring a questionable merger into compliance with the law. Divestiture was also promoted by the relaxation of bank branching restrictions in the 1990s which increased the size and geographic scope of bank mergers. Divestiture is typically not practical in a merger of two small banks, but for mega-mergers—like those that characterized the past decade—it is often the only means to gain regulatory approval. Diagnosing the Problem U.S. banking law requires an antitrust review of proposed bank mergers and prohibits mergers that have substantial anti-competitive effects.3 To understand how divestiture can remedy these effects, it's first necessary to understand how such effects are measured in the markets where firms compete. From an antitrust viewpoint, a market has two components: the product market and the geographic market. Banking industry definitions of these markets have been shaped by U.S. Supreme Court decisions. The product market refers to the actual products supplied by the merging firms. Commercial banks supply a variety of products, many of which—for example, deposit accounts and personal loans—are also provided by nonbank firms. The Supreme Court has ruled that the appropriate banking product market is the "cluster" of products and services provided by commercial banks, since the convenience to the consumer of having the products clustered together raises the cluster's value above the sum of its parts. Total deposits are typically used as a proxy to measure a bank's capacity to provide the product cluster. The geographic market is the specific area where the products are sold. The Court has determined that convenience issues restrict many bank customers to their own local communities, making most banking markets local in nature. As a result, the primary focus of the antitrust review of bank mergers—even those involving giant, multi-state banks—is on the competitive effects in the local markets where the banks do business. To apply these principles to a particular case, it's necessary to specify the geographic boundaries of local market areas and calculate the concentration of banking services in each market where the merging banks compete. Most analysts prefer the Herfindahl-Hirschman Index (HHI) over other market concentration measures because it accounts for both the number and relative size of firms in the market. Calculating the HHI is simple. First, calculate the percentage of total market deposits held by each bank. This is the bank's market share. Second, square the market shares. Finally, add the squared market shares. The greater the resulting HHI, the greater the market concentration and the less the presumed competition in the market. According to the DOJ guidelines, any market with an HHI above 1800 is highly concentrated. A merger that results in an HHI of less than 1800, or that increases the HHI by less than 200 in a highly concentrated market, is not considered anti-competitive and is generally approved. Mergers in which the HHI increases by more than 200 points in a highly concentrated market violate the DOJ guidelines.4 While these mergers are not summarily denied, they are closely examined for any factors that might mitigate the potential reduction in competition resulting from the merger.5 If no such factors are discovered, the merger will likely be denied. This is where divestiture can be useful. Although competitive problems often arise in only a few of the markets where merging banks do business, just one problem market is enough to deny the entire merger. By divesting enough offices in problem markets, the changes in the HHI can be brought within ranges to satisfy the antitrust laws, and the merger can proceed. Divest Two Offices and Call Me in the Morning Bank mergers need approval from the appropriate bank regulator and the DOJ.6 In practice, the Federal Reserve and the DOJ supervise almost all mergers that require divestiture. Both agree that divestiture is an important remedy, but they differ about how it should be prescribed.7 The Fed does not usually specify particular offices to be sold or stipulate the details of divestiture. It generally takes the position that any fullservice office can be a viable competitor and provide a full range of banking services to local customers. The Fed typically prefers that offices be divested to banks not already in the local market so that new competition is introduced; however, divestitures may also be to competitors already in the local market, as long as the resulting change in the HHI meets DOJ guidelines. The DOJ and the Fed generally approach divestiture differently because each has its own definition of a bank's product market. The Fed continues to use the traditional commercial banking "cluster" product market—a definition that the DOJ abandoned in the 1980s, citing a new competitive environment with increased competition from non-bank firms. The DOJ instead began to focus on specific bank products, usually loans to small- and medium-sized businesses, since these firms have fewer non-bank credit alternatives than other bank customers.8 Because the DOJ believes that some bank offices are better positioned than others to compete in this narrow product market, it often dictates many divestiture details to ensure that the divested offices can become viable competitors. The merger of Fleet and BankBoston is a good example of DOJ intervention in divestiture agreements.9 The DOJ required that 278 of the 306 divested offices be sold in one lot to a single buyer. Fleet was also required to divest the majority of its small- and medium-sized business loans, although no bad loans could be divested. The DOJ also insisted that divested offices retain employees and managers, and Fleet agreed not to hire the divested workers for at least three years. The intent of all these DOJ requirements was that the divested offices would have the resources and expertise to retain old customers and compete vigorously for new commercial loans. The banking industry has experienced unprecedented merger activity in the past 20 years. Some of these proposed mergers held serious antitrust implications in local banking markets. Divestiture of offices in those markets remedied many of the problems, permitting the mergers to proceed. In most cases, only small divestitures were necessary, but, for some of the largest mergers, hundreds of offices and billions of deposit dollars had to be divested. If bank consolidation continues in the