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The Regional

Economist

A Quarterly Review
of Business and
Economic Conditions
Vol. 16, No. 4

Income Inequality

Exports to China

It’s Not So Bad
in the United States

District Tops Nation
in Growth of Shipments

October 2008

Community
Colleges

c o n t e n t s

6
The Regional

p r e s i d e n t ’ s

Community Colleges
By Natalia Kolesnikova and Luke Shimek

Originally, their goal was to prepare students to
transfer to a four-year college. Today, they also offer
work force training, certification in professions, adult
continuing education—and even bachelor’s degrees.

president’s message

Economist
october 2008

Income Inequality
By Thomas A. Garrett
Census data show that the
income of the rich is growing
faster than the income of the
poor. But such common measures exaggerate the degree of
income inequality. In addition,
income inequality is the result
of, and not a detriment to, a
well-functioning economy.

Director of Research
Robert H. Rasche
Deputy Director of Research
Cletus C. Coughlin
Director of Public Affairs
Robert J. Schenk

Inflation’s Dark Shadow
By Kevin L. Kliesen
While there has been some good
economic news of late, most of it
has been overshadowed by
a high rate of inflation.
Nevertheless, the consensus of most forecasters
is that the FOMC will keep its
current target of 2 percent for
the fed funds rate until early
next year.

Managing Editor
Al Stamborski
Art Director
Joni Williams
Contributing Artists
Mark Kunzelmann
Kathie Lauher

Single-copy subscriptions are free.
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Bank of St. Louis, Box 442, St. Louis,
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includes all of Arkansas, eastern
Missouri, southern Illinois and Indiana,
western Kentucky and Tennessee, and
northern Mississippi. The Eighth District
offices are in Little Rock, Louisville,
Memphis and St. Louis.

2 The Regional Economist | October 2008

district overview
Mortgage Foreclosures
By Yuliya Demyanyk
and Michael Pakko

12
The Eighth Federal Reserve District

FICO and Subprime
By Yuliya Demyanyk
One would think that credit
scores would be a predictor
of who would default on a
subprime mortgage. But that
doesn’t seem to be the case.

Worry Less About Systemic Risk, More About Inflation
20

Elsewhere in the country, falling
house prices seem to be a major
factor in mortgage delinquencies. But in the Eighth District,
house prices have not experienced the declines that we’ve
seen elsewhere in the country,
and the region has correspondingly lower mortgage delinquency rates.

communit y profile
Paris, Tenn.
By Susan Thomson
This small town has no illusions
of once again becoming a manufacturing powerhouse. Instead,
leaders have focused their job
development efforts on health
care, entrepreneurs and tourism.
So far, the results are tres bien.

e c o n o m y at a g l a n c e

17 N a t i o n a l o v e r v i e w

Co-Editors
Michael R. Pakko, Howard J. Wall

Jim Bullard, President and CEO
Federal Reserve Bank of St. Louis

Exports to China
By Cletus C. Coughlin
The states in the Eighth Federal
Reserve District are reporting
faster growth in exports
to China than is the U.S. as
a whole. Missouri is leading
the region’s pack, with an
annual rate of growth topping 31 percent.

VOL. 16, NO. 4

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. Views
expressed are not necessarily those
of the St. Louis Fed or the Federal
Reserve System.
Please direct your comments to:
Michael R. Pakko at 314-444-8564 or
by e-mail at 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 edit letters for clarity and length.

m e s s a g e

re ader e xchange

ver the past 16 months or so, there
has been great concern in the U.S.
over systemic risk—the possibility that the
sudden failure of a financial firm may start
a cascading effect among healthy financial
firms, causing these firms to fail as well. The
potential for lasting damage to the financial
intermediation sector of the economy could
be severe under such a scenario.
The worries over systemic risk have been
used to justify much of the policy action of
the Federal Reserve over the past 16 months.
But systemic risk is a notoriously slippery
concept and, so, may not provide the best
foundation for sound monetary policy.
In principle, any large corporation that
fails will affect its partners in business,
including suppliers and customers. If a
major automotive manufacturer were to fail,
for instance, scores of businesses that supply
the manufacturer would be impacted and
might also close up shop. But generally, nonfinancial firms are not thought to pose a systemic risk. We can allow bankruptcy court
to handle failures of nonfinancial firms.
Financial firms are thought to be more
vulnerable because they have significant
exposure to one another through interbank
deposit markets, transactions in over-thecounter derivatives, and wholesale payment
and settlement systems—connections that
other businesses do not have. The speed with
which transactions occur makes it difficult to
accurately evaluate the riskiness of the assets.
Financial institutions are vulnerable, too,
because of their comparatively thin capital
margins, which leave them less able than
other types of businesses to absorb losses.
Systemic risk would not always be a concern even for financial firms. In the recent
history of financial markets, there have been

major failures that did not seem to have a systemic effect on the market. Among these are
Drexel Burnham Lambert in 1990, Barings
Bank in 1995, Long Term Capital Management in 1998, Enron in 2001 and Amaranth
Advisors in 2006. Some of these failures
involved a measure of government intervention; others did not. But none of these
seemed to trigger a paralyzing domino effect.
More recently, the Federal Reserve
facilitated the acquisition of Bear Stearns
by JP Morgan Chase. The failure of a key
investment bank was surprising, as these

