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july 2007
F e d e r a l

R e s e r v e

B a n k

o f

S a i n t

L o u i s

The

Regional Economist

A Quarterly
Review of
Business and
Economic
Conditions

Gasoline Prices

“Gouging” by Stations
Ensures Adequate Supply

Industrial Loan
Companies

Feel the Heat of the Spotlight

Mass Retirement

As Boomers Slow Down,
So Might the Economy
COMMUNITY PROFILE

Natural Gas Is a Bonus
for Conway, Ark.

www.stlouisfed.org

Table of Contents
The Regional Economist is published quarterly by the Research
and Public Affairs departments
of the Federal Reserve Bank of
St. Louis. It addresses the
national, international and
regional economic issues of the
day, particularly as they apply
to states in the Eighth Federal
Reserve District. The Eighth
District includes the state of
Arkansas and parts of Illinois,
Indiana, Kentucky, Mississippi,
Missouri and Tennessee.
Views expressed are not necessarily those of the St. Louis Fed
or the Federal Reserve System.
Articles may be reproduced if
the source is credited. Please
send a copy of the reprinted
materials to the editor.
We appreciate hearing from readers about this publication. Please
direct your comments to either
co-editor: Michael R. Pakko at
314-444-8564 or by e-mail at
michael.r.pakko@stls.frb.org, or to
Howard J. Wall at 314-444-8533
or by e-mail at wall@stls.frb.org.
You can also write to either one at
the address below. Submission
of a letter to the editor gives us
the right to post it to our web site
and/or publish it in The Regional
Economist unless the writer states
otherwise. We reserve the right to
choose which letters to use and to
edit them for clarity and length.

3

Vanity Plates Take the Message of Monetarism to the Streets
4

By Michelle Clark Neely

Industrial banks have been around for almost 100 years, but only in the past
couple of years have they been in the spotlight. That’s largely because of who
wants to own them—big-box retailers like The Home Depot and Wal-Mart.
10

By William Emmons and Christopher J. Neely

Although some consumers are convinced that they are being gouged at the pump,
the practice of raising prices now in anticipation of what might happen in the
future helps to ensure that the supply won’t be interrupted.
12

Matt Heller
Mark Kunzelmann
Kathie Lauher
Becca Marshall
Contributing Artists
Single-copy subscriptions to
The Regional Economist are free
of charge. To subscribe, call
314-444-8809; e-mail debbie.
j.dawe@stls.frb.org; or write to
The Regional Economist, Public
Affairs Office, Federal Reserve
Bank of St. Louis, Post Office
Box 442, St. Louis, MO 63166.
You can also subscribe via our
web site at www.stlouisfed.org/
publications/subscribe.html.

mass retirements

As Boomers Slow Down, So Might the Economy
By Kevin L. Kliesen

Next January, the baby boomers begin their exodus from the workforce as the
oldest members of this generation turn 62, making them eligible for federal
retirement benefits. Coupled with the slowdown in productivity and the
near-zero saving rate, growth in GDP could fall to levels not seen in 25 years.
14	COMMUNITY PROFILE

Conway, Ark., Economy Mixes Work and Play
By Glen Sparks

Natural gas wells keep popping up all over the Fayetteville Shale Play, in northcentral Arkansas. The center for the state’s energy economy is the Little Rock
suburb of Conway, a city long noted for manufacturing and higher education.
16

DISTRICT OVERVIEWS

Population, Sprawl and Immigration Trends Vary across Metro Areas
Little Rock is the only major metro area in the Eighth District to have
experienced faster population growth than the nation. That’s just
one of many interesting demographic trends in the District since 2000.

Al Stamborski
Managing Editor
Joni Williams
	Art Director

gasoline prices

Allegations of Gouging Are Usually Misguided

Cletus C. Coughlin
	Deputy Director of Research

Michael R. Pakko
Howard J. Wall
Co-Editors

industrial loan companies

Major Retailers’ Plans To Enter Banking Fuel Debate

Robert H. Rasche
	Director of Research

Randall C. Sumner
	Director of Public Affairs

PRESIDENT’S MESSAGE

18	NATIONAL OVERVIEW

The Economy Continues To Take a Punch
By Kevin L. Kliesen

Rising gasoline prices, slower productivity growth, the housing slump and
an unexpected weakening in purchases of business equipment and software
ganged up on the economy in the first quarter, leading to the weakest GDP
growth in more than four years. Still, forecasters expect growth to approach
the trend rate (roughly 3 percent) by year’s end.
19

MEASURING THE ECONOMY

National Data
Selected major macroeconomic and farm sector indicators.

[2]

The Regional Economist July 2007
n

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President’s Message

William Poole
President and CEO, Federal Reserve Bank of St. Louis

“If vanity plates are supposed to say something about
a person, what better plates could I have?”

Driving Home the Responsibilities of a Policymaker
I’ve often been asked why I
chose the equation“MV–PT”
as my car license plate number. (Missouri doesn’t provide for

an “equals” sign on the license plate;
so, I have a dash instead.) For those
not familiar with the monetarist
tradition in economics or its impact
on central banking, my plates must
seem a mystery. But for me, they
represent a constant reminder of
my duties and responsibilities as a
policymaker, not to mention my profession. I’m sure that more than one
economist has smiled when seeing
this plate out on the road. (Others
probably think it a cute reminder of
a strong marriage between Maggie
Violet and Peter Thomas. Nice to be
part of the “in” crowd now, isn’t it?)
MV=PT stems from the quantity
theory of money. This theory, in
turn, is reflected in the well-known
description of inflation—too much
money chasing too few goods.
In past centuries, during which
many major countries adhered to
a monetary system based on gold,
world gold discoveries led to large
increases in national money sup-

plies. Such increases eventually led
to large price increases.
Several notable economists,
including David Hume (writing in
the mid-18th century) and Henry
Thornton (in the early 19th century),
developed detailed accounts of the
channels through which increases in
the money supply are translated into
higher price levels. Indeed, the basic
idea was understood by the ancients.
Irving Fisher, a U.S. economist
writing in the first half of the 20th
century, formalized these ideas in the
“equation of exchange,” MV=PT. This
equation, probably the most famous
in economics, states that the quantity
of money (M) times its velocity of circulation (V) equals the price level (P)
times the quantity of output or transactions in the economy (T). Fisher
argued that V is determined by payments customs and technology, such
as how long it takes to clear a check.
He also argued that T depends on the
total size of the real economy—its
stock of physical capital and number
of workers. Finally, Fisher argued
that V and T would be relatively fixed
in the short run. The conclusion
was that price level changes—infla[3]

tion—would be driven by changes in
the money stock.
In a vigorous revival of interest in
monetary economics starting in the
1950s, these basic ideas were greatly
refined. The revival was led by the
late Milton Friedman, professor at
the University of Chicago and Nobel
Prize winner in 1976. I studied
under Friedman, which is an additional reason for me to have MV–PT
plates. Moreover, although I had
the same plates on my car in Rhode
Island before coming to St. Louis,
the St. Louis Fed has long been a
leader in research in the monetarist,
or Chicago, tradition. It was natural
for me to apply for the same plates
when I moved to St. Louis.
So, my MV–PT plates represent
my graduate training, my profession,
my conviction within my profession
and my current job. If vanity plates
are supposed to say something about
a person, what better plates could
I have?

[4]

The Regional Economist July 2007
n

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Industrial Loan Companies Come Out of the

Shadows
B y M i c h e l l e C l a r k N e e ly

A little-known segment of the U.S. financial services industry has been making big waves lately. Industrial loan
companies (ILCs), also called industrial banks,
ost ILC owners
Depot—the world’s
are financial services
largest home improvehave been around for almost 100 years,
firms, including some
ment specialty retailer—
but only in the past couple of
of the nation’s leading
and Wal-Mart—the world’s
years have they been in largest general retailer—have
companies: Merrill Lynch, American
the spotlight.
Express, Morgan Stanley and Goldman
sought ILC charters.

M

Sachs. The ILCs owned by these financial giants are among the industry’s largest
ILCs—averaging $30.5 billion in assets at
year-end 2006—and enjoy considerable access
to capital markets. Other ILCs that are owned
by financial services firms are much smaller.
Many ILCs—those owned by financial services
firms and those owned by others—are narrowly focused on a single community, product
line or customer type. For example, Wright
Express Financial Services, a Utah ILC owned
by Wright Express Corp., offers payment processing and information management services
to the U.S. commercial and government vehicle
fleet industry.
About one-quarter of ILCs are owned by
nonfinancial companies. If commercial companies such as these want to own a financial
institution, their only option is to obtain an ILC
charter. These ILCs offer financial services that
tend to directly support the products of their
parent companies. Captive finance companies
would fall into this category.
In the auto industry, General Motors, BMW,
Volkswagen and Toyota all own ILCs, as does
motorcycle manufacturer Harley-Davidson.
General Electric, Pitney-Bowes, UnitedHealth
Group and Target are other nonfinancial firms
that control ILCs. More recently, The Home

[5]

Some of the recent attention and
scrutiny can be traced to the industry’s
tremendous growth. Over the past two
decades, the collective assets of these institutions have increased by more than 5,000 percent, and several ILCs rank among the nation’s
largest financial institutions. ILCs, formerly
niche players in the financial marketplace, are
an increasingly diverse lot, and many differ
very little from commercial banks in terms of
the products and services they offer.
But the reason ILCs are drawing so much
attention now has less to do with their size and
scope and more to do with who owns them—
or wants to. The recent ILC applications by
Home Depot and Wal-Mart have renewed
long-standing national debates about the mixing of banking and commerce, the concentration of economic power and the proper role for
federal banking supervisors.
Simple Beginnings

The first industrial loan companies appeared
in the early 1900s. They were small, statechartered institutions that made uncollateralized loans to low- and moderate-income
workers who couldn’t get such loans from banks.
Because state laws at the time generally did

not permit ILCs to accept deposits, they
funded themselves by issuing to investors
certificates of investment or indebtedness,
dubbed thrift certificates.
Over time, the Federal Deposit Insurance Corp. (FDIC) granted deposit insurance to ILCs on an individual basis. All
ILCs became eligible for deposit insurance
with the passage of the Garn-St. Germain
Depository Institutions Act of 1982. Some
states then began requiring ILCs to be
FDIC-insured as a condition for keeping their charters. As a result, most ILCs
became subject to federal safety and
soundness supervision by the FDIC—
a condition for deposit insurance—as well
as the supervision mandated by their
chartering states.
Five years later, Congress passed the
Competitive Equality Banking Act (CEBA).
This 1987 legislation was designed to
close perceived loopholes in federal
banking legislation—holes that permitted commercial firms to own so-called
nonbank banks.1 Among other provisions, CEBA broadened the definition of a
bank under the Bank Holding Company
Act (BHCA) to include any institution that
was insured by the FDIC, which would
seem to include most, if not all, ILCs. But
ILCs—relatively small in number and size
at the time—were essentially left alone
in the legislation. Several states were
permitted to grandfather existing ILCs
and continue to charter new ILCs, whose
owners—financial or commercial—would
not be subject to the BHCA and the
consolidated federal supervision that goes
with it.2 (Consolidated federal supervision
refers to a federal agency’s ability to assess
the financial and managerial strength and
risks within the consolidated organization
as a whole, including the parent company
and nonbank affiliates.)
Banking Behemoths?