future, divestiture is likely to remain a key prescription for maintaining healthy competition. Endnotes 1. See Burke (1998). [back to text] 2. The DOJ guidelines are applicable to mergers in all industries, not just banking. [back to text] 3. Holder (1993) contains a detailed description of the antitrust review of bank mergers. [back to text] 4. The guidelines actually state than an increases of more than 50 points is aunacceptable in a highly concentrated market. However, banks are heald to a less-restrictive standard in light of the substantial competition they face from non-depository financial institutions. [back to text] 5. A wide variety of factors may mitigate anti-competitive effects. Factors that measure competition from thrifts and non-bank firms, public benefits and the attractiveness of the a market for entry by new banks are typically considered. [back to text] 6. The Federal Reserve regulates bank holding companies and state member banks. The Comptroller of the Currency oversees national banks, while the Federal Deposit Insurance Corp. regulates state banks that are not Fed members. The DOJ reviews all three regulators' decisions and can sue to block any mergers it finds anti-competitive. [back to text] 7. See Burke (1998). [back to text] 8. See Baker (1992). The courts ruled against this narrow product market in the only case ever litigated on this issue. The DOJ has continued to focus on commercial loans, however. One side effect of divestiture has been the almost total elimination of anti-trust litigation in banking over the past 20 years. Without such litigation, the courts have not clarified or updated their earlier product market definition. [back to text] 9. See Keenan (1999). [back to text] References Baker, Donald I. "Searching for an Antitrust Beacon in the Bank Merger Fog," The Antitrust Bulletin (Fall 1992), pp. 651-66. Burke, Jim. "Divestiture as an Antitrust Remedy in Bank Mergers," Finance and Economics Discussion Series Working Paper 1998-14, Board of Governors of the Federal Reserve System (February 1998). Holder, Christopher L. "Competitive Considerations in Bank Mergers and Acquisitions: Economic Theory, Legal Foundations, and the Fed," Economic Review, Federal Reserve Bank of Atlanta (January/February 1993), pp. 23-36. Keenan, Charles, "Justice Dept. Aims to Make Deal Spinoffs Competitive," American Banker, December 15, 1999, p.1. REGIONAL ECONOMIST | JANUARY 2001 https://www.stlouisfed.org/publications/regional-economist/january-2001/281-million-and-counting National and District Overview: 281 Million and Counting Howard J. Wall According to the results of Census 2000, the population of the United States was more than 281 million in April 2000, having grown by about 13.2 percent since 1990.1 As with economic growth during the 1990s, this rate of population growth was relatively higher than in recent decades. The U.S. population grew by 11.4 percent in the 1970s, and by only 9.8 percent in the 1980s. The sources of population growth also differed in the 1990s, as natural population growth—the difference between births and deaths—has declined substantially. The U.S. birthrate has been falling, while the death rate has remained roughly constant. The decline in natural population growth has been filled by international migration, which accounted for 31.3 percent of population growth between 1990 and 1999 (the most recent period for which complete data are available), compared with only 25.9 percent of growth in the 1980s. The populations of the seven states that lie at least partly in the Eighth District tended to grow slower than the country as a whole between 1990 and 1999. The estimated change in the U.S. population over this period rose by about 10 percent. Only Tennessee's population—at 12.4 percent—grew faster. Arkansas' population growth of 8.5 percent was not far behind the country's, but the remaining District states—Illinois, Indiana, Kentucky, Mississippi and Missouri—fell well short, growing by between 6 and 7.5 percent. While these numbers look rather dreary next to the national numbers, they need to be put into perspective. Although the District's population grew much slower than in the West and South, which increased by 13.6 and 12.9 percent, respectively, it grew much faster than the Northeast region's, which posted only a 2 percent gain. Go (Mid)West, Young Man Several trends are behind the differences between District and national population growth rates in this period. For one thing, all District states but Illinois had substantially lower rates of natural population growth. In the United States and Illinois, the number of births exceeded the number of deaths by more than 75 percent, whereas in the rest of the District births exceeded deaths from just 35 percent to 61 percent. Net international migration was also lower in the District than in the country as a whole. For the United States, net international migration rate between 1990 and 1999 was about 3 percent, while for no District state except Illinois—where it was 3.4 percent—did migration exceed even 1 percent. In all District states except Illinois, more people moved in from the rest of the country than moved out. This made up for the low natural growth rates and low net international migration. In Arkansas and Kentucky, positive net migration from the rest of the country accounted for more than half of the population change for 1990-99, and for every District state except Illinois, it accounted for 20 to 36 percent of the change. Illinois, on the other hand, lost more people to other states than it gained, canceling out some of the population advances it made through having a high natural growth rate and high net international migration. Onward to 300 Million In its Statistical Abstract of the United States: 1999, the Census Bureau predicts that U.S. population growth will slow in the next decade, while still coming out 8.4 percent higher in 2010 than in 2000. This prediction is based on a birth rate that will stabilize at just below the current level, and a death rate that will rise as the baby boom generation enters old age. Lower foreign immigration rates are projected as well. The Census Bureau also predicts slower population growth for the District states, with a more marked slowing than for the country as a whole. Endnotes 1. These estimates are at the Census Bureau's web site, www.census.gov/population/www/estimates/popest.html. [back to text] REGIONAL ECONOMIST | JANUARY 