The financial crisis has
gone on for too long—
the surprise factor is gone.

kinds of institutions are perceived to be both
profitable and stable. The rationale for the
intervention was that other financial institutions doing business with Bear Stearns might
be caught by surprise, creating the possibility
that they also would be put out of business.
This might cause severe damage to the U.S.
financial system.
An important part of this story is the
unexpected, or surprise, component. But is
it reasonable to assume that financial firms
may still be surprised if a partner company
goes out of business once the crisis has been
rolling on for more than a year? Probably
not. Instead, players are pricing the chance
of failure into their business dealings with

questionable firms, demanding higher
interest rates on repayments, for example. If
a shaky firm fails, its healthy business partners may lose money, but they have thought
about and protected themselves against
outright failure.
The premise of systemic risk is the
unexpected failure. To the extent that the
possibility of failure is anticipated, then it is
priced into the market. That is, agents and
institutions have adjusted the price of transactions to reflect the probability that a given
institution may go out of business.
Systemic risk worries are having a large
impact on monetary policy. Inflation
problems are brewing as we wait for financial
markets to repair. Evidence of systemic risk
in recent U.S. financial history is weak, however. At this point, it does not seem likely
that the failure of a major financial firm
would be a significant, unpriced event. The
financial crisis has gone on for too long—the
surprise factor is gone. Some institutions
may fail as part of a normal industry shakeout in reaction to the large shock originating
in the housing sector. Those with better
management will make changes and survive.
But a failure by itself cannot be surprising at
this point.

The Regional Economist | www.stlouisfed.org 3

c o n t e n t s

6
The Regional

p r e s i d e n t ’ s

Community Colleges
By Natalia Kolesnikova and Luke Shimek

president’s message

Economist
october 2008

Director of Research
Robert H. Rasche
Deputy Director of Research
Cletus C. Coughlin
Director of Public Affairs
Robert J. Schenk

Managing Editor
Al Stamborski
Art Director
Joni Williams
Contributing Artists
Mark Kunzelmann
Kathie Lauher

2 The Regional Economist | October 2008

district overview
Mortgage Foreclosures
By Yuliya Demyanyk
and Michael Pakko

12
The Eighth Federal Reserve District

FICO and Subprime
By Yuliya Demyanyk
One would think that credit
scores would be a predictor
of who would default on a
subprime mortgage. But that
doesn’t seem to be the case.

Worry Less About Systemic Risk, More About Inflation
20

e c o n o m y at a g l a n c e

17 N a t i o n a l o v e r v i e w

Co-Editors
Michael R. Pakko, Howard J. Wall

Jim Bullard, President and CEO
Federal Reserve Bank of St. Louis

VOL. 16, NO. 4

m e s s a g e

re ader e xchange

The financial crisis has
gone on for too long—
the surprise factor is gone.

The Regional Economist | www.stlouisfed.org 3

i n c o m e

g a p

U.S. Income Inequality:
It’s Not So Bad
By Thomas A. Garrett

E
FIGURE 1A
Movement to Higher Income Quintiles

1996 HOUSEHOLD INCOME QUINTILE

1996-2005

% IN A HIGHER QUINTILE BY 2005

FIGURE 1B
Movement to Lower Income Group

1996 INCOME GROUP

1996-2005

% IN A LOWER GROUP BY 2005
SOURCE: Treasury Department

One problem with popular portrayals of the income
gap is that they show income distribution at a single
point in time. But for many households, income
changes over time. The low-paying jobs from high
school days usually give way to better-paying jobs later
in life. Figure 1A shows the percentage of households
that moved from one income group to another between
1996 and 2005. For example, nearly 58 percent of
the households in the lowest income quintile in 1996
moved to a higher category by 2005. The reverse also
happens, as shown in Figure 1B. Of those households
that were in the top 1 percent in income in 1996, for
example, more than 57 percent dropped to a lower
income group by 2005.
4 The Regional Economist | October 2008