Since 1987, there has been tremendous
change in the ILC industry. (See charts.)
Some ILCs now rank among the largest financial institutions in the country.
Utah-based Merrill Lynch Bank USA, the
nation’s largest ILC, had more than $67
billion in assets at year-end 2006, putting
it in the top 20 among all U.S. financial
institutions. In total, 17 ILCs, or 28 percent
of the industry, had more than $1 billion
in assets at year-end 2006, compared with
about 7 percent of commercial banks.
Because of the grandfathering provisions of CEBA, the ILC industry is concentrated in a handful of states. Utah is home
to just over half of currently operating
ILCs, with 32, followed by California (14),
Nevada (five) and Colorado (four). Eight
of the 10 largest ILCs are Utah-based,
and the state’s ILCs account for almost
90 percent of the industry’s assets. The
[6]

Government Accountability Office (GAO)
reports that officials from the Utah
Department of Financial Institutions credit
Utah’s “business friendly”environment,
among other reasons, for the dominance
and growth of the ILC industry in Utah.3
In addition to getting bigger, ILCs are
broadening their scope. While a number
of ILCs are still niche players that provide
specialized products for corporate parents
or narrow segments of customers, others
offer a wide variety of loan and investment products and are virtually indistinguishable from commercial banks. Two
important features of ILCs—permitted
commercial ownership and a lack of consolidated federal supervision—set them
apart from commercial banks, however,
and it’s those traits that have put the ILC
industry in the limelight.
Obscure No More

Much of the current debate about
the ILC industry can be attributed to the
banking ambitions of two of the nation’s
largest retailers—Home Depot and WalMart. Home Depot is seeking approval
to buy Utah-based EnerBank, an ILC
currently owned by CMS Energy Corp.
EnerBank makes loans to consumers
to finance home improvement projects,
and Home Depot says it intends to keep
the ILC’s business plan and corporate
structure intact. In its May 2006 Change
in Control Application to the FDIC, Home
Depot notes that “EnerBank has had
significant success helping local, small
contractors achieve business success.
This fits with The Home Depot’s desire to
expand its relationships with contractors
and trade professionals—especially the
local, small contractors that are core to
The Home Depot’s business.”
Wal-Mart, on the other hand, applied
in 2005 to open a new ILC. It would be
called Wal-Mart Bank and would also
be based in Utah. In its application, the
company stated that its ILC would not be
engaged in retail banking—taking deposits from the public and making loans.
Instead, Wal-Mart’s ILC would be focused
on processing electronic checks and debit
and credit card payments, eliminating
the need for a third-party processor; the
savings would be passed on to Wal-Mart’s
customers through lower prices, the company said.
To say these applications were controversial is an understatement. Thousands
of comment letters—the vast majority of
them negative—were sent to the FDIC.
The FDIC also held a series of public
hearings about the Wal-Mart application in the spring of 2006. Members of
Congress soon jumped into the fray. In
June of last year, 98 members of Congress
wrote a letter to the FDIC requesting a

The Regional Economist July 2007
n

Supervisory Blind Spot?

Concern about the growing size of
the ILC industry had been building for
several years prior to the Home Depot
and Wal-Mart bids. Bankers’ organizations, consumer groups, some banking
regulators—including then-Fed Chairman Alan Greenspan—and several
members of Congress had protested the
exploding growth of a “parallel banking
system.” Requests from the ILC industry
that it be included in proposed legislation
that would allow banks to offer business
checking accounts and to branch nationwide raised more unease. Once Wal-Mart
and, to a lesser extent, Home Depot
threw their hats into the ring, the protests
grew louder and the issue took on frontburner status.
Most of the criticism being leveled
at the ILC industry centers on commercial ownership and can be boiled down
to its effects on competition and safety
and soundness. Critics typically offer

Total Assets and Number of ILCs

250

140
120

200

150

80
60

100
Total Assets
50

40

Number of ILCs

Number of Institutions

100

Total Assets (in billions)

moratorium on approvals for new, commercially owned ILCs. And in early July
2006, Reps. Barney Frank, D-Mass., and
Paul Gillmor, R-Ohio, introduced a bill
that would permanently bar commercial
ownership of ILCs retroactive to June 1,
2006.4 The legislation would also require
ILCs to be subject to federal consolidated
supervision similar to that mandated for
bank holding companies.
The FDIC responded at the end of
July 2006, issuing a six-month moratorium on approving ILC applications. In
August, the agency issued a Notice and
Request for Comment, seeking public
comment on 12 questions related to
ILC ownership and supervision. When
the comment period ended, the FDIC
had received more than 10,000 letters,
including ones from Home Depot, WalMart and a number of existing ILCs.5
State legislators in more than a dozen
states began debating, and in many cases
enacting, legislation that would, in effect,
bar banks from opening branches on the
grounds of a commercial affiliate.6
Because Frank and Gillmor’s ILC
legislation wasn’t acted on last year, they
reintroduced it in late January 2007. Two
days later, the FDIC announced it was
extending the freeze on approvals of ILC
applications by nonfinancial firms for one
year. Financial firms that wished to charter or buy ILCs could still submit deposit
insurance applications. That left four
nonfinancial firms, including the giant
retailers, in limbo. Wal-Mart ended up
pulling its deposit insurance application in
March. Home Depot recently reworked
its deal with CMS to buy EnerBank, giving
the retailer more time to get its ILC application through the FDIC.

www.stlouisfed.org

20

0

0
1985

1989

1993

1997

2001

2005

ILCs by State, Year-End 2006

California (14)

Hawaii (1)
Indiana (1)
Minnesota (2)
Utah (32)
Colorado (4)

Nevada (5)

one or more of the following objections
to commercial ownership. First, letting
nonfinancial firms own ILCs runs counter
to a long-standing—though somewhat
porous—barrier in the United States
between banking and commerce. Second,
letting large commercial companies like
Home Depot and Wal-Mart into banking
will create economic conglomerates and
could concentrate economic resources
into the hands of a few. Third, some
ILCs, unlike most other regulated financial institutions, are not subject to consolidated supervision at the federal level,
creating safety and soundness, as well as
competitive, issues.
The debate about the mixing of banking and commerce in the United States is
a long-standing one. Although numerous exceptions (including commercially
owned ILCs) have occurred, federal and
state laws have attempted for the most
part to keep the two separate. Those
opposed to joint ownership of banking
and nonfinancial businesses say a combination would produce risks that far
[7]

Though the number of
ILCs has declined by
about half over the past
20 years, the industry’s
assets have grown
exponentially. More than
three-fourths of all ILCs
are based in Utah
and California.

outweigh any benefits. Those perceived
risks include conflicts of interest, a lack
of impartiality in credit decisions, the
creation of monopoly power and an
expansion of the federal safety net.
Conflicts of interest could arise in a
number of ways. First, a commercially
owned financial institution could grant
loans to its affiliates at below-market
terms, resulting in distortions in the
credit-granting process. Tying, which
occurs when the provision of one product
or service is dependent on the purchase
of another product or service, is also a
frequently cited concern, even though it
is generally illegal in the United States for
all businesses. The use of inside information to benefit one affiliate of a firm at the
expense of outsiders is another potential
conflict of interest.
Opponents of commercially owned
ILCs also express worries about a concentration of economic power in banking that
could seriously impair competition. Public

and political distrust of large companies,
especially banks, is deeply ingrained in
American history and accounts for much
of the impetus for keeping banking and
commerce separate. Indeed, one of the
major fears expressed about a Wal-Mart
bank is the notion that it could become
a local banking monopoly, putting community banks out of business in some
small markets.
Giving commercial firms access to the
federal safety net—deposit insurance and
the Federal Reserve’s discount window
and payments system—is yet another
perceived risk, especially if these firms are
not subject to the same supervision and
regulations imposed on financial firms
with federally insured depository institutions. Here, the concern is that the bank
could make loans or engage in other
activities that would benefit an affiliate
or the parent, but that would threaten
the solvency of the bank. And because
ILCs—which operate only under very

Wal-Mart: Always Controversy. Always.

W

al-Mart’s 2005 application to the Utah Department of Financial Institutions (for an ILC charter) and to the FDIC (for federal deposit insurance)
marked the fourth time that the retail giant has attempted to enter
the banking business.
In 1999, the company tried to acquire Federal BankCentre, a small savings and
loan institution in Broken Arrow, Okla. But this first venture was thwarted when
Congress passed the Gramm-Leach-Bliley Act (GLBA) of 1999, which prohibited
commercial companies from acquiring unitary thrifts like Federal BankCentre after
May 4, 1999. Wal-Mart missed that deadline and dropped its bid.
Two years later, Wal-Mart announced plans to offer banking services to its
customers through a joint venture with TD Bank USA, a subsidiary of Canada’s
Toronto-Dominion Bank. The companies planned initially to offer banking services
in 100 Wal-Mart stores; Wal-Mart retail employees were going to be permitted to
perform banking transactions in those stores. But the arrangement was torpedoed
by the Office of Thrift Supervision (OTS) after the agency determined that the plan
violated regulations designed to keep banking and commerce separate.
Undeterred, Wal-Mart sought permission in 2002 to buy Franklin Bank, an ILC
based in Orange, Calif. As with its most recent attempt to charter an ILC in Utah,
Wal-Mart stated that it planned to use the acquired ILC to process the millions of
debit card transactions made in Wal-Mart stores each month. Buying Franklin
would have given Wal-Mart access to the electronic payments system, permitting it
to drop its third-party processors. The bid drew the attention of community bankers
and other opponents, who lobbied the state legislature to pass a law that would
prohibit the purchase. In the last two weeks of the 2002 legislative session, California
enacted a law barring commercial firms from buying or chartering ILCs.
When Wal-Mart submitted its Utah ILC charter application in July 2005, the
company’s assurances that it had no intention of engaging in retail banking did
nothing to quell the opposition. In response to some of the criticism, the company
reversed its request to be exempt from the Community Reinvestment Act (CRA);
executives said earlier that the law would not apply to Wal-Mart’s ILC because it
would not be dealing directly with the public.