2001 https://www.stlouisfed.org/publications/regional-economist/january-2001/action-jacksontennessee-town-seeks-to-continue10year-roll Community Profile: Action Jackson—Tennessee Town Seeks to Continue 10-Year Roll Stephen P. Greene A community's economic success can come in many flavors. In Jackson, Tenn., these flavors include cheddar, ranch, barbecue and sour cream and onion. For while Silicon Valley can point to the computer chip as the reason for its progress, those who live here in the Tennessee Valley have a greater appreciation for the potato chip. For nearly 30 years, Procter & Gamble has produced its Pringles snack chip brand in Jackson, a city of 100,000 residents 80 miles east of Memphis. The Pringles plant has led the way in a manufacturing boom that has taken place here over the past decade. In a recent economic impact analysis, the Jackson Area Chamber of Commerce stated that between 1990 and 1999, more than 8,800 industrial jobs were created as part of a capital investment of more than $1.1 billion. One of the results of this growth has been the proliferation of the restaurant and retail industry, particularly on the north end of town near Interstate 40. How is Jackson managing its unprecedented economic momentum, and what is being done to make sure the streak continues? The Chip of the Iceberg Between 1996 and 1998, Procter & Gamble poured $375 million into its Jackson plant and added nearly 400 new employees. The Pringles plant currently employs about 1,500 people, making it the second-largest manufacturer in Jackson. Although Procter & Gamble officials declined to give exact distribution figures, the Jackson plant is the largest exporter of all of the company's U.S. facilities. "Jackson is an ideal location for us from a distribution standpoint," says Greg Stuart, quality systems manager at the plant. "Rail and road facilities are very good." What Procter & Gamble means to the community is clear by examining the period between 1996 and 1998. During that time frame, the company accounted for more than half of the nearly $700 million of industrial investment in Jackson. When total investment in Jackson dropped by about $140 million in 1999, it was mainly because Procter & Gamble did not make any major financial upgrades to the Pringles plant that year. The company's value extends all the way to the three-year-old baseball stadium where the minor league West Tennessee Diamond Jaxx play—Pringles Park. Other businesses that call Jackson home include a diverse mix. One is Pentair Corp., which employs a total of 2,300 people at two operations: Porter-Cable, maker of industrial power tools, and DeVilbiss Air Power Co., which produces air compressors and generators. In addition, Maytag Corp. makes dishwashers at its Jackson factory, and industry leader Bruce Hardwood Flooring is also located here. About 600 people work at Bruce Hardwood, which has been a member of the Jackson business register since 1892. The company recently added a new product line and this spring will introduce new proprietary laser scanning equipment to help identify and eliminate defects in wood, thereby increasing the company's yield. "What this says to the Jackson community is that even though we have been in business more than 100 years, we know that we have to change and be innovative or else someone at some point will pass us," says Jim Smith, general manager of the Bruce Hardwood plant. What are some of the keys to Jackson's success with manufacturers? For Procter & Gamble has operated its Pringles plant in Jackson for nearly 30 years; the city's three-year-old minor league baseball stadium, Pringles Park, illustrates the company's connection to the community. starters, the state of Tennessee helps by offering corporate excise tax credits and franchise tax credits. Jackson and Madison County also offer at least two years of property tax abatement for new or expanding companies. Bob Cook, president of the Jackson Chamber, sees favorable The recently completed federal courthouse is one example of the effort to inject new energy into downtown Jackson. labor/management conditions as another major factor. Nearly all of Madison County's employers operate without union participation. "I think that is a large factor, but we want to be clear that low unionization does not mean low wages and benefits," Cook says. "We're very serious about wanting to see wages increase and benefits improve." Cook also says that some of Jackson's success is due to its fortuitous proximity to growing markets in Nashville and Memphis. "That does help us," Cook says. "We have suppliers here making components being purchased by Saturn and Nissan in the Nashville area. And some other companies take advantage of the fact that they can access the world through all of Memphis' distribution capabilities." "But that's not the sole reason, or even the primary reason, that Jackson is doing so well. Jackson has developed its own manufacturing base that is independent of those two cities. That's where we've really seen the growth." Northern Exposure On the northern edge of town, where Interstate 40 cuts through, a new road was opened a decade ago. The Highway 45 Bypass provided a shortcut for drivers needing to get downtown. These days, the Bypass is anything but. Restaurants, shopping centers and new subdivisions line this road, making it one of Jackson's busiest thoroughfares. Open acreage began filling in with shops and establishments to serve a rapidly growing labor force. An important development came in 1986 when a change in the law in Madison County allowed for liquor sales by the drink. Until then, chain restaurants steered clear of Jackson. The new law paved the way for a restaurant explosion, especially along the Bypass and other roads near the interstate where passing motorists could stop to shop or eat. The high restaurant volume resulted in Restaurant Business magazine ranking Jackson second among all U.S. markets in its Restaurant Growth Index in 1998. Michael Philpot, executive director of the West Tennessee Industrial Association, believes that even though 55 percent of Madison County's workforce comes from the eight surrounding counties, even greater numbers of people regard Jackson as a hub for other activities too. "Jackson has become a regional draw for things like entertainment, retail, health care and banking," he says. "Having more than 400,000 people living within a 50-mile radius has made this area an attractive