ach year, the U.S. Census Bureau releases
data on the income levels of America’s
households. A comparison of these annual
data over time reveals that the income for
wealthier households has been growing faster
than the income for poorer households—
real income for the wealthiest 5 percent of
households rose by 14 percent between 1996
and 2006, while the income for the poorest
20 percent of households rose by 6 percent.
As a result of these differences in income
growth, the income of the wealthiest 5 percent of households was 8.1 times that of the
income of the poorest 20 percent of households in 1996 and increased to 8.7 times by
2006. By these figures, a common conclusion
is that income inequality in the United States
has increased.
The apparent increase in U.S. income
inequality has not escaped the attention of
policymakers and social activists who support
public policies aimed at reducing income
inequality. However, the common measures
of income inequality that are derived from
the census statistics exaggerate the degree
of income inequality in the United States
for several reasons. Furthermore, although
income inequality is seen as a social ill by
many people, it is important to understand
that income inequality has many economic
benefits and is the result of, and not a detriment to, a well-functioning economy.

An Inaccurate Picture

The Census Bureau essentially ranks all
households by household income and then
divides this distribution of households into
quintiles of equal size.1 Finding the highest
ranked household in each quintile then provides the upper income limit for each quintile.2 Comparing changes in these income
limits over time for different quintiles reveals

that income
for the wealthier
households has been growing
faster than the income for poorer households,
thus giving the impression of an “increasing
income gap” or “shrinking middle class.”
One big problem with using the census
income statistics to infer income inequality
is that these statistics only provide a snapshot
of the income distribution at a single point
in time. The statistics do not consider the
reality that the income for many households
changes over time, i.e., incomes are mobile.
The income of most people increases over
time as they move from their first low-paying
job in high school to a better paying job later
in their lives. It is also true that some people
lose income over time due to business cycle
contractions, demotions, career changes,
retirement, etc. The point is that individuals’
incomes are not constant over time, which
implies that the same households are not in
the same income quintiles over time. Thus,
comparing different income quintiles over
time is the proverbial “comparing apples to
oranges” because incomes of different people
are being compared at different stages in
their earnings profile.
The U.S. Treasury released a study in
November 2007 that examined income
mobility in the U.S. from 1996 to 2005.3
Using data from individual tax returns, the
study documented a household’s movement
along the distribution of real income over
the 10-year period. As shown in Figure 1A,
the study found that nearly 58 percent of the
households that were in the lowest income
quintile (lowest 20 percent) in 1996 moved
to a higher income quintile by 2005. Similarly, nearly 50 percent of the households
in the second lowest quintile (20 percent
to 40 percent) in 1996 moved to a higher

income quintile by 2005. Even a significant
number of households in the third and
fourth income quintiles in 1996 moved to
a higher quintile in 2005.
The Treasury study also documented falls
in household income between 1996 and 2005.
This is most interesting when considering the
richest households. As shown in Figure 1B,
more than 57 percent of the richest 1 percent
of households in 1996 fell out of that category
by 2005. Similarly, more than 45 percent of the
households having the top 5 percent of income
in 1996 fell out of that category by 2005.
The main point is that, over time, a significant number of households move to higher
positions along the income distribution and
a significant number move to lower positions
along the income distribution. Common
reference to “classes” of people (e.g., the lowest
20 percent, the richest 10 percent) is very misleading because income classes do not contain
the same households and people over time.
Another problem with the inequality
statistics is that they do not consider the
noncash resources received by lower income
households and the tax payments made by
wealthier households to fund these transfers. Lower income households annually
receive tens of billions of dollars in subsidies
for housing, food and medical care. None
of these is considered income by the Census
Bureau.4 Thus, the resources available to
lower-income households are actually much
greater than is suggested by their income.
On the other hand, these noncash payments
to lower income households are funded
through taxpayer dollars, mostly from
wealthier households since they pay a majority of overall taxes. One research report estimates that the share of total income earned
by the lowest income quintile increases
roughly 50 percent, whereas the share of total
income earned by the highest income quintile drops roughly 7 percent when transfer
payments and taxes are considered.5
The census statistics also do not consider
the fact that the households in each quintile
contain different numbers of people, and it
is differences in income across people that
provide a clearer measure of inequality. Lower
income households tend to consist of single
people with low earnings, while higher income
households tend to be married couples with
multiple earners.6 Thus, lower income households have fewer people than higher income

households, thereby skewing the income distribution. When considering household size
along with transfers received and taxes paid,
the income share of the lowest quintile nearly
triples and the income share of the highest
quintile falls by 25 percent.7

endnotes
1

Is Policy Needed?