[8]

The outcry about Wal-Mart’s latest application prompted the FDIC to hold public
hearings on Wal-Mart’s deposit insurance application—a first in the agency’s
74-year history. The hearings, held over three days, featured more than 60 presenters and drew hundreds of people. The vast majority of witnesses urged the FDIC
to deny Wal-Mart’s deposit insurance application. Though most objections were
based on competitive and safety and soundness concerns, others focused on the
company’s labor policies and more issues unrelated to banking. Even former Utah
Sen. Jake Garn, who helped boost the ILC industry in his home state, testified that he
had asked Wal-Mart executives not to apply in Utah because he was afraid that a
Wal-Mart application would create trouble for the whole industry.
Subsequent congressional hearings and an FDIC request for public comments
about the ILC industry produced more of the same. Although proponents of
commercial ownership of ILCs testified and outlined compelling arguments in
favor of the status quo, they were vastly outnumbered by opponents who argued
against it. Many expressed concerns that Wal-Mart would change its business plan
and expand its banking operations after its ILC charter was granted, despite the
company’s assurances.
The heat was turned up again in January 2007, when federal legislation to bar
commercial ownership of ILCs was reintroduced in Congress and the FDIC extended its
freeze on approving ILC applications by commercial owners. More state legislatures
began passing bills that would prevent commercially owned ILCs from branching into
their states, and observers credit (or blame) Wal-Mart for the flurry of activity.
In mid-March 2007, Wal-Mart withdrew its deposit insurance application, citing
the “manufactured controversy” over its ILC charter bid. Company officials said it
would work to expand financial services—like check cashing and bill paying—that
did not require a bank. Executives also pledged to continue Wal-Mart’s partnerships with retail banks located in many of its stores and indicated that making loans
through these third-party partnerships was a possibility.
The ILC bid was not in vain, however; spokesmen indicated that Wal-Mart’s
payment services providers had lowered their prices, recognizing that the company
was serious about cutting these costs.

The Regional Economist July 2007
n

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limited constraints—are not subject to
the BHCA, their corporate parents are not
supervised to the extent those of other
insured financial institutions are, thus
potentially creating an uneven competitive playing field.7
Though very few critics of ILCs in their
current form find fault with past supervision of ILCs, Federal Reserve officials and
others, such as the GAO, maintain there
are potential problems with a lack of
supervisory authority over ILC parents.
In testimony before the U.S. House Subcommittee on Financial Institutions, Scott
Alvarez, general counsel for the Federal
Reserve Board (FRB), noted:
The primary federal bank supervisor for
an ILC [the FDIC] may take enforcement
action against the parent company or a nonbank affiliate of an ILC to address an unsafe
or unsound practice only if the practice occurs
in the conduct of the ILC’s business. Thus,
unsafe and unsound practices that weaken
the parent firm of an ILC, such as significant
reductions in its capital, increases in its debt
or its conduct of risky nonbanking activities,
are generally beyond the scope of the enforcement authority of the ILC’s primary federal
bank supervisor.
To solve such potential problems,
some policymakers and ILC industry
critics propose that the FDIC be given
consolidated supervisory powers over
ILC parents equivalent to the Federal
Reserve’s authority over bank holding
companies and to the Office of Thrift
Supervision’s (OTS) authority over thrift
holding companies; others believe such
powers over ILCs should go to the Federal
Reserve. The FDIC itself has asked for
additional supervisory authority over ILC
parents and has imposed new restrictions and conditions on recently granted
deposit insurance applications by ILCs
with financial parents.8
Proponents’ Response

The ILC industry in its current form has
a number of backers. Many economists
argue that the wall between banking and
commerce is not only artificial but unnecessary and may do more harm than good
if resources are allocated inefficiently.
There may be operational efficiencies—
economies of scale and scope, as well as
informational efficiencies—from combining commercial and financial firms that
would reduce the costs of providing goods
and services. Such combinations may
produce greater product and geographic
diversification for firms, lessening the
chance of failure, as well as greater access
to capital for firms of all types and sizes.
Put succinctly, allowing new entrants in
the financial services industry will likely

increase competition, reduce costs and
increase choices for consumers, proponents say.
In terms of safety and soundness, all
ILCs are supervised by their chartering
states, as well as by the FDIC; some ILCs
are also subject to consolidated federal
supervision by the OTS. The so-called
bank-centric or bank-up approach to ILC
supervision has its supporters. In this
model, a bank’s supervisor has examination and regulatory authority over the
bank only and may have limited ability
to examine and take supervisory actions
against the bank’s holding company or
affiliates. Proponents argue that the current regulatory framework for supervising
ILCs is more than sufficient to protect the
deposit insurance fund and, hence, the
taxpayers from losses. Though about two
dozen ILCs have failed in the past 20 years,
just two of the failures resulted in material
losses to the deposit insurance fund.9
ILC industry backers point to the
bankruptcy of Conseco Inc. in 2002 as an
example of how the bank-up approach
can and does work. Conseco’s profitable
Utah-chartered ILC, Conseco Bank, was
sold at book value to GE Capital when the
parent declared bankruptcy, with no loss
to the FDIC.10 Similarly, when Tyco International, a maker of electronics, plastics
and fire and security products, went into
financial distress and was embroiled in
corporate scandals in 2002, it successfully
spun off its Utah industrial bank, which
still operates today as CIT Bank.

ENDNOTES
1	A

nonbank bank is a financial institution that either accepts demand
deposits or makes commercial loans.
Since the BHCA prior to CEBA defined
a bank as an institution that does both,
the holding companies of nonbank
banks were able to avoid supervision
by the Federal Reserve.

2

Grandfathered states include California, Colorado, Hawaii, Minnesota,
Nevada and Utah. See GAO (2005)
for more detail on CEBA and how it
affected the ILC industry.

3

See GAO, pp. 18-21, for more information on the evolution of the ILC
industry.

4	A

commercial owner is defined as a
company that derives more than
15 percent of its revenue from
nonfinancial activity.

5

A large proportion of the letters were
form letters. For example, more than
7,000 letters were from members of a
group called “Close Loophole Advocates.” Employees of Home Depot sent
in almost 1,700 duplicate letters.

6	See Adler

(March 13, 2007) for more
detail on state efforts to curtail commercial ILCs.

7

To be exempt from the BHCA, ILCs
cannot offer demand deposits that the
depositor may withdraw by check or
other means to make payment to third
parties. Small ILCs (less than $100
million) and ILCs chartered before
Aug. 10, 1987, are not subject to any
restrictions to be exempt from the
BHCA.

8	See Adler

(April 23, 2007) for examples
of new requirements and curbs
imposed by the FDIC on recent ILC
applications.

9
10

See GAO (2005), pp. 59-61.
See Blair (2005).

REFERENCES
Adler, Joe. “State Bills on ILCs Boost
Federal One.” American Banker,
Vol. 172, No. 49, p. 1, March 13, 2007.

What’s Next?

Wal-Mart’s decision to withdraw
its ILC application has taken some of
the heat out of the firestorm over ILCs.
Nevertheless, given the current climate,
it appears likely that the ILC industry
will be subject to more regulation, both
at the ILC and parent company levels.
The Frank-Gillmor bill, recently passed
by the full House, would require federal
consolidated supervisory authority over
the industry and divide it among the OTS,
FDIC, Federal Reserve and the Securities
and Exchange Commission.
A Senate version of the House ILC bill
was introduced by three senators in midMay. Observers expect the bill to have a
rougher going there, primarily because
Utah Sen. Bob Bennett, the No. 2 Republican on the banking panel, staunchly
opposes curbs on the ILC industry. Bill
backers in both chambers have floated the
idea of an exemption for automakers on a
ban on commercial ownership, which may
placate some lawmakers hesitant to pass
the existing bill.
Michelle Clark Neely is a visiting scholar at the
Federal Reserve Bank of St. Louis. Yadav Gopalan
provided research assistance.

[9]

Adler, Joe. “ILC Bill? FDIC Isn’t Waiting;
Latest Approvals Have Long List of
Restrictions.” American Banker, Vol. 172,
No. 77, p. 1, April 23, 2007.
Alvarez, Scott G. Testimony by the general
counsel of the Federal Reserve Board
on ILCs before the Subcommittee on
Financial Institutions and Consumer
Credit, Committee on Financial Services, U.S. House of Representatives,
July 12, 2006.
Blair, Christine E. “The Mixing of Banking and Commerce: Current Policy
Issues.” FDIC Banking Review, January
2005, Vol. 16, No. 4, pp. 97-120.
Dash, Eric. “Wal-Mart Abandons Bank
Plans.” The New York Times, p. B1,
March 17, 2007.
Federal Deposit Insurance Corp. “Moratorium on Certain Industrial Bank
Applications and Notices.” Federal
Register, Vol. 72, No. 23, Feb. 5, 2007,
pp. 5290-93.
Government Accountability Office.
Industrial Loan Corporations: Recent
Asset Growth and Commercial Interest
Highlight Differences in Regulatory
Authority. September 2005, GAO05-621.
Wysocki Jr., Bernard. “On the Shelf:
How Broad Coalition Stymied WalMart’s Bid to Own a Bank.” The Wall
Street Journal, Oct. 23, 2006, p. 1.