place for businesses like restaurants to invest in." In fact, all of this growth has led to serious discussions of the need for another bypass off Interstate 40. "The way this town is spreading out, we're going to have to develop some new roads or else we won't be able to get the traffic from one end of town to the other too easily," says C.J. Roper, region president for BancorpSouth. "We Can Compete" After losing re-election to the U.S. Congress in 1834, Davy Crockett stood in the center of downtown Jackson and told his constituents: "You can go to hell, I'm going to Texas." He later died defending the Alamo. While Crockett won't be coming back to downtown Jackson anytime soon, city officials are hoping that small businesses, visitors and residents will. In fact, some already are. Wary of the possible costs of a junior-sized urban sprawl, Jackson leaders have begun to revitalize the downtown area. In the past five years, a new city hall building, criminal justice center and federal courthouse have been constructed. In 1999, a new cultural arts center opened downtown as well. There are new building facades, improved street lighting and an effort to convert some older buildings into loft apartments. "There has been unprecedented investment, both public and private, downtown recently," says the chamber's Cook. But the area's top priority is to continue the industrial progress of the past decade. Cook and others hope that new developments like the Tiger Jones Technology Park just north of the Maytag plant can attract new businesses. A 150,000 square-foot spec building was erected in the park last spring. The hope is that the park's modern amenities and infrastructure will entice even more businesses to Jackson. The task for people like Cook and Philpot is to show prospects that Jackson offers many of the advantages of a larger market. "The toughest thing," says Philpot, "is battling the perception that we won't be able to provide what a primary market like Memphis, Nashville or Atlanta can. But when we get people to come to Jackson or the surrounding area, it's very eye-opening. We can compete." Jackson has achieved a great deal over the past decade, but in this concluding remark in its aforementioned Economic Impact Analysis, the Chamber of Commerce itself acknowledges that nothing in the world of economic development is guaranteed: "We must never lose sight of the fact that industries mature, management sometimes fails, facilities become obsolete, and recession happens. Economically, we are at the top of the curve, and unless we continue to aggressively recruit industries that will be responsible citizens, the curve will quickly turn over." Jackson, Tenn., by the numbers Population 101,611 Labor Force 57,700 Unemployment Rate 3.3% Per Capita Personal Income $23,725 Top FiveEmployers Jackson-Madison County General Hospital 3,800 Pentair Corporation 2,300 Jackson-Madison County Board of Education 1,554 Procter & Gamble Manufacturing 1,450 Maytag Corporation 800 Population total is from 1999. Per capita personal income is from 1998. REGIONAL ECONOMIST | JANUARY 2001 https://www.stlouisfed.org/publications/regional-economist/january-2001/rising-oil-prices-and-economic-turmoil-must-theyalways-go-hand-in-hand Rising Oil Prices and Economic Turmoil: Must They Always Go Hand in Hand? Kevin L. Kliesen After falling sharply during the Asian financial crisis in late 1998, market prices of crude oil and other energy products climbed in November 2000 to their highest levels since the Gulf War. The oil price shock, as economists have coined it, occurred as monetary policy-makers acted to keep the economy from overheating. This combination of events has raised a few red flags in certain quarters, since nearly all post-World War II recessions were preceded by higher oil prices and a restrictive monetary policy. Unlike other oil price shocks since the 1970s, however, the current run-up in energy prices has not yet raised the alarm one might have expected. Indeed, while the pace of U.S. economic activity appeared to slip noticeably during the fourth quarter of 2000, most forecasters continue to project solid growth and moderate inflation for the next two years. Is the U.S. economy better positioned today to withstand the body blows of sharply higher oil prices than it was in the past? Oil Price Shocks in U.S. Economic History An oil price shock is one of several possible disturbances to a country's aggregate price level. Its significance reflects the fact that crude oil is an important energy source for most industrialized countries, who use energy as a direct or indirect input in the production of most goods and services. Because higher oil prices tend to raise the prices of petroleum-based products and alternative sources of energy, such as natural gas, the aggregate price level will rise unless the prices of all other goods and services fall to offset the rise in oil prices. Of course, oil price shocks are not always one-sided. Prices of crude oil can also fall in significant fashion, as they did in 1986 and 1998. On balance, though, the public and policy-makers tend to think of oil price shocks as energy price increases, hence, the adverse connotation. In the early post-World War II period, the run-up in energy prices prior to economic downturns was comparatively mild. During the four quarters preceding the onset of the 1948-49, 1953-54, 1957-58, 1960-61 and 1969-70 contractions, the relative (real) price of energy increased a little more than 1.5 percent, on average. These increases, however, were tempered by the fact that the relative price of energy actually declined 2.4 percent and 1 percent prior to the 1960-61 and 1969-70 contractions, respectively—though energy prices subsequently rose sharply in the midst of these two recessions. The figure below shows that energy price changes have been much more pronounced (relative to output prices) since the early 1970s. The average increase in real energy prices prior to the onset of the four recessions during this period—1973-75, 1980, 1981-82 and 1990-91—was 17.5 percent, much greater than in earlier recessions. Except for the 1990-91 recession, one of the mildest since World War II, the contractions of the 1970s and 1980s were the deepest since the Great Depression. Though U.S. economic growth remained solid through the third quarter of 2000, the 23 percent increase in real oil prices from four quarters earlier is nevertheless large in historical