Income inequality will still exist even
if these income inequality statistics are
adjusted to account for the aforementioned
factors.8 Given the negative attention income
inequality receives in the popular press, an
important question is whether reducing
income inequality is worthy of public policy.
It is important to understand that income
inequality is a byproduct of a well-functioning capitalist economy. Individuals’ earnings
are directly related to their productivity.
Wealthy people are not wealthy because they
have more money; it is because they have
greater productivity. Different incomes,
thus, reflect different productivity levels.
The unconstrained opportunity for
individuals to create value for society, which
is reflected by their income, encourages
innovation and entrepreneurship. Economic
research has documented a positive correlation between entrepreneurship/innovation
and overall economic growth.9 A wary eye
should be cast on policies that aim to shrink
the income distribution by redistributing
income from the more productive to the less
productive simply for the sake of “fairness.” 10
Redistribution of wealth would increase the
costs of entrepreneurship and innovation,
with the result being lower overall economic
growth for everyone.
Poverty and income inequality are related,
but only the former and not the latter deserves
a policy response. Sound economic policy
to reduce poverty would lift those out of
poverty (increase their productivity) while not
reducing the well-being of wealthier individuals. Tools to implement such a policy include
investments in education and job training.
Income inequality should not be vilified,
and public policy should encourage people
to move up the income distribution and not
penalize them for having already done so.

Thomas A. Garrett is an economist at the Federal
Reserve Bank of St. Louis. For more on his work,
see http://research.stlouisfed.org/econ/garrett.

4
5
6

7
8

9
10

See www.census.gov/hhes/www/income/
histinc/inchhdet.html. All data referred to
here are from Table H-1.
Except the upper 20 percent, which is unlimited. The upper income limits for 2006
household income were: lowest quintile
–$20,035; second quintile –$37,774; third
quintile –$60,000; fourth quintile –$97,032.
To be in the top 5 percent of all incomes
in 2006, a household needed an income of
$174,012.
See the Treasury Department. The report
is available online at www.treas.gov/offices/
tax-policy/library/incomemobilitystudy
03-08revise.pdf.
The Census Bureau only considers money
income as income.
See Rector and Hederman.
See various data from the U.S. Census Current
Population Survey (2007), Table HINC-01,
available at http://pubdb3.census.gov/
macro/032007/hhinc/new01_001.htm.
See Rector and Hederman.
The degree of income inequality is also less
if one considers the purchasing power of
different income groups. Broda and Romalis
(2008) argue that the purchasing power of
lower income groups has increased relative
to higher income groups due to the fact that
the goods that lower income people spend a
greater percentage of their income on, such as
food and clothing, have increased in price at a
much slower rate than the goods and services
that higher income groups tend to consume.
See Baumol et al., Link and Siegel, and Lazear
for recent examples.
The economist Martin Feldstein argues that
economic policy to reduce income inequality
would only be appropriate if the well-being
of society increases when overall societal
wealth falls.

References
Baumol, William J; Litan, Robert E.; and
Schramm, Carl J. Good Capitalism, Bad
Capitalism, and the Economics of Growth and
Prosperity. New Haven, Conn.: Yale University Press, 2007.
Broda, Christian; and Romalis, John. “Inequality and Prices: Does China Benefit the Poor
in America?” University of Chicago working
paper, 2008.
Feldstein, Martin. “Income Inequality and Poverty.” NBER Working Paper 6770, National
Bureau of Economic Research, October 1998.
Lazear, Edward P. “Productivity and Wages.”
Business Economics, October 2006, Vol. 41,
No. 4, pp. 39-45.
Link, Albert N.; and Siegel, Donald S. Innovation,
Entrepreneurship, and Technological Change.
New York: Oxford University Press, 2007.
Rector, Robert; and Hederman, Rea. “Two
Americas: One Rich, One Poor? Understanding Income Inequality in the United States.”
The Heritage Foundation, Aug. 24, 2004. See
www.heritage.org/research/taxes/bg1791.cfm.
Treasury Department. “Income Mobility in the
U.S. From 1996 to 2005.” Washington, D.C.,
2007. See www.treas.gov/offices/tax-policy/
library/incomemobilitystudy03-08revise.pdf.

The Regional Economist | www.stlouisfed.org 5

i n c o m e

g a p

U.S. Income Inequality:
It’s Not So Bad
By Thomas A. Garrett

E
FIGURE 1A
Movement to Higher Income Quintiles

1996 HOUSEHOLD INCOME QUINTILE

1996-2005

% IN A HIGHER QUINTILE BY 2005

FIGURE 1B
Movement to Lower Income Group

1996 INCOME GROUP

1996-2005

% IN A LOWER GROUP BY 2005
SOURCE: Treasury Department

An Inaccurate Picture

endnotes
1

Is Policy Needed?