Why Do Gasoline Prices React to
Things That Have Not Happened?
By William Emmons and Christopher J. Neely

H

ave you ever wondered why gasoline stations raise their prices in
response to fears about future supplies of oil? You may have thought to
yourself, “I know the gasoline in the
station’s underground storage tank
was purchased before the world price
increased. How can they raise the gas
price now? The gasoline market must
be rigged.”
In fact, gasoline stations should raise
their prices to reflect increased future
costs of replacing their inventories.
Prices act like engine or voltage regulators—they automatically speed up or
slow down the flow of the commodity in
order to maximize performance, or what
economists call allocative efficiency.1
Oil and Gas, Here and There,
Then and Now

To understand why U.S. gas prices
respond now to things that might happen in the future, halfway around the
world, one must understand how spot
and futures prices for storable commodities, such as oil or gasoline, are
related to each other.
The cost of oil comprises about half
the cost of gasoline, but oil is the most
volatile component; other factors, such
as taxes and profit margins, do not
change often.2 The figure shows that
while gasoline prices can diverge from
oil prices for short periods because of
seasonal demand, tax changes or other
reasons, the two prices are closely
linked over longer periods.3
Because oil can be transported
anywhere, trading on global spot and

futures markets determines the
global price of a given grade of oil,
aside from local taxes and transportation costs.4 Oil can either
be sold for immediate delivery or
stored for sale in the future; so, firms
adjust their inventories in response
to news about the future supply
and/or demand for oil. For example,
an unsuccessful terrorist attack on
a Saudi Arabian oil facility might
create fears of further incidents that
would actually disrupt supplies from
the Persian Gulf. These fears would
raise expected future prices and current spot prices, too. Current prices
rise because the rise in the futures
price will encourage firms to take
oil off the spot market and sell it for
delivery in the future. This inventory
increase keeps the spot and futures
prices moving up together.
Because oil is such an important
component of gasoline, wholesale
gasoline prices react instantly to
changes in oil prices, including those
caused by expectations of future
events. The price at your local gas
station will change nearly as quickly
as the wholesale price.
The close connection between
world oil prices and local gasoline
prices can be seen by considering
how two hypothetical competing
gasoline stations in a small town
would react to a sudden increase in
the price of oil. On one quiet morning, both the Conch Gas station
and the Pegasus Gas station were
charging $1.999 per gallon of regular
gasoline. They each had bought
[10]

their inventories a few days before
at a cost of $1.48 per gallon. With
federal, state and local taxes combining for 50 cents per gallon, each
station calculated that it would make
about 2 cents per gallon at a retail
price of $1.999.5
During the late morning, news
of an unsuccessful terrorist attack
on Saudi Arabian oil fields spurred
widespread fears of cuts in future
oil supplies. As frenzied trading
on exchanges in New York, London
and elsewhere bid up the world
price of oil, the owner-manager
of the Conch Gas station learned
that wholesale gasoline prices for
delivery next week had increased by
$1 per gallon. “Folks aren’t going to
like this,” she muttered to herself as
she adjusted the prices on her gasoline pumps and climbed the ladder
to raise her posted price to $2.999
per gallon. The owner-manager of
the Pegasus Gas station had just
finished changing his price to $2.999
when the two managers shrugged
and nodded to each other across the
street before they walked back into
their respective stations.
Despite much grumbling at the
price increases, sales at the Conch
Gas and the Pegasus Gas stations
proceeded much as before—both
stations sold out their existing
inventories right on schedule and
then took delivery on a new load of
gasoline at the new, higher wholesale prices. The station owners
made a tidy, unexpected profit that
week—$1.02 per gallon.

The Regional Economist July 2007
n

Are the Gas Stations Gouging Us?

Did the stations’ simultaneous price
changes the week before wholesale
prices actually went up prove that Conch
Gas and Pegasus Gas were colluding to
gouge consumers? No. These competing station owners did not have much
choice if they wanted to remain as
profitable as their competitors and stay
in business over the long haul. Let’s
consider why they raised their prices in
response to announcements of wholesale price increases and what would
have happened if they had not done so.
Suppose first that only Conch Gas had
held its price at $1.999, while Pegasus Gas
had raised its price to $2.999. Conch Gas
obviously would have captured all of the
traffic that day, but its storage tank would
have run dry much sooner than expected.
By the first or second day after the overseas
disruption in the oil market, the ownermanager of Conch Gas might as well have
gone on vacation—although she would
have been better off if she worked throughout the week and charged the higher price.
Meanwhile, the manager of Pegasus
Gas—who took his vacation in the first
two days of the crisis—returned to sell
out his remaining inventory at $2.999
per gallon. In the end, the Pegasus Gas
station made a much larger profit. The
manager of Conch Gas will not make
this pricing mistake again.
Now suppose that both Conch Gas
and Pegasus Gas had decided to show
home-town solidarity by keeping their
prices at $1.999, at least until the new,
higher-cost gasoline inventories arrived
in a few days. Local residents certainly
would have been appreciative, but so
would all of the eager drivers from
neighboring towns who would have
driven in to enjoy “cheap” gas. In this
case, consumers would have had to line up
for gas, and both the Conch and Pegasus
stations would have run dry before their

replacement inventories arrived. Anyone
in this town who was unfortunate
enough to need gas on the third day
of the crisis would have been out of luck.
Taking the entire region into account, it
is likely that about the same amount of
gasoline would have been sold during
the first days after the crisis as otherwise
would have been the case. But there
would have been wasteful driving by
out-of-towners seeking cheap gas, while
local residents would have been inconvenienced by the gas lines and the
shortage when the Conch and Pegasus
stations ran dry.
Consider one final possibility: What
if all the gasoline stations in the state
had agreed to keep their prices at $1.999
until higher-cost supplies started arriving?
Even if the flow of out-of-state bargain
hunters turned out to be small, a statewide shortage of gasoline would have
been almost guaranteed in short order.
How could this happen? Recognizing
that gas prices were only temporarily low
and were bound to rise soon, all rational
owners of cars, trucks, tractors, off-road
vehicles, lawn mowers or leaf blowers
would fill up their tanks as quickly as
possible. That is, any attempt to constrain
the retail price of gasoline in the face of
higher future prices simply induces a
scramble among buyers to beat the price
increase. Many people would make
wasteful extra trips to top off half-full
tanks, and others would be genuinely
inconvenienced as shortages developed.
Thus, the simultaneous price
increases by Conch and Pegasus Gas
are not harmful price gouging at all.
Although no one likes to pay more for
gas, market-determined gasoline prices
operate to prevent shortages and maximize economic efficiency.
William Emmons and Christopher J. Neely are
both economists at the Federal Reserve Bank
of St. Louis.

Oil and gasoline prices move together
80
70

$/Barrel
$/Barrel

60
50
40

30
20
10
0

350
350

90
Domestic Spot Market Crude Price: West Texas Intermediate, Cushing

80

300
300

Average U.S. Conventional Gasoline Regular Spot Price

70

250
250

SOURCES: Crude oil prices are from The Wall Street Journal.
Gasoline prices are from the U.S. Department of Energy.

60
50

200
200

40

150
150

30

100
100

20

50
50

10
0
1988
1988

1991
1991

1994
1994

1997
1997

2000
2000

2003
2003

[11]

2006
2006

0
0

Cents/Gallon
Cents/Gallon

90

www.stlouisfed.org

ENDNOTES
1

Allocative efficiency means that consumers get the goods for which they
are willing and able to pay.

2

See Energy Information Administration.

3

Although the figure shows just one
grade of oil, West Texas Intermediate,
the prices of all grades of oil tend to
move closely together.

4

A spot market is one in which commodities are traded for near-term
delivery—within a month for oil
markets (Haubrich et al.). A futures
market is one in which a commodity
is traded for delivery on a specified
future date, which could be months or
years away. Major fuel users, such as
airlines and trucking companies, often
buy oil in futures markets to guarantee
the cost of the fuel they will use. Oil
suppliers are more likely to sell oil
contracts in futures markets.

5

Other components of gasoline prices
include taxes and the retail markup.
The federal tax on gasoline is 18.4 cents
per gallon; state and local taxes vary
from 8 to 50 cents per gallon. The local
service station makes about 1-4 cents
of profit per gallon. See National
Association of Convenience Stores.

REFERENCES
Energy Information Administration.
“A Primer on Gasoline Prices.” U.S.
Department of Energy, May 2006. See
www.eia.doe.gov/bookshelf/brochures/
gasolinepricesprimer/printerversion.pdf.
Haubrich, Joseph G.; Higgins, Patrick; and
Miller, Janet. “Oil Prices: Backward to
the Future?” Federal Reserve Bank of
Cleveland Commentary, December 2004.
See http://clevelandfed.org/Research/
Commentary/2004/Decnew.pdf.
National Association of Convenience
Stores. “Retailer Margins Shrink as
Prices Climb.” Industry Resources,
May 2007. See www.nacsonline.com/
NACS/Resource/PRToolkit/Campaigns/
prtk_gp2007_Retailer+Margins.htm.