terms. Figure 1 Rising Oil Prices Have Usually Preceded Most Recessions As the figure shows, nearly all post-World War II recessions in the United States were preceded by, or accompanied by, a sharp increase in energy prices relative to the aggregate price level. As a result, oil price shocks tend to be viewed with alarm by macroeconomists, markets and public policy-makers. This heightened sense of concern is largely an outcropping of the 1970s and 1980s. NOTE: Producer Price Index for Fuels and Related Products and Power (not seasonally adjusted) divided by the price index for Business Sector Output. Shaded areas are periods of recessions, as defined by the National Bureau of Economic Research. SOURCE: U.S. Bureau of Labor Statistics. One reason why oil prices have been more volatile since the 1970s has been the advent of the Organization of Petroleum Exporting Countries (OPEC). Economically, OPEC is a cartel—a type of oligopoly that attempts to keep prices above their competitive levels by actively adjusting crude oil supplies. Last year, for example, OPEC oil ministers announced that they intended to alter production to keep the market price of crude oil between $22 and $28 a barrel. OPEC has also tried to manipulate prices for political reasons. The best-known example was the 1973 Arab oil "embargo," which sought to punish the United States for its support of Israel during the Arab-Israeli War. Ultimately, OPEC's ability to manipulate market prices is limited, since oil is a readily fungible commodity—that is, it is traded internationally and its U.S. price depends not only on domestic supply and demand, but also on foreign supply and demand. Moreover, its power is further limited because many of the largest oil-producing countries—such as the United States, Russia, Mexico and Norway—are not OPEC members. Nevertheless, the cartel has considerable influence on crude oil prices simply because OPEC countries control roughly 40 percent of world production. But OPEC is not the only reason for increased volatility of world energy prices during the past 30 years or so. Another possible reason is the deregulation of U.S. energy markets in the late 1970s and early 1980s. Because price determination is now largely a function of market forces, economic or political developments can sometimes engender wide swings in oil prices if markets are caught unaware. A salient feature of most oil price shocks since the 1970s has been a change in the amount of oil supplied, or the expectation of a disruption in the oil supply (such as during the Gulf War). But oil price shocks can also occur when the demand for oil rises or falls relative to the supply.1 Indeed, the price of imported oil plummeted to below $10 a barrel in late 1998 because of a marked slowing in the growth of world oil consumption— reflecting, importantly, the significant declines in economic activity in South-east Asia. Even though the subsequent run-up in prices during the past two years occurred while OPEC was trying to limit output to boost prices, steadily faster rates of worldwide economic growth suggest that demand-side influences have also been important in pushing up the price of oil. Forecasting the future pace of real GDP growth is a high-risk venture even in the best of times. But when the economy is hit with an oil price shock and a modestly restrictive monetary policy, the degree of difficulty increases by several magnitudes. At present, higher energy prices seem not to have rattled consumer confidence. This could obviously change if events take a turn for the unexpected or, as government forecasters expect, household energy expenditures climb markedly higher this winter than they did during last year's relatively benign winter. And whereas the cost structure of firms in industries that are fairly intensive users of energy, like manufacturers, transportation firms and agriculture, also tend to be hit disproportionately when energy prices turn higher, most firms—and by extension, the U.S. economy—have managed to cope with the latest oil price shock rather well. In view of this development, is there something fundamentally different in the structure of the economy that explains this development, or have policy-makers, particularly the Federal Reserve, done a better job of coping with the current oil price shock? What's Different This Time? In December 1998, the price of imported oil plunged to around $9 a barrel. In real terms, this was its lowest level since late 1973. All else equal, this positive price shock should have been good for the economy. But with considerable uncertainty hanging in the air because of the Asian financial crisis, Russian debt devaluation, and the failure of Long Term Capital Management, a majority of U.S. forecasters were predicting a downshift in the pace of U.S. real GDP growth in 1999 to just over 2 percent; they also expected CPI inflation to rise to about 2.3 percent.2 When the first forecasts for 2000 were published in January 1999, Blue Chip forecasters expected continued moderate real GDP growth (2.4 percent) and inflation (2.5 percent), and not much change in the unemployment rate (4.9 percent).3 Needless to say, these forecasts missed their mark by a wide margin. Real GDP growth turned out to be 5 percent in 1999, the strongest growth since 1984, while the unemployment rate dropped to a shade over 4 percent. The brisk pace of economic activity continued into 2000, with real GDP growing at a 4.2 percent annual rate during the first three quarters, and the civilian unemployment rate staying near its 30-year low of 4 percent. CPI inflation tracked higher in 1999 and 2000, as forecasters expected, but largely not for the reasons they cited. And while the oil-induced acceleration in consumer prices in 2000 (3.5 percent through November) is more than most forecasters expected—and, rather troubling when viewed against the relatively good inflation performance from 1992 to 1998—there appears to be little erosion in long-term inflation expectations by the public and most forecasters. Indeed, judging from its continued strong performance, the economy is better positioned to weather this combination of oil price shock and monetary tightening than it was previously.4 On the surface, the recent poor performance of forecasters and—thus far, at least—the ability of the U.S. economy to weather the recent oil price storm appear unconnected.5 But in fact, three developments suggest a closer correspondence. Two