Thomas A. Garrett is an economist at the Federal
Reserve Bank of St. Louis. For more on his work,
see http://research.stlouisfed.org/econ/garrett.

4
5
6

7
8

9
10

The Regional Economist | www.stlouisfed.org 5

e d u c a t i o n

St. Louis Community College has four campuses, including the newest one (above), which opened in the suburb of Wildwood last year.

Compared with a
traditional four-year
college, a community
college has several
important advantages
for students.

Community
Colleges
Not So Junior Anymore
By Natalia Kolesnikova and Luke Shimek

6 The Regional Economist | October 2008

oliet Junior College, the oldest community college in the nation, was founded
in 1901. Since then, community colleges
have become increasingly important for the
U.S. education and training system. Today,
11.5 million students (6.5 million of whom are
credit students) are enrolled in almost 1,200
community colleges, according to the American Association of Community Colleges. Of
all U.S. undergraduates, community college
students constitute a remarkable 46 percent.1
The original goal of two-year colleges was
to prepare students, through an associate’s
degree program, to transfer to a four-year
college. Over time, the purpose evolved
to include work force training programs,
schooling toward certification in areas such
as nursing and other professions, and adult
continuing education classes. Lately, some
community colleges have started to offer
bachelor’s degrees in a number of fields.
However, there are big differences across
states in how the community college system
is used. Economist Cecilia Elena Rouse found

evidence suggesting that states tend to focus
their resources on either a community college
or a four-year college system. California has
the largest network of the former, with 66
percent of the state’s current undergraduates
attending community colleges. Nevada and
Vermont have only 16 percent of their undergraduates in community colleges.2
Among the states within the Eighth District,
Illinois and Mississippi have the largest proportion of undergraduates—about half—in
community colleges. Indiana has the lowest
percentage—19 percent. Table 1 summarizes
enrollment and other relevant statistics for the
Eighth District.
Advantages of Community Colleges

Compared with a traditional four-year
college, a community college has several
important advantages for students. To begin,
the open admission policy makes it easier to
enroll regardless of prior academic record.
The cost to attend community college is
also less because of lower tuition and other

fees than what four-year colleges charge.
Community college students on average paid
$2,017 in tuition and fees for the 2006-07
academic year, which is less than half of what
students in public four-year universities paid
($5,685) and only about one-tenth of the
tuition and fees for students in private fouryear universities ($20,492), according to the
U.S. Department of Education. In addition,
most community college students live at
home, thus saving room and board expenses
incurred by students at other institutions.
Finally, community colleges offer a more
flexible curriculum, and their schedule
includes evening and weekend classes. That
gives students an opportunity to attend college while working.
Community College Students

The population of community college
students is diverse and is different from the
population at four-year colleges. Community college students are 60 percent white,
15 percent black, 14 percent Hispanic and
The Regional Economist | www.stlouisfed.org 7

e d u c a t i o n

St. Louis Community College has four campuses, including the newest one (above), which opened in the suburb of Wildwood last year.

Compared with a
traditional four-year
college, a community
college has several
important advantages
for students.

Community
Colleges
Not So Junior Anymore
By Natalia Kolesnikova and Luke Shimek

6 The Regional Economist | October 2008

TABLE 1
Comparisons for the Eighth District

Average tuition and required fees 2006-07
Enrollment in
community colleges,
fall 2005

Percent of all
undergraduates,
fall 2005

Four-year public
(in-state)