By Kevin L. Kliesen

O

n Jan. 1, 2008, the first members
of the baby boom generation
will turn 62 and, thus, become eligible
for some retirement benefits from
the federal government. Countless
studies have tried to estimate the fiscal
implications of the pending retirement
of this generation. Perhaps less known
to the public are the implications for
U.S. labor markets and, thus, the future
growth rates of real GDP. Using a
standard growth accounting framework, the aging of the U.S. population
suggests weaker growth of real GDP
going forward. Whether this occurs
will depend crucially on future trends
in labor productivity growth and, to a
lesser extent, the evolving trend in the
labor force participation rate.
The Economics of
Growth Accounting

Economic theory holds that, in the
long run, an economy’s growth rate
depends on factors such as population
growth, saving and investment rates,
technology, tax and regulatory policies,
and consumer preferences for work
and leisure.1 To gauge an economy’s
potential for growth over longer
periods of time, which implicitly takes
into account these factors, economists
sometimes employ a growth accounting framework. A simplified version of
this framework is published each year
in the Economic Report of the President.
The growth accounting framework

projects the percentage change in
real GDP by adding up estimates of
the percentage changes in: the adult
population (those aged 16 and over),
the participation rate of the working
age population (ages 25 to 64) and
aggregate labor productivity (GDP per
worker).2 Using conventional demographic assumptions that predict a significant reduction in the participation
rate, the growth accounting framework
shows that real GDP growth could
slow dramatically in coming decades.
Population Growth

Currently, the Census Bureau
projects that the annualized growth of
the adult population will slow from a
rate of 1.9 percent per year from 1970
to 2006, to 0.9 percent per year from
2007 to 2017, and then 0.8 percent
per year from 2018 to 2028.3 From this
starting point, one can begin to get a
sense of effects of the retirement of the
baby boom generation by looking at
the projected growth of the working
age population over the next 10 to 20
years. According to the Census Bureau,
growth of the working age population averaged about 2.25 percent per
year from 1970 to 2006. However, over
the next decade, its growth is slated to
drop sharply. Between 2007 and 2017,
growth is projected to average just 0.65
percent per year; from 2018 to 2028,
growth is expected to average only
0.12 percent per year. At the same
[12]

time, growth of the population age
65 and older is projected to accelerate,
averaging 2.8 percent per year from
2007 to 2017 and by nearly 3 percent
per year from 2018 to 2028.
Labor Force Participation Rates

The labor force participation rate
is the percentage of the population
16 and older that is either employed
or is actively seeking employment.
Beginning in the early 1960s, the
U.S. participation rate began to trend
upward. From 1964 to 1997, the total
participation rate rose from 58.7 percent
to 67.1 percent, or by an average of 0.25
percentage points per year. An increasing percentage of women entering
the labor force was a key factor in this
increase. However, higher labor force
participation rates did not materially
boost aggregate growth over most of
this period because of a sharp deceleration in labor productivity growth from
about 1973 to about 1995. Since
the late 1990s, though, the U.S. labor
force participation rate has declined
slightly, to 66 percent, but this effect
has been more than offset by a reacceleration in labor productivity growth
since about 1995.
A second factor that explained the
upward trend in the aggregate labor
force participation rate until the late
1990s was the aging of the population.4
For example, the working age population as a percentage of the total resident

The Regional Economist July 2007
n

www.stlouisfed.org

population rose from 44 percent in the late
1960s/early 1970s to about 53 percent by
last year. It is projected to remain at that
level until 2011 and then begin to fall to
about 47 percent by 2050.
With growth of the retiree population
increasing and the growth of the working
age population decreasing, the labor force
participation rate will probably trend lower.
In their 2007 report, the trustees of the
Social Security Administration (SSA) estimate that the participation rate will steadily
decline to a little more than 59 percent by
2081.5 Some developments could prevent
this from occurring. First, an increasing
percentage of the working age population
must enter the labor force. Second, the
baby boomers must either postpone retirement or continue to work part time. Third,
the participation rates of women must
resume their upward trend.
But these events are unlikely, for the
following considerations.6 First, the participation rates of women, particularly those
who are married and with children, have
declined in recent years. Second, a larger
percentage of teens and young adults are
attending post-secondary schools and
staying in school longer. Finally, health
and mortality considerations will eventually limit the participation rates of elderly
baby boomers.
Productivity Growth

Productivity plays a crucial role in the
growth accounting framework. In the
long run, a nation’s real GDP growth rate
depends crucially on the growth of output
per hour (productivity). The most common
measure of labor productivity is output per
hour in the nonfarm business sector. After
increasing by an average of 1.4 percent per
year from 1973 to 1994, the nation’s labor
productivity growth rate began to accelerate beginning around 1995. From 1995
to 2006, labor productivity increased at an
average annual rate of 2.7 percent. By most
accounts, this acceleration stemmed from
innovations in information and communication technology equipment.7 Recently,
however, labor productivity growth has
decelerated sharply, from 4.1 percent in
2002 to only 1.6 percent in 2006; last year’s
increase was the smallest since 1997. The
steady slowing in labor productivity growth
is unsettling and perhaps raises questions

about its underlying strength. However,
the most recent Survey of Professional
Forecasters projects that labor productivity
growth will increase by an average of 2.2
percent per year over the next 10 years.8

As shown in the table, the growth
accounting framework projects that real
GDP growth will slow from an average of
3 percent per year from 1990-2006 to 2.5
percent per year from 2007-2017 and then
to 2.2 percent per year from 2018-2028.9
These estimates are based on the census
population projections and the SSA labor
force participation rate projections noted
earlier, along with the assumption that the
rate of aggregate productivity growth will
remain at its 1990-2006 average.
It is apparent that faster aggregate
productivity growth can also mitigate the
projected slowing in real GDP growth.
However, there are several factors that
could prevent this from occurring. First,
productivity growth may slow, as older,
more experienced workers are replaced
with younger, less experienced workers. Second, if tax rates are increased to
address the looming fiscal crisis stemming
from the retirement of the baby boomers, then capital spending (investment)
by firms might drop, putting a brake on
productivity growth. A related effect could
occur if taxes or regulations are implemented to address climate change. In this
case, higher energy taxes would render
obsolete some portion of the nation’s
stock of capital goods, much as the oil
price shocks of the 1970s did. Third, U.S.
saving rates have been extraordinarily low.
In fact, the personal saving rate was negative in 2005 and last year. Unless reversed,
negative personal saving rates will limit
capital formation and productivity growth.
From a pure growth accounting standpoint, real GDP growth rates are projected
to slow to rates last seen from 1973 to
1983 (2.25 percent per year). Whether this
occurs will depend on future productivity
growth rates and labor force participation
rates—including those people who choose
to continue working in “retirement.”
Kevin L. Kliesen is an economist at the Federal
Reserve Bank of St. Louis. Joshua A. Byrge provided
research assistance.

Percent changes, annual rate per year
2007-2017

1	Economists

typically measure economic
growth from a long-run perspective as
the growth of real GDP per capita.

2

Adding It Up

Accounting for Annual Growth, 1990 to 2028
1990-2006

ENDNOTES

2018-2028

Population

1.24

0.91

0.83

+ LFP rate

–0.03

–0.25

–0.40

+ Productivity

1.82

1.82

1.82

= Real GDP

3.0

2.5

2.2

NOTE:  Projections of the
labor force participation rate
(LFP) are based on the cost
assumptions used in the Social
Security Administration’s 2007
Trustees Report.

[13]

Monetary policy plays no role in boosting the economy’s long-run rate of
growth in this supply-side framework.
Instead, central banks can only influence the price level in the long run
(that is, the inflation rate).

3	The

U.S. Census Bureau formally
counts the nation’s population every
10 years. Between these counts, the
Census Bureau publishes population
estimates based on the number of
births, the number of deaths and net
(total) migration that occur each year.
From these estimates, long-run population projections are made based on
assumptions like future trends in fertility and death rates and in immigration.

4

Briefly, if the participation rate of a specific age group changes, or the share
of a certain age group within the total
population (i.e., the population weight)
changes, then the labor force participation rate can change significantly.

5	This

would be the lowest rate since
1966, when the participation rate
averaged 59.2 percent. The SSA
participation rate is based on the
projection consistent with the trustees’
intermediate cost projections for Social
Security benefits.

6	See Aaronson

et al. (2006) and Juhn
and Potter (2006).

7	See Anderson

and Kliesen (2006).

8	See

Federal Reserve Bank of Philadelphia (2007). The growth accounting
framework uses aggregate productivity,
which is based on total GDP; nonfarm
business sector output is about 77
percent of total GDP.

9	Actual

real GDP growth also averaged
3 percent per year from 1990 to 2006.

REFERENCES
Aaronson, Stephanie; Fallick, Bruce; Figura,
Andrew; Pingle, Jonathan; and Wascher,
William. “The Recent Decline in the
Labor Force Participation Rate and Its
Implications for Potential Labor Supply.”
Brookings Papers on Economic Activity,
2006, No. 1, pp. 69-134.
Anderson, Richard G.; and Kliesen, Kevin
L. “The 1990s Acceleration in Labor
Productivity: Causes and Measurement.” Federal Reserve Bank of St. Louis
Review, May/June 2006, Vol. 88, No. 3,
pp. 181-202.
Board of Trustees of the Federal Old-Age
and Survivors Insurance and Federal
Disability Insurance Trust Funds. The
2007 Annual Report of the Board of Trustees
of the Federal Old-Age and Survivors
Insurance and Federal Disability Insurance Trust Funds. Washington, D.C.,
April 23, 2007.
Federal Reserve Bank of Philadelphia.
Survey of Professional Forecasters. Feb. 13,
2007. See www.phil.frb.org/files/spf/
survq107.html.
Juhn, Chinhui; and Potter, Simon. “Changes
in Labor Force Participation in the United
States.” Journal of Economic Perspectives,
Summer 2006, Vol. 20, No. 3, pp. 27-46.

Community Profile
By Glen Sparks

Conway

Good fortune runs in a strip across north-central Arkansas, anywhere

D

40

arkansas

hendrix
college

64

central
baptist
college

40

Conway

64

365

southwestern
energy

286
to li

acxiom
corp.

rock

ic corp.

ttle

university
of central
arkansas

Conway, Ark.
By the Numbers

Population....................................................................... City 51,999 (2005)
                       	