developments are largely an outcropping of ongoing structural improvements in the economy stemming from the upsurge in spending on high-tech capital goods. The third development, though somewhat harder to quantify, is better monetary policy,which has resulted in the achievement of near price stability. Explanation #1: A More Productive Economy Perhaps the largest difference between the macroeconomic effects of this oil price shock and previous shocks is the underlying performance of the U.S. economy. In particular, it appears that there has been a marked upswing in the economy's capacity to produce goods and services with a given level of inputs like labor, capital and energy. As inputs become more efficient, they earn a higher rate of return: Real wages of labor increase, as do the returns to capital. Invariably, these efficiency gains boost the nation's living standards. Since 1995, per capita real GDP has grown at a 3.2 percent annual rate, far exceeding the 1.8 percent rate of gain from 1973 to 1995. In fact, per capita output growth during the past five years surpasses even the heyday of strong productivity growth from 1947 to 1973, when living standards grew at a 2.4 percent annual rate. Most forecasters and many academic researchers seem to believe that this improvement is permanent. They have concluded that the U.S. economy can now grow much faster on a sustained basis without sparking an acceleration in inflation—the potential rate of output. For example, in a survey of recent research on this topic, the consensus was that gains in labor productivity stemming from the technological innovations and other advancements have boosted the economy's potential rate of growth by about 1 percentage point during the past five years.6 As a result, compared with the period of slow growth that existed from 1973 to 1995, when most economists figured that potential output growth was around 2 to 2.5 percent, many economists now believe that the economy can grow by around 3.5 percent per year. The primary reason for this productivity upswing has been the proliferation of computers, advances in telecommunications equipment and the Internet, all of which have dramatically lowered the cost of informationgathering and retooled production and distribution processes. These innovations are embodied in the equipment, software and business practices of firms, enabling a greater amount goods and services to be produced and distributed with proportionately fewer inputs. One obvious example is in the production of crude oil. Innovations such as horizontal or directional oil drilling techniques, and 3-D and 4-D seismic imaging, today allow energy producers to lift oil from the ground in areas previously considered inaccessible or infeasible. Other innovations include the development of deep-sea drilling and floating production platforms. Soon, the maximum feasible depth of useful production is expected to drop to 7,500 feet, more than triple what it was in the late 1980s. In the parlance of economists, the economy's production possibilities frontier has been shifting outward from the origin. The ability to produce proportionately more output, accordingly, has enabled firms to keep labor and nonlabor costs in check. At a time when margins are being squeezed by higher labor costs and, more recently, by the sharp increase in energy prices, firms have been able to post significant profits, which have, accordingly, boosted equity prices and engendered other economy-wide benefits.7 Explanation #2: The U.S. Economy is More Energy Efficient Since energy is an important input into the production of goods and services, efficiency gains arising from technological innovations have necessarily meant that, over time, the United States uses less energy per unit of output. For example, since the early 1970s, the average efficiency of a new refrigerator has nearly tripled, while the average fuel economy of vehicles sold in the United States has doubled. Further improvements are on the horizon. The inevitable switch from the current 14-volt electrical system in automobiles to the more powerful 42-volt system is expected to boost future fuel efficiency by as much as 10 percent. Whether bushels of corn or wheat, tons of steel, or millions of board feet of lumber, the energy component of U.S. output has been dwindling over time. In 1973, for example, a little more than 18,000 BTUs (British Thermal Units) were required to produce $1 of real GDP in the United States (measured in 1996 dollars). By 1983, the number of BTUs required to produce $1 of real GDP was cut by nearly one-fourth to about 13,750. By 1999, only about 10,500 BTUs were needed to produce $1 of real GDP—more than 40 percent below the 1973 requirements.8 From a competitive standpoint, firms and industries that have most successfully adopted energy-efficient production processes should have an advantage. One way to see how changes in energy efficiency affect economic performance is by considering energy usage by state. In general, states that have above-average increases in energy-efficiency gains—measured as the growth of gross state product relative to total energy consumption from 1977 to 1997—have also experienced faster growth in employment. Conversely, states whose industries have experienced below-average increases in energy efficiency have had modestly slower employment growth. Explanation #3: Better Monetary Policy The price system plays an important role in a market economy like the United States. Scarce resources tend to flow to those areas where after-tax returns are the highest (or opportunity costs are the smallest). Crucial in this regard is a low and stable inflation rate—because it helps to minimize risk and uncertainty about future real returns. Indeed, the contours of our record-setting business expansion suggest that price stability has been a key ingredient in firms' decisions to add to their productivity-enhancing stock of capital goods. Firms will thus be less apt to alter investment plans when the believe that rampant inflation will not be the ultimate outcome of an oil price shock. A key lesson learned by policy-makers during the 1970s was that the amount of money supplied in response to an oil price shock will eventually determine the course of inflation. If the money supply increases relative to the fewer amount of goods and services produced after the shock, then the relative value of money will fall (too much money chasing too