Four-year private

Two-year public

6,184,000

$5,685

$20,492

$2,017

Arkansas

47,771

$ 4,937

$ 13,396

$ 1,890

Illinois

352,824

$ 8,038

$ 20,181

$ 2,252

Indiana

59,969

$ 6,284

$ 22,060

$ 2,713

Kentucky

84,669

$ 5,821

$ 14,739

$ 2,633

Mississippi

66,298

$ 4,457

$ 12,300

$ 1,709

United States
8th District States

Missouri

86,742

Tennessee

74,829

28
31

$ 6,320
$ 5,009

$ 16,539
$ 17,576

$ 2,284
$ 2,474

SOURCE: U.S. Department of Education, National Center for Education Statistics
3

5 percent Asian. Forty-one percent of
community college students are males. In
comparison, students attending four-year
colleges are more likely to be white (70 percent) and male (45 percent).
Because of the flexibility they offer, and
the relatively low monetary and time costs
of attending, community colleges have more
so-called nontraditional students than fouryear colleges have. Community college students are more likely to be older: 35 percent
of them are 30 years old or older compared
with 16 percent in four-year colleges. The
average community college student is 28
years old, with a median age of 24. The
corresponding ages for students in four-year
colleges are 24 and 21.
Only 31 percent of community college students are enrolled full-time, in part because
students attending community colleges are
more likely to also be working. In contrast,
63 percent of students at four-year colleges
are enrolled full-time. Only 21.4 percent
of all community college students do not
work, compared with 30.5 percent at fouryear colleges. Furthermore, 40.8 percent of
community college students work full-time,
compared with 22.8 percent of their fouryear college counterparts.
More students in community colleges are
first-generation college students than are
students attending four-year colleges. More
than 40 percent of the former have parents
with only a high school education or less.
In contrast, only 27 percent of four-year college students have parents with a high school
education or less.
8 The Regional Economist | October 2008

Not surprisingly, most community college students attend an institution that is
close to their home. They live on average
40 miles away from the college they attend.
In comparison, students at four-year institutions attend colleges on average 230 miles
away from their home. Over 95 percent of
community college students attend colleges
in their states compared with 83 percent of
students at four-year colleges.
Along Different Paths

Community college students have various educational goals and intentions when
they enter college. Although many of them
plan to obtain an associate’s degree, some
students enroll to take just a couple of classes
to improve their skills or aim at getting a
certification in a certain field. Some intend
to transfer to a four-year institution without
any formal community college credential.
This ability of community colleges to offer
students many options provides a unique
opportunity to have postsecondary education for many students who would not have
it otherwise. On the other hand, because the
educational objectives of students, and, thus,
their paths are so different, it is difficult to
track their progress through college and to
assess the effect of community college education on their educational attainment and labor
market outcomes. The fact that most students
attend community colleges part-time and
take longer to complete their program adds
another complication to the task.
Critics of the community college system
often point out that a significant proportion

of community college students complete
relatively few college credits. Economists
Thomas Kane and Rouse calculated that
the majority of community college students
complete one year or less and 35 percent
complete one semester of study or less. The
two economists also showed that less than
one-half of community college students
complete any degrees. In particular, about
15 percent receive a certificate, 16 percent
complete an associate’s degree and another
16 percent eventually receive a bachelor’s
degree or higher. Kane and Rouse point out
that, among four-year college entrants, almost
60 percent receive at least a bachelor’s degree.
Does this mean that enrolling in a twoyear college somehow reduces an individual’s
educational attainment? One view is that
easy access to community college sidetracks
students from a four-year college, where they
are more likely to obtain a bachelor’s degree.
On the other hand, many nontraditional
students would not have attended four-year
colleges. For them, community colleges
provide a chance for a post-secondary education they would not have had otherwise.
Therefore, researchers argue, even if attending community college instead of four-year
college might lower educational attainment
for some students, more students have access
to higher education, which makes overall
educational attainment in society higher.
To better answer a question about the
effect of community colleges on educational attainment, it is necessary to consider
students’ intentions toward their educational
objectives together with their outcomes.
The problem is a lack of reliable data that
measures students’ goals and preparation.
The U.S. Department of Education is
among those that attempted to study educational outcomes of community college
students. Its report used data from several
sources, including those tracking students
over time.
The study found that about 90 percent
of students entering community college
intended to obtain a formal credential
or to transfer to a four-year college. One
could argue that it is more reasonable to
consider completion rates only for those
who intended to obtain a degree in the first
place. The report estimated that between
51 and 63 percent (depending on data
used) of these students had fulfilled their

expectations within 6-8 years after initial
enrollment. In particular, about 11 percent
had earned a certificate, 17-18 percent had
earned an associate’s degree, 11-28 percent
(depending on data used) had attained a
bachelor’s degree or higher, and 12-13 percent had transferred to a four-year college
without attaining a formal degree.
Keeping in mind that one of the main
goals of two-year colleges is to prepare
students for continuing their studies at fouryear institutions, it is particularly important
to evaluate their transfer rates. The U.S.
Education Department report indicated
that, overall, about 29 percent of community
college students had transferred to four-year
colleges. Interestingly, 51 percent of those
who intended to complete a bachelor’s
degree when they first started had transferred. At the time data was collected,
80 percent of those who did transfer either
obtained a bachelor’s degree or were still
working toward it.
What about the students who left community college without any formal credential? This amounts to more than half of
them. According to the report, about onethird of this group said that postsecondary education improved their salary. For
47 percent, attending community college
led to increased job opportunities. About
43 percent reported improvement in job
performance, and 47 percent said they had
more job responsibilities.
Students who did receive a certificate or
a degree were more likely to be satisfied with
their outcomes. About 80 percent of them
said their salaries had increased. Almost
85 percent reported having a better job or
more responsibilities.
Labor Market Returns