County 97,739 (2005)
County Labor Force.................................................. 25,761 (January 2007)
County Unemployment Rate............................... 4.6 percent (January 2007)
County Per Capita Income........................................................$25,534 (2004)
Top Five Employers
Acxiom................................................................................................ 2,000
University of Central Arkansas........................................................... 2,000
Conway Regional Medical Center...................................................... 1,300
IC Corp................................................................................................. 1,279
Conway Human Development Center................................................. 1,200

rills chew through the earth toward this good fortune, aka the
Fayetteville Shale Play, a rich natural gas deposit that stretches
100 miles long and 20 miles wide. (Shale is a rock that yields gas
after being put under extreme pressure. “Play”is an energy industry term that describes a portion of the exploration and production
cycle after companies identify an area with potential oil or gas
reserves.)
“Conway seems to be the heart” of the play, says John Thaeler,
senior vice president of SEECO Inc., a subsidiary of Houstonbased Southwestern Energy Co., which holds about 1 million
acres in mineral leases throughout the state. “This is going to be
a huge boost to the economy.”
A recent study conducted by the University of Arkansas College of Business and paid for by Southwestern Energy concluded
that the play will add $1.6 billion to the state economy this year,
employ more than 6,600 workers and generate nearly $106 million in state and local tax revenue.1
“The play’s greatest benefit to the state of Arkansas is that it
will provide an economic stimulus and will diversify the employment base, reducing the dependence on manufacturing and retail,
and providing many jobs with above-average pay,” economist Jeff
Collins predicted when the study was released. Collins served as
director of the Center for Business and Economic Research at the
University of Arkansas and now runs a consulting firm.
In Conway, the play benefits a city long noted as an education
center (see sidebar), but one that also boasts a strong manufacturing sector. This Little Rock suburb features a blend of traditional and high-tech businesses.
The natural gas boom began in Arkansas after Southwestern
Energy successfully drilled test wells in the Conway area in 2004.
Chesapeake Energy, based in Oklahoma City, followed Southwestern to Conway, as did natural gas company suppliers like
National Oilwell Varco (NOV) and Schlumberger.
Southwestern opened a Conway office in 2005 with 12 people.
Now, the firm has more than 400 employees working in Conway. Southwestern plans to invest nearly $1 billion in the shale
play this year, in part by building between 400-450 horizontal
wells, which drill down to the gas reservoir and then move horizontally through the gas-bearing zone.
Landowners who allow energy companies to explore for gas
on their property get a part of the cut—one-eighth to one-fifth of
the sales profit once the gas goes to market.
Companies usually expect about 20 years of production from a
working well, but that estimate is subject to considerable uncertainty.
“You really don’t know how much these wells will produce,
or how the technology might advance and let you produce even
more,” Thaeler says. “We have wells in Texas that have been
pumping out gas for more than 30 years.”
School Bus Capital

Long before energy
firms began drilling in
Conway, workers here
built school buses. IC
Corp. makes more school
buses than any other company in the United States,
says IC’s plant manager,

ABOVE: Curtis Henry operates a drill at a SEECO Inc. rig site in the.
middle of a hay field 30 miles north of Conway.
RIGHT: Workers put the finishing touches on a school bus at IC Corp.
MIDDLE: A network engineer works in the Network Operations Center
at Acxiom.
FAR RIGHT TOP: At Hendrix College, a covered swimming pool goes
up at the new Wellness and Activities Center.  Hendrix plans to build
a mixed-use community with shops, restaurants and apartments in the
wooded area behind the pool.

[14]

The Regional Economist July 2007
n

www.stlouisfed.org

Makes Play for
Economic Boom
from 1,500 feet to 6,500 feet below the ground.
Ed Hartung. In 2007, the company expects to complete as many as
8,000 school buses, plus some prison buses and tour buses.
With more than 1,200 employees, IC is the largest manufacturer in
town. (Other large manufacturers include Virco, with 821 employees;
Kimberly-Clark, 481; and Snap-on tools, 472.)
Founded as Ward School Bus Manufacturing in Conway in 1933,
IC is a wholly owned subsidiary of International Truck and Engine,
which, in turn, is part of Navistar, based in the Chicago area.
A typical wage for IC assembly-line workers, who are represented
by the local United Auto Workers union, is $15.75 an hour. “For the
person in Conway who has a high school education and who is looking
for a good wage and great benefits, we fill that niche,” Hartung says.
Conway High-Tech

Acxiom, founded in 1969, grew out of the bus builder’s data processing department. The company manages data for an international
clientele, helps companies analyze and build on their customer base,
and identifies the best strategies for information management. Acxiom has branch offices
in the United States and
in 10 countries around
the globe, with 7,000
employees worldwide.
In late May, a private
equity firm announced
that it wanted to buy
Acxiom. Because the
deal won’t close until
mid-September, it’s hard to tell what impact the buyout will have
on the company or Conway, says Jerry Adams, Acxiom’s economic
development chief and director of community relations.
Adams also serves as chairman of a statewide economic development group, Accelerate Arkansas. He says that Acxiom is a model
for the type of high-tech, white-collar businesses that Arkansas wants
to attract.
Brad Lacy, head of the Conway Development Corp., agrees. “The
natural gas industry has gotten big here over the last couple of years,
but that’s like a present given to us,” Lacy says. “We’ve shown that we
can grow a major technology firm here, and we want more of that.”
The city population has grown by almost 9,000 people since 2000,
according to Census Bureau figures. Over the past several years,
Conway also has added the 650,000-square-foot Conway Commons
mall and several chain restaurants. Downtown has undergone revitalization, including a $2.5 million renovation of the historic Halter
building, constructed in 1917.
The growth in Conway notwithstanding, Acxiom decided in 2000
to transfer its corporate headquarters to Little Rock, which makes it
easier to attract and retain top executives, Adams says. About 700
Acxiom employees work in Little Rock. Acxiom still has about 2,000
employees in Conway on a 12-building campus.
“Getting workers to come to Conway is becoming easier all the
time,” says Adams, who is originally from St. Louis. “It’s one of those
things where you still have the small-town atmosphere, but there has
been so much growth in recent years, and the big city (Little Rock) is
just 30 minutes away.”
Glen Sparks is an editor at the Federal Reserve Bank of St. Louis.
1

See http://cber.uark.edu/data/FayettevilleShaleEconomicImpactStudy.pdf.

[15]

Hendrix College Embraces
the City Life
Hendrix College is one of a handful of colleges and
universities across the country that hope to attract more
students by adding a bit of the city life to their rural or
suburban campuses.
That’s the idea behind The Village at Hendrix, a retail
and residential space that the liberal arts school is
developing in Conway.  Hendrix College plans to break
ground late this year or early next year on the approximately 93-acre development, which will be located on
the edge of campus.
Plans call for 170,000 square feet of retail space,
plus 190 single-family houses, 130 townhouses, 160
apartments and 30 loft-style units.  The development
should appeal to students, but also to faculty, senior
citizens and anyone else who prefers to walk, not drive,
to the dentist or supermarket.
“The Village at Hendrix is one of the new urban communities that put amenities within walking distance,” says
Scott Schallhorn, the vice president and general counsel
for Hendrix and the CEO of The Village at Hendrix LLC.
A combination of special improvement district bonds
and private financing will pay for the $235 million
project.  Hendrix will contribute about $10 million in
Phase I, which includes much of the infrastructure work.   
Individual home-building firms will finance much of the
project, Schallhorn says.
Hendrix, with an enrollment of about 1,100 students,
is one of three colleges in Conway, along with Central
Baptist College, which has about 500 students, and the
University of Central Arkansas, which has approximately 12,400.
Central Arkansas’ enrollment has risen by almost
5,000 since 2001, says Warwick Sabin, the school’s vice
president of communications.  He credits this dramatic
rise to an aggressive marketing campaign begun by Lu
Hardin,  president since 2001.  Hardin has done several
TV ads and other promotions as a way to attract more
students to UCA.
The school is also making more scholarships available
to incoming freshmen, Sabin says, and interest is up in
the school’s health sciences programs, such as nursing,
physical therapy and occupational therapy.
Roger Lewis, an economist at Central Arkansas,
says that the three Conway schools help keep the local
economy strong.  Graduates help fill jobs at Acxiom (see
main article) and other firms.  Students never seem to run
out of money, Lewis adds.
“The kids seem to spend, spend, spend,” Lewis says.
“Because there are so many schools here, we have so
much to do.  We even have a symphony in town.”

District Overviews

LITTLE ROCK

|

Louisville

|

MEMPHIS

|

ST. LOUIS Zones

Population, Sprawl and Immigration Trends
in Eighth District Metro Areas Vary Widely
By Michael R. Pakko and Howard J. Wall

R

ecently, the Census Bureau
released estimates of metro-area
populations as of July 1, 2006. The latest data are consistent with the usual
observation that population is flowing
from the Snow Belt to the Sun Belt,
with slower growth rates concentrated
in the East and Midwest and more
rapid growth rates concentrated in
the West and South. As a region that
straddles the Midwest and Midsouth,
the Eighth Federal Reserve District
experienced a wide range of population changes across its metro areas.
Taking the totals for all metro areas
in the District, the 2006 population
estimate was 8.6 million, representing
an increase of approximately 460,000
residents since 2000 (a growth rate of
5.6 percent). By comparison, the population of the United States as a whole
experienced an increase of 6.4 percent
over the period. Among the four
major metro areas in the District, only
Little Rock, Ark., saw faster-than-average population growth: 6.9 percent.
Louisville, Ky.-Ind., and Memphis,
Tenn.-Ark., grew by 5.2 percent and
5.8 percent, respectively, while the
St. Louis, Mo.-Ill., metro area population expanded by only 3.9 percent.1
Some of the smaller metro areas
in the District were among the fastest growers. Most prominently, the
Fayetteville, Ark.-Mo., metro area grew
by 21.3 percent since the beginning
of the decade, putting it among the
20 fastest-growing metro areas in the
country. Other rapidly growing metro
areas in the District include Springfield, Mo. (10.5 percent); Bowling
Green, Ky. (8.8 percent); Hot Springs,
Ark. (8.1 percent); and Columbia,
Mo. (7.1 percent). At the other end of
the spectrum, the population of Pine
Bluff, Ark., fell by 3.4 percent—the
only metro area in the District to have
experienced a population decline over
the period.
Suburban Sprawl

The data for metro areas as a whole
obscure some significant patterns of
growth within the metro areas them-

selves, particularly the ongoing movement of population from central cities
and inner suburbs to outlying suburbs.
The St. Louis metro area offers a prime
example of this trend. Since the beginning of the decade, the population of
the city of St. Louis rose by only 1.6
percent, while St. Louis County, which
is home to the suburbs immediately
abutting the city, experienced a decline
of 1.6 percent. Counties containing
the second and third layers of suburbs beyond the central city grew very
rapidly, however: Lincoln, Mo. (28.7
percent), Warren, Mo. (21 percent),
St. Charles, Mo. (19.3 percent) and
Monroe, Ill. (15.4 percent).
Similarly, in the central counties
of the Little Rock (Pulaski), Memphis
(Shelby) and Louisville (Jefferson)
metro areas, which include central
cities and inner suburbs, population expanded by less than 2 percent,
meaning that the bulk of metro area
population growth took place in
outlying suburbs. In the Little Rock
area, growth was strongest in Lonoke
(19.1 percent), Faulkner (17.1 percent)
and Saline (12.6 percent) counties. In
the Memphis area, two Mississippi
counties—De Soto (35.0 percent)
and Tunica (12.9 percent)—and two
Tennessee counties—Fayette (25.3
percent) and Tipton (11.9 percent)—
grew much faster than the rest of the
metro area. The population of Spencer County, Ky., has been the fastest growing county in the Louisville
metro area (and, indeed, in the entire
Eighth District), having expanded by
40 percent since 2000. Another five
counties in the Kentucky part of the
Louisville metro area also saw doubledigit population growth: Oldham (19.7
percent), Shelby (19.1 percent), Bullitt
(19 percent), Nelson (12.3 percent) and
Trimble (11.7 percent).
This movement toward outlying
suburbs is evident even in some of the
smaller metro areas in the District. For
example, Greene County, Mo., which
includes the city of Springfield, grew
by 6 percent, while the nearby counties
of Webster and Christian expanded by
14.4 percent and 29.9 percent, respec[16]

tively. Similarly, the fastest growing
county in the Fort Smith, Ark., metro
area is Crawford County rather than its
own Sebastian County, and the most
rapidly growing county in the Jefferson City, Mo., metro area is Callaway
County instead of its own Cole County.
International and
Domestic Migrants