few goods). If this continues, the Fed runs the risk of fueling even more inflation, possibly leading people to revise upward their expectation of future inflation. With higher actual inflation and expectations for future inflation now greater than before, the degree of action required by the Fed to bring inflation under control—as the early 1980s demonstrated—will be stronger than if it had acted vigilantly in the first place. As the figure below shows, monetary policy-makers failed to quell the higher inflation expectations that followed the 1973 and 1979 oil price shocks—that is, they were too accommodative. In the aftermath of those events, expectations of higher inflation were built into planned adjustments in wages and prices, further eroding the purchasing power of the consumer's dollar. Although expected inflation has climbed noticeably since the first quarter of 1999, markets appear confident that the Federal Reserve will not let inflation expectations and, hence, actual inflation, get out of hand—something they appeared to do successfully following the ephemeral 1990 oil price shock. In short, current monetary policy performance has been much better than it was in prior episodes. Figure 2 Forecasters Expect Much Better Inflation Performance in the Aftermath of the Latest Oil Shock SOURCE: Survey of Professional Forecasters. The figure above plots market expectations of inflation (GDP prices) eight quarters before and after four major oil price shocks since the early 1970s. It shows another reason why economic activity has not been appreciably hampered by the current oil price shock: Not only were inflation expectations prior to the oil price surge in the first quarter of 1999 fairly low and stable, but inflation expectations were falling as well. A similar pattern was seen before the Gulf War, though expected inflation was somewhat higher and modestly more volatile. In contrast, prior to the 1973 and 1979 shock, expected inflation was not only higher than in 1999, but it was also rising. Are Oil Price Shocks Now Off Our Backs? Oil price shocks have periodically dotted the post-World War II economic landscape. Thus far, however, the severe economic disruption and dislocation that usually followed the spike in oil prices during the 1970s and early 1980s has not come to pass. Indeed, the current outlook for the U.S. economy suggests that oil-induced turbulence might be a relic of the past. The torrent of investment in information and communications technology equipment in recent years appears to have led to significant structural improvements in U.S. labor productivity and energy efficiency, allowing firms to offset higher energy and non-energy costs. But perhaps more important, since the Great Inflation of the 1970s and early 1980s, the Federal Reserve has implemented, and largely achieved, a policy designed to maintain price stability. As long as these factors persist, current forecasts calling for continued solid growth and moderate inflation may turn out to be right for a change. Thomas A. Pollmann provided research assistance. The Economics of an Oil Price Shock Ever since the 1973 energy crisis, economists have attempted to learn how oil (or energy) price disturbances affect the growth of output, employment, productivity and inflation.9 To help answer this question, economists tyypically use models to explain how the economy operates. There are numerous competing models out there, and no one model can account for every last wiggle in the data. That said, one well-known model is a standard aggregate production function framework. In this approach, an economy's output (real GDP) is determined by the quantity and quality of its capital and labor inputs.10 Thus, how fast the economy ultimately grows depends on its rate of investment (increase in capital), its population growth (increase in labor) and its productivity growth (increase in the efficiency of capital and labor arising from technological improvements). Inflation is a product of the money market: An excess supply of money—determined by monetary policy—relative to demand causes inflation to accelerate. In this simple model, an increase in oil prices reduces the relative efficiency of older capital (machines and equipment); newer capital uses energy more efficiently. Firms react by striving to economize on their use of energy in the production process by scrapping older vintages of capital goods. Thus, capital obsolescence results in less capital available per worker, causing a reduction in labor productivity, a decline in output and an increase in the price level. Although unemployment tends to increase, the fall in the real wage may spur firms to change the mix of their inputs—substituting the relatively less expensive labor for the more expensive capital. For a decrease in oil prices, the effect is just the opposite: Productivity and output increase, while inflation subsides. Ultimately, higher inflation results from too much money chasing too few goods. Whether higher inflation results from an increase in energy prices depends, first, on whether the increase in oil prices is temporary or permanent and, second, on whether the Federal Reserve chooses to increase the supply of money to counteract the adverse effect on output and employmnet. Economists now generally agree that the Fed was too accommodative during most of the 1970s, when the relative price of oil increased steadily. That is, it actually fueled higher inflation by increasing the supply of money too much. During the Gulf War-induced jump in oil prices, which was short-lived, the Fed was more successful, as evidenced by the subsequent deceleration in inflation and rebound in economic activity. Endnotes 1. The supply of oil tends to be fixed in the short term, since it takes time to explore for new reserves or tap proven reserves. In economist lingo, the supply curve for oil is inelastic in the short run. Accordingly, an increase or decrease in the demand for oil will engender a disproportionate response on the price side.