What is the economic payoff to attending
community college? This turns out to be a
rather complicated question to answer. One
reason is the lack of available data. Until
1990, the U.S. Census Bureau recorded only
the number of years of education, making it
impossible to identify individuals attending
specifically community college. In the 1990
and 2000 U.S. censuses, the highest educational
attainment was recorded instead of years of
education. This makes it possible to focus
on individuals with a completed associate’s
degree. Still, this information does not make

Missouri Students Have Chance To Attend
Community College for Almost Nothing

he “A+” program of the state of Missouri

the unpaid balance of the cost of tuition,

makes it easy for residents to attend com-

general fees and up to half the cost of books

munity college. The program provides fund-

at the community college. To obtain this

ing for qualified high schools and for students

funding, these students must have had a

enrolled in community colleges.

95 percent attendance rate at a participat-

The program came about when two school

ing high school for at least three years,

districts sued the state of Missouri, accusing

maintained a 2.5/4.0 grade point average,

it of negligence and unfair practices in the

completed 50 hours of unpaid supervised

education funding mechanism in place at the

tutoring/mentoring, signed an agreement

time (1990). That mechanism based funding

with the participating high school concerning

on the district’s prior enrollment and perfor-

the program and have no criminal record. To

mance. The judge found the state’s school

maintain the grant, the student must try to

funding plan did not “pass constitutional

secure funding from the federal government

muster.” As a response, on the last day of

via the Free Application for Federal Student

the 1993 session, the state legislature passed

Aid (FAFSA), attend a community college

the Outstanding Schools Act of 1993, which

or technical school fulltime and maintain a

included the provisions for the A+ Schools

2.5/4.0 GPA at that institution.

program. In 2006, the legislature expanded

The program provides funding to high

the program from strictly public institutions

schools that submit themselves to the

to include private technical colleges.

authority of the Department of Elementary

The program has had a strong response:

and Secondary Education.

253 high schools have signed up. Since

These A+ schools commit themselves to:

1997, more than 77,000 students who

• establishing clear guidelines and mea-

enrolled in the A+ program graduated from

surement standards to which students

those schools, with over 38,000 of them

must adhere,

receiving financial incentives to go on with

• requiring rigorous course work,

their schooling. According to the program’s

• developing a partnership program with

office, the high school dropout rate has

local businesses, community

decreased and the high school graduation

colleges, community leaders and

rate has increased at those schools com-

technical schools to create a counsel-

pared with the state averages.

ing and mentoring service for students

The program provides funding for high
schools and students in order to (1) discourage students from dropping out, (2) provide
more challenging course work, and (3) help
those students who are unlikely to attend a
four-year institution proceed to a two-year
public community college, technical school
or other postsecondary course work.
For students who had enrolled in the A+

as well as an apprenticeship/internship
program,
• making available facilities and services
for adult literacy training, and
• developing a procedure for evaluating
the effectiveness of the program.
Missouri isn’t the only state in the Eighth
District that has a program to encourage
students to attend community college. For

program while still in high school, the pro-

example, Mississippi has the Tech Prep pro-

gram provides reimbursement for

gram, and Arkansas has Nex+ Step.
The Regional Economist | www.stlouisfed.org 9

TABLE 1
Comparisons for the Eighth District

Average tuition and required fees 2006-07
Enrollment in
community colleges,
fall 2005

Percent of all
undergraduates,
fall 2005

Four-year public
(in-state)

Four-year private

Two-year public

6,184,000

$5,685

$20,492

$2,017

Arkansas

47,771

$ 4,937

$ 13,396

$ 1,890

Illinois

352,824

$ 8,038

$ 20,181

$ 2,252

Indiana

59,969

$ 6,284

$ 22,060

$ 2,713

Kentucky

84,669

$ 5,821

$ 14,739

$ 2,633

Mississippi

66,298

$ 4,457

$ 12,300

$ 1,709

United States
8th District States

Missouri

86,742

Tennessee

74,829

28
31

$ 6,320
$ 5,009

$ 16,539
$ 17,576

$ 2,284
$ 2,474

SOURCE: U.S. Department of Education, National Center for Education Statistics
3

Missouri Students Have Chance To Attend
Community College for Almost Nothing

he “A+” program of the state of Missouri

the unpaid balance of the cost of tuition,

makes it easy for residents to attend com-

general fees and up to half the cost of books

munity college. The program provides fund-

at the community college. To obtain this

ing for qualified high schools and for students

funding, these students must have had a

enrolled in community colleges.