Data on net international and
internal (domestic) migration across
District metro areas, also published by
the Census Bureau, show no clear pattern. In fact, there is not even a clear
pattern in whether the two types of
migration are negative or positive net
contributors to population growth at
the metro-area level.
In the St. Louis metro area, for
example, international migration
added 26,682 residents over the
decade, offsetting a 23,449 outflow of
domestic migrants. In Memphis, on
the other hand, net inflows have been
positive for both types of migrants,
with a net inflow of 13,040 international migrants and 5,934 domestic
migrants. Louisville also saw positive
net flows for both types of migrants,
but it was domestic migration that was
predominant (a net inflow of 16,776),
although international migrants did
account for a large portion of the
population increase (a net inflow of
11,803). This pattern was more pronounced for Little Rock, where the net
increase in population due to domestic
migration was about 4.5 times that due
to international migration.
For the central counties of these
four metro areas, there was a clear
pattern of the relative importance
of the two types of migration. In
each case, positive net international
migration helped to offset the large
net out-migration to other parts of
the area or the country. In fact, if it
weren’t for international migration,
these central counties would have
seen overall population losses. The
city of St. Louis saw a net international inflow of 11,050 and a net
domestic outflow of 52,859.2 Shelby

The Regional Economist July 2007
n

www.stlouisfed.org

Illinois

Indiana

Columbia
St. Louis

Jefferson City

Evansville

Missouri

Owensboro

Springfield

Bowling Green

Fayetteville-Springdale-Rogers
Jonesboro

Jackson

Arkansas

Fort Smith

Louisville-Jefferson County
Elizabethtown

Kentucky

Tennessee

Memphis

Little Rock-North Little Rock

Hot Springs

Metro Area Population

Pine Bluff
Texarkana

Mississippi

					
Shading defines the zones covered by the
2006 Population
Change Since
Percentage
International
four major cities in the District: St. Louis,
		
2000
Change
Migration
Little Rock, Louisville and Memphis.

Internal
(Domestic)
Migration

Large Metro Areas
St. Louis, Mo. - Ill.
Little Rock-North Little Rock, Ark.
Louisville-Jefferson County, Ky. - Ind.
Memphis, Tenn. - Miss. - Ark.
Small and Medium Metro Areas
Bowling Green, Ky.
Columbia, Mo.
Elizabethtown, Ky.
Evansville, Ind. - Ky.
Fayetteville-Springdale-Rogers, Ark. - Mo.
Fort Smith, Ark. - Okla.
Hot Springs, Ark.
Jackson, Tenn.
Jefferson City, Mo.
Jonesboro, Ark.
Owensboro, Ky.
Pine Bluff, Ark.
Springfield, Mo.
Texarkana, Texas - Texarkana, Ark.

2,803,024
652,834
1,222,216
1,274,704

104,337
42,316
60,241
69,500

3.9
6.9
5.2
5.8

26,682
3,710
11,803
13,040

–23,449
17,027
16,776
5,934

113,320
155,997
110,878
350,356
420,876
288,818
95,164
111,937
144,958
113,330
112,093
103,638
407,092
134,510

9,154
10,331
3,331
7,541
73,831
15,648
7,096
4,560
4,906
5,568
2,218
–3,703
38,718
4,761

8.8
7.1
3.1
2.2
21.3
5.7
8.1
4.2
3.5
5.2
2.0
–3.4
10.5
3.7

2,455
2,927
–38
1,520
9,957
3,763
444
1,027
859
886
307
443
1,489
516

3,550
1,488
–1,147
854
43,199
4,327
8,148
796
506
2,132
–868
–5,871
28,532
2,771

SOURCE: U.S. Census Bureau

County (Memphis) experienced a net
inflow of 11,795 international migrants
and a net outflow of 35,862 domestic
migrants. Jefferson County (Louisville)
had an inflow of 9,638 international
migrants and a domestic outflow of
17,310. In Little Rock, Pulaski County
had a net inflow of 2,843 international
immigrants to partly offset its net
domestic outflow of 11,373 residents.
International migration has been
important for some of the smaller- to
medium-sized metro areas as well,
especially those that experienced the
most-rapid growth. Metro areas in
which international migration has
accounted for more than 20 percent

of the area’s population growth include
Bowling Green, Columbia, Evansville,
Fort Smith and Jackson. It is worth
noting, however, that the two fastest
growing metro areas in the District—
Fayetteville and Springfield—owe
most of their population growth to net
migration from the rest of the country.
For Fayetteville, large net domestic
migration accounted for 59 percent of
the total change in population, while
the corresponding number for Springfield was 74 percent.
Michael R. Pakko and Howard J. Wall are both
economists at the Federal Reserve Bank of
St. Louis. Joshua Byrge, a research associate,
provided research assistance.

[17]

ENDNOTES
1	The numbers for the St. Louis metro area do not
include the portion of Crawford, Mo., county that
lies within the metro area border. Also, St. Louis
city successfully appealed its initial population
estimate, which had indicated a population
decline. In this article, the data on total population changes in the St. Louis metro area and the
city of St. Louis reflect the revised estimate.
2	These numbers are from the original estimates,
not the revised estimates, which are not yet available at this level of detail.

National Overview
The Economy Continues to

Take a

n
Pu ch
By Kevin L . Kliesen

U

.S. real GDP growth was quite
weak in the first quarter, a
continuation of the belowtrend growth that has been seen for
the past year. Still, a return to trendlike growth by the end of the year
remains the most likely scenario. At
the same time, resurgent crude oil
and gasoline prices since mid-January
have caused an unwelcome rebound
in headline inflation pressures. The
headline measure that excludes food
and energy prices (core inflation) has
eased modestly since the third quarter
of 2006, providing Fed policymakers
some degree of comfort.
From mid-January to late May
2007, U.S. average retail gasoline
prices rose by 48 percent to $3.22 per
gallon. Driven by seasonal demand,
by refinery outages that have dramatically reduced inventories and by strong
global demand for gasoline, retail
gasoline prices are expected to hover
around $3 per gallon this summer.
The government’s forecast of an
above-average hurricane season this
summer raises the risk that energy
prices could increase further. Forecasters, nevertheless, expect Consumer
Price Index (CPI) inflation to average
about 2.5 percent during the second
half of this year, about one percentage
point less than that projected for the
first half of the year.
Price pressures have eased modestly outside of the food and energy
complex. Since September 2006, the
year-to-year percent change in the
core Personal Consumption Expenditures (PCE) inflation rate has declined
by a little more than 0.25 percentage
points to 2 percent. Although the
Federal Open Market Committee
(FOMC) expects some additional
moderation, forecasters are more
skeptical. The Survey of Professional
Forecasters (SPF) expects that the core
PCE will increase by 2.1 percent this
year and next.

Rising energy prices, the
housing correction, and an
unexpected weakening in the
pace of business equipment and
software purchases have been
key factors pushing the pace
of real GDP over the past
year below its trend rate
of growth (roughly 3
percent). This slowdown
culminated with an anemic 0.6 percent growth
rate in the first quarter of this
year, the smallest increase in a little
more than four years and well short
of the 2.5 percent gain posted in the
fourth quarter of last year. Forecasters, by and large, still see the economy
steadily gaining strength after the weak
first-quarter performance.
Compared with their projections
at the end of last year, SPF forecasters
have become a bit more pessimistic
about the strength of real personal
consumption expenditures for the
remainder of this year, perhaps in
response to increased gasoline prices.
The unexpected weakness in business capital outlays (equipment and
software) over the past year, as well
as uncertainty in energy markets, has
also caused some forecasters to expect
a somewhat weaker rebound in real
business fixed investment for the rest
of this year than what was expected at
the end of last year. In any event, business capital spending appears to be
improving after declining during the
fourth quarter of last year, as evident
by the strong rebound in new orders
for manufactured nondefense capital
goods (excluding aircraft) in March
and April.
Some signs of stabilization have
appeared in the housing sector, as seen
by a modest rebound in housing starts
since January and the sharp jump in
new-home sales in April. That said,
home builders are still trying to pare
the sizable inventory of unsold homes,
[18]

chiefly through price reductions or
sales incentives. Accordingly, the
stabilization of the housing market
might be several months away, but
it is nonetheless a key factor in the
expected return to trend-like real GDP
growth toward the end of this year.
Also key is the continued favorable
outlook for commercial construction
spending and the foreign demand for
U.S. goods and services.
Labor market conditions have
weakened modestly this year. First,
payroll employment gains thus far in
2007 have averaged only 133,000 per
month, about 55,000 per month less
than last year. Second, labor productivity growth in the nonfarm business
sector has slowed from 4.1 percent
in 2002 to 1.6 percent last year. This
development, which is being watched
closely, has caused some forecasters to
lower their estimate of potential real
GDP growth to below 3 percent. In the
short run, the threat posed by higher
energy prices could intensify if labor
productivity growth weakens further.
If so, core inflation may not moderate as much as the FOMC expects. In
view of the consensus forecast for real
GDP, policymakers are likely to remain
focused on keeping inflation and inflation expectations in check.
Kevin L. Kliesen is an economist at the Federal
Reserve Bank of St. Louis. Joshua A. Byrge
provided research assistance.