[back to text] 2. Real GDP grew at about a 4.25 percent annual rate through the first three quarters of 1998; CPI inflation averaged 1.5 percent during the same period.. [back to text] 3. Blue Chip Economic Indicators dated December 10, 1998, and January 10, 1999, respectively. [back to text] 4. The Experimental Recession Index developed by Harvard Professor James Stock and Princeton University Professor Mark Watson, which attempts to predict turning points in the business expansion, showed that as of November 2000, the probability of the U.S. economy being in recession in May 2001 was only 7 percent. The report can be obtained at http://ksghome.harvard.edu/~.JStock.Academic.Ksg/xri/INDEX.HTM. [back to text] 5. In recent years, the "average" forecaster has tended to underpredict the strength of U.S. economic activity (real GDP growth and unemployment rates) and overpredict the run-up in inflation. See Kliesen (2000). [back to text] 6. International Monetary Fund (2000), pp. 48-52. [back to text] 7. For example, realized capital gains have boosted consumer incomes and thus spending (the wealth effect); in addition, increases in realized capital gains have caused individual tax payments to the Treasury to skyrocket, helping to produce record federal budget surpluses. [back to text] 8. U.S. energy use per unit of real GDP declined at annual rates of 2.7 percent from 1973 to 1983; 1.4 percent a year from 1983 to 1995, and 2.6 percent a year from 1995 to 1999. [back to text] 9. See articles by Rasche and Tatom (1977, 1981) and Hamilton (1983). [back to text] 10. This is a standard aggregate production function framework which follows a Cobb-Douglas model. See Auerbach and Kotlikoff (1998) for a textbook treatment. [back to text] References Auerbach, Alan J., and Laurence J. Kotlikoff. Macroeconomics: An Integrated Approach (Cambridge, Mass.: The MIT Press, 1998). Blue Chip Economic Indicators. Aspen Publishers, Inc. Hamilton, James D. "Oil and the Macroeconomy Since World War II," Journal of Political Economy (April 1983), pp. 228-48. International Monetary Fund. World Economic Outlook, Washington, D.C., October 2000. Kliesen, Kevin L. "The Economic Out-look for 2000: Bulls on Parade?" Federal Reserve Bank of St. Louis National Economic Trends (January 2000). Rasche, Robert H., and John A. Tatom. "The Effects of the New Energy Regime on Economic Capacity, Production and Prices," Review, Federal Reserve Bank of St. Louis (May 1977), pp. 2-12. ____________. "Energy Price Shocks, Aggregate Supply, and Monetary Policy: The Theory and the International Evidence," Supply Shocks, Incentives and National Wealth, Carnegie-Rochester Conference Series on Public Policy, volume 14, Karl Brunner and Allan H. Meltzer, eds., Amsterdam: North-Holland (Spring 1981), pp. 9-94. 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. 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 third quarter 2000 U.S. Banks by Asset Size ALL $100 million$300 million Return on Average Assets* Net Interest Margin* Nonperforming Loan Ratio Loan Loss Reserve Ratio 1.22 1.25 1.21 1.41 1.28 1.45 1.37 1.14 3.94 4.67 4.65 4.63 4.64 4.63 4.64 3.54 1.03 0.83 0.86 0.76 0.82 1.02 0.93 1.09 1.65 1.33 1.35 1.45 1.39 1.89 1.66 1.65 less than $300 million $300 million$1 billion less than $1 billion $1billion$15 billion Net Interest Margin* Return on Average Assets * 1.19 1.26 1.11 1.16 0.98 1.03 1.10 1.05 0 .25 .50 .75 1 1.25 4.16 4.18 4.13 4.25 Eighth District Arkansas 3.83 3.89 Illinois 4.44 Indiana 1.46 1.24 1.31 1.29 1.31 1.19 1.22 Mississippi 4.58 Missouri 1.75 2 4.06 3 percent 3.50 Nonperforming Loan Ratio 0.65 1.13 Illinois 0.87 0.81 0.79 Kentucky .6 .7 .8 .9 1.40 1.40 1.37 1.35 1.45 Tennessee 1.09 1.1 1.2 1.3 6 1.33 Missouri 1 5.50 1.34 1.25 Mississippi 0.80 0.74 .5 5 1.24 1.25 1.21 1.27 1.22 1.26 Arkansas Indiana 0.99 4.50 1.32 1.35 Eighth District 0.76 0.58 4 4.44 Loan Loss Reserve Ratio 0.91 0.89 0.96 1.00 1.04 4.99 4.20 3.85 Tennessee 1.45 4.66 3.99 4.05 Kentucky 1.50 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 Third Quarter 1999 Third Quarter 2000 NOTE: Data include only that portion of the state within Eighth District boundaries. SOURCE: FFIEC Reports of Condition and Income for all Insured U.S. Commercial Banks *Annualized data [16] For additional banking and regional data, visit our web site at: http://www.stls.frb.org/fred/data/regional.html. 1.8 1.9 2 The Regional Economist January 2001 ■ www.stls.frb.org Regional Economic Indicators Nonfarm Employment Growth year-over-year percent change third quarter 2000 Goods Producing United States Arkansas Illinois Indiana Kentucky Mississippi Missouri Tennessee Service Producing 1 total mfg cons 2.0% 2.7 0.8 0.8 2.1 –1.0 1.2 1.4 –0.3% 0.4 –0.4 –0.1 –0.8 –1.6 –2.5 –1.2 4.2% 8.6 0.8 0.1 1.1 –5.3 1.0 4.3 2 govt 1.7% 3.0 0.6 2.9 4.0 1.1 3.7 2.7 tpu fire3 services trade 2.1% 3.1 1.9 –0.6 2.8 3.7 –0.7 0.7 0.2% 2.8 0.4 0.1 0.9 –1.7 1.3 0.3 3.5% 3.4 1.5 1.9 3.5 –1.5 2.6 2.3 1.6% 2.6 0.5 0.0 2.0 –2.3 0.6 1.7 Unemployment Rates Total State Revenue percent year-over-year percent change United States Arkansas Illinois Indiana Kentucky Mississippi Missouri Tennessee III/2000 II/2000 III/1999 4.0% 4.0 4.3 3.1 3.8 5.1 2.7 3.7 4.0% 4.3 4.3 3.4 3.9 5.8 2.6 3.7 4.2% 4.4 4.4 3.0 4.4 5.0 3.4 4.0 United States 3.9 Arkansas 4.5 7.8 7.8 Illinois 5.0 5.1 Indiana 3.8 4.4 Kentucky Mississippi 5.8 3.1 3.2 Missouri Tennessee 5.5 7.7 3.7 0.0 2.0 4.0 6.0 8.0 2000 third quarter 1999 Housing Permits Real Personal Income year-over-year percent change 13.4 2.1 – 15.0 14.6 – 4.0 – 1.2 – 7.1 – 0.8 2000 Construction 2 Illinois 2.0 0.9 Mississippi 2.4 –5 3.7 2.3 2.5 Kentucky – 0.7 –15 –10 1.4 Arkansas Indiana 4.9 – 12.6 –20 3.2 3.1 United States 4.6 – 4.0 10 15 20 percent 0 1999 Transportation and Public Utilities 1 2 2000 3 Finance, Insurance and Real Estate [17] 2.5 2.9 2.7 Tennessee 5 2.4 2.4 2.3 2.1 2.0 Missouri 0 12.0 second quarter – 20.5 1 10.0 year-over-year percent change in year-to-date levels – 4.1 –25 10.8 6.1 All data are seasonally adjusted. 3 4 1999 5 Major Macroeconomic Indicators Real GDP Growth Consumer Price Inflation percent 9 percent 8 7 6 5 4 3 2 1 0 1995 4.0 3.5 all items, less food and energy 3.0 2.5 2.0 all items 1.5 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 (Nov.) 00 (Nov.) 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 3.5 1995 96 97 98 99 00 (Nov.) 3 1995 96 97 98 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 30 105 25 100 imports 20 crops 95 15 90 10 trade balance 5 0 1995 96 97 98 99 00 livestock 85 80 1995 (Oct.) NOTE: Data are aggregated over the past 12 months. Beginning with December 1999 data, series are based on the new NAICS product codes. 96 97 98 99 00 (Sep.) NOTE: Data are aggregated over the past 12 months. U.S. Crop and Livestock Prices index 1990-92=100 145 135 crops 125 115 105 95 livestock 85 75 1986 87 88 89 90 91 92 93 [18] 94 95 96 97 98 99 00 (Nov.)
@FedFRASER