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
first quarter 2007

U.S. Banks
by Asset Size

ALL

$100
million­$300
million

Return on Average Assets*

1.24

1.11

1.02

1.22

1.12

1.25

1.19

1.26

Net Interest Margin*

3.34

4.16

4.17

4.06

4.12

3.87

3.99

3.10

Nonperforming Loan Ratio

0.82

0.86

0.90

0.74

0.82

0.68

0.75

0.85

Loan Loss Reserve Ratio

1.17

1.26

1.29

1.23

1.26

1.24

1.25

1.14

less than
$300
million

$300
million$1 billion

less
than
$1 billion

$1billion$15
billion

Return on Average Assets *
1.00

Net Interest Margin *
Arkansas
Illinois
Indiana
Kentucky

1.57

1.16
1.24
1.07
1.21

Mississippi
Missouri

0.84

0

.25

.50

.75

1

3.72
3.83
3.97
4.12
3.51
3.63
3.49
3.50
3.93
3.85
3.97
4.12
3.85
4.00

Eighth District

1.41

1.02
1.16
0.95
1.03
0.80
1.00
1.12

1.25 1.50 1.75

2

3.22
3.39

Tennessee

2.13

2.25 2.50 percent

1

Nonperforming Loan Ratio
1.08

2.5

3

Illinois

1.05
1.08
0.89

Indiana
Kentucky

1.01

0.49
0.43

Mississippi
0.63

0.78

Missouri
0.93
0.96

.75

1

3.5

4

4.5

1.24
1.28
1.38
1.45
1.25
1.21
1.30
1.45
1.17
1.39
1.24
1.32
1.35
1.36

Arkansas

0.98

0.81

.5

2

Eighth District

0.83

.25

1.5

Loan Loss Reserve Ratio

0.88
0.80

0

less
More
than
than
$15 billion $15 billion

0.97
0.92

Tennessee

1.25

First Quarter 2007
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

0

.25

.50

.75

1

1.25

First Quarter 2006
For additional banking and regional data, visit our web site at:
www.research.stlouisfed.org/fred/data/regional.html.

1.50

1.75

The Regional Economist July 2007
n

www.stlouisfed.org

Regional Economic Indicators
Nonfarm Employment Growth*

year-over-year percent change

first quarter 2007
united
states

Total Nonagricultural

eighth
district

1.5%
7.5
0.3
–0.7
0.8
0.9
1.8
2.7
2.7
3.5
0.6
1.3

Natural Resources/Mining
Construction
Manufacturing
Trade/Transportation/Utilities
Information
Financial Activities
Professional & Business Services
Educational & Health Services
Leisure & Hospitality
Other Services
Government

0.9%
2.6
1.8
–1.7
0.9
0.5
1.1
1.7
2.2
2.8
0.5
0.5

arkansas

0.8%
12.7
0.9
–3.8
1.0
3.4
2.1
1.4
2.7
1.3
2.3
1.8

illinois

indiana

1.0%
–1.7
1.2
–0.6
0.5
–0.4
1.3
2.0
2.5
3.1
0.4
-0.2

kentucky

mississippi

0.8%
3.0
–0.2
–0.9
0.4
1.6
1.8
1.5
1.9
2.1
0.4
0.9

2.1%
4.8
5.9
–2.3
1.8
–2.4
–0.2
2.1
4.0
7.6
–0.1
2.3

0.2%
0.5
–0.4
–2.0
1.0
0.5
0.4
1.1
1.0
0.6
0.8
0.5

missouri

tennessee

1.1%
–3.1
0.4
–1.8
1.5
–0.3
1.7
1.9
2.3
3.2
0.1
0.2

1.0%
0.0
6.6
–2.6
1.0
3.0
0.5
1.1
2.3
3.4
0.8
0.1

Unemployment Rates

Exports

percent

year-over-year percent change

I/2007

IV/2006

4.5%
5.0
4.5
4.8
5.6
6.6
4.8
4.8

United States
Arkansas
Illinois
Indiana
Kentucky
Mississippi
Missouri
Tennessee

United States

I/2006

4.5%
5.4
4.1
4.8
5.6
6.9
4.9
5.0

Arkansas

4.7%
5.0
5.0
5.0
6.0
7.1
4.7
5.2

14.7

10.8
10.4
10.9

17.3
19.0

Illinois
5.3

Indiana

12.7
15.7
14.9
16.6

Kentucky
Mississippi
Missouri

16.5
15.5

Tennessee

0

5

10

15

26.3
22.1

18.6

20

25

2005

2006

first quarter

fourth quarter

Housing Permits

Real Personal Income ‡

year-over-year percent change
in year-to-date levels
–26.8
–25.3

year-over-year percent change
United States

4.4

–29.3

16.2

–37.1

34.0

2007

0

10

20

4.9
2.9

1.0

2.8
2.7

Tennessee

30

40

50 percent –3

2006

*NOTE: Data have been converted from the 1987 Standard Classification (SIC) system
basis to a 2002 North American Industry Classification (NAICS) basis.

2.3

0.2

Missouri
18.3

–50 –40 –30 –20 –10

1.9

Mississippi

3.1
–21.2

3.2

0.5

Kentucky

17.4

3.5

1.2

Indiana

2.5

–27.7

3.7

0.3

Illinois

24.6

3.6

1.5

Arkansas

–3.7

–24.2

30

–2

–1

0

1

2006
†

2

3

4

5

6

2005

NOTE:  Real personal income is personal income divided by the PCE chained price index.

The Regional Economist July 2007
n

www.stlouisfed.org

Major Macroeconomic Indicators

Consumer Price Inflation

Real GDP Growth

percent

percent

8

5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5

6
4
2
0
–2

02

Additional charts can be found on the web version of The Regional Economist.  
Go to www.stlouisfed.org/publications/re/2007/c/pdf/07_07_data.pdf.

03

04

05

06

07

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

all items

all items, less
food and energy
02

03

04

05

06

May

07

NOTE: Percent change from a year earlier

Civilian Unemployment Rate

Interest Rates

percent

percent
7

6.5

6

6.0

5

5.5

4

5.0

3

fed funds
target

2

4.5

1

May

4.0

02

03

04

05

06

0

07

NOTE: Beginning in January 2003, household data reflect revised population
controls used in the Current Population Survey.

May

three-month t-bill
02

03

04

05

07

06

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
45
40
35
30
25
20
15
10
5
0

billions of dollars
130
125

exports

120
115

crops

110

imports

livestock

105

trade balance

100
95

March

02

03

05

04

06

90

07

NOTE: Data are aggregated over the past 12 months.

Feb.

02

03

04

05

06

07

NOTE: Data are aggregated over the past 12 months.

U.S. Crop and Livestock Prices
index 1990-92=100
155
145
135
125
115
105
95
85
75
1993
94
95

crops

livestock
May

96

97

98

99

00

01

02

03

04

05

06

07

2008 Will Bring Changes to The Regional Economist
Dear Readers,
Last year, we surveyed you to find
out what you like and dislike about
The Regional Economist. We also solicited your suggestions for making this
publication better.
At long last, we’re ready to share
the results of this survey and to let
you know what changes we are planning at your suggestion.
The changes will debut with our
January 2008 issue—the 15th anniversary of this publication. Although we
are still mulling over what should go
into the “new and improved” RE, we’re
quite certain that you will see one
additional article by our economists
in each issue, as well as a new section
that will give you a forum for your
comments and questions. This section will also include results from our
online polls and announcements of
special programs involving our
economists that are open to the public.
In all of our articles, you may see a bit
more zing, as our writers anticipate
conflicting viewpoints and address
those. They will also embrace wellreasoned debate and seek out moretimely angles—without rehashing
what appears in the popular press.
Changes in the “look”of RE are also
in the works. We’ll switch to a moretraditional size—8.5 X 11, something
many of you have requested to make
filing easier. As we add pages, we will
have space for more charts, photos and
other artwork. The goal is to create a

publication that you and others will
want to spend more time with—and
to increase everyone’s understanding
of major economic issues of the day.
These are not dramatic changes.
But you didn’t want such. In fact, many
who responded to our survey asked us
not to change a thing. On average, you
gave The Regional Economist a score of
4.35 on a scale of 1 to 5, with 5 being
the highest. You told us your favorite
articles were those on monetary policy,
on national public policy issues (such
as Social Security, health insurance
and the minimum wage) and on
national economic benchmarks (GDP,
CPI, etc.). You expressed a strong
interest in articles in which multiple
sides of an issue are argued, and you
gave us hundreds of ideas for new
issues to write about, everything from
the overuse of credit to privatization to
the underground economy.
The number of you who filled
out our lengthy survey was flattering—more than 1,700 of our 12,000
subscribers. Here’s some basic demographic info on RE readers: We’re
middle-aged, with almost 60 percent
of us being between 41 and 65. We’re
well-educated: 39 percent have a
master’s degree and 28 percent have a
doctorate. We work in a wide variety
of fields: 23 percent in teaching or
academic research, 16 percent in corporations, 15 percent in other financial
services, 12 percent in banking. While
our target audience is largely busi-

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Illinois and Indiana, western Kentucky and Tennessee
and northern Mississippi. The Eighth District offices
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Federal Reserve Bank of St. Louis
Post Office Box 442 • St. Louis, MO 63166

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Trends in Neighborhood
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ness executives, 45 percent of those
who took the survey have some kind
of degree in economics and 23 percent
currently work as economists. Although
we have “regional” in our name, only
32 percent of us live or work in the
Eighth Federal Reserve District—our
region. Surveys were returned not only
from almost every U.S. state but from
more than 20 countries.
One surprise was the lukewarm
response to our ideas to expand our
online presence. Relatively few of you
said you’d read blogs, listen to podcasts
or tune in to online chats with our
economists. In fact, fewer than 40 of
you took the survey online, even though
we had it posted on our web site for
months. Nonetheless, we are going
to continue to offer more RE-related
content online: audio interviews with
economists; reader polls; charts, photos
and articles to supplement what you get
in the version of RE we mail to you each
quarter. We think that, despite a slow
start, our Internet presence is destined
to become more popular. But don’t
worry—we have no plans to get rid of
the printed version of RE.
For details on the survey results and
to check out RE’s presence online, go to
www.stlouisfed.org/publications/RE.
Thank you for reading this—and for
reading RE.
Michael R. Pakko and Howard J. Wall,
Co-editors

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