95 percent attendance rate at a participat-

The program came about when two school

ing high school for at least three years,

districts sued the state of Missouri, accusing

maintained a 2.5/4.0 grade point average,

it of negligence and unfair practices in the

completed 50 hours of unpaid supervised

education funding mechanism in place at the

tutoring/mentoring, signed an agreement

time (1990). That mechanism based funding

with the participating high school concerning

on the district’s prior enrollment and perfor-

the program and have no criminal record. To

mance. The judge found the state’s school

maintain the grant, the student must try to

funding plan did not “pass constitutional

secure funding from the federal government

muster.” As a response, on the last day of

via the Free Application for Federal Student

the 1993 session, the state legislature passed

Aid (FAFSA), attend a community college

the Outstanding Schools Act of 1993, which

or technical school fulltime and maintain a

included the provisions for the A+ Schools

2.5/4.0 GPA at that institution.

program. In 2006, the legislature expanded

The program provides funding to high

the program from strictly public institutions

schools that submit themselves to the

to include private technical colleges.

authority of the Department of Elementary

The program has had a strong response:

and Secondary Education.

253 high schools have signed up. Since

These A+ schools commit themselves to:

1997, more than 77,000 students who

• establishing clear guidelines and mea-

enrolled in the A+ program graduated from

surement standards to which students

those schools, with over 38,000 of them

must adhere,

receiving financial incentives to go on with

• requiring rigorous course work,

their schooling. According to the program’s

• developing a partnership program with

office, the high school dropout rate has

local businesses, community

decreased and the high school graduation

colleges, community leaders and

rate has increased at those schools com-

technical schools to create a counsel-

pared with the state averages.

ing and mentoring service for students

program while still in high school, the pro-

example, Mississippi has the Tech Prep pro-

gram provides reimbursement for

gram, and Arkansas has Nex+ Step.
The Regional Economist | www.stlouisfed.org 9

Community colleges draw more nontraditional
students than do four-year colleges. For example,
35 percent of community college students are at
least 30 years old, compared with 16 percent who
are that old at four-year colleges. Whites make
up 60 percent of students at community colleges
but 70 percent of students at four-year colleges.

it possible to identify an institution students
attended if they did not complete a degree.
Several available studies used data from
surveys instead. Most of the surveys
recorded data on various characteristics
of respondents, starting with their teenage
years and following them over the years.4
One limitation of these studies is that, given
the timeline of surveys, they include only
students who enrolled in community college
soon after graduating from high school.
Most studies found that students who
attended community college, but did not
complete a degree, earn 9 to 13 percent more
than those with a high school diploma only.
The estimation technique usually attempts to
control for differences in academic preparation between the two groups as measured
by test scores and class rank. Furthermore,
researchers found that there is an increase
in annual earnings of 5-8 percent associated
with each year of education at community
college. This finding is particularly interesting because it is very similar to the return to
a year of schooling in a four-year college.
Economists Louis Jacobson, Robert
LaLonde and Daniel Sullivan looked at a
very different group—older, high-tenure
displaced workers. Much of the retraining
efforts for this group is done at community
colleges. Researchers found that one year of
community college schooling increases longterm earnings of displaced workers by about
9 percent for men and about 13 percent for
women compared with earnings for similar
workers who did not attend community
college. Another important fact reported
by the authors is that while there is a high
return to technically oriented and math and
science courses (about 14 percent for men
and 29 percent for women), less technically
oriented courses yield very low and possibly
zero returns.
Returns to an Associate’s Degree

Another way to think about a value of
community college education is to ask how
much more a person with an associate’s
degree earns compared with a similar person who has only a high school diploma.5
Studies done separately by researchers
Kane and Rouse and by Duane Leigh and
Andrew Gill estimated the labor market
return to an associate’s degree of about
16-27 percent.
10 The Regional Economist | October 2008

Using the much larger data set from the
U.S. 2000 census, more detailed questions
can be answered.6 For instance, are there differences in labor market returns to an associate’s degree between different demographic
groups? Are the returns the same across
different cities? Data also allow looking at
the differentials in hourly wages rather than
annual earnings.
One immediate feature of the results,
reported in Table 2, is that though the
estimated average returns to an associate’s
degree are consistent with other researchers’ findings, there are significant differences
between demographic groups. Women of
all races have higher returns to an associate’s
degree than men do, mostly because women
are more likely to major in nursing and related
fields. There is also variation in the return
to an associate’s degree among racial groups.
Hourly wages of white men with an associate’s
degree are 18 percent higher than wages of
white men who stopped their formal education at high school.7 The returns are much
higher for black and Hispanic men—25 and
27 percent, respectively.
Furthermore, the return to an associate’s
degree is not the same across different cities
in the U.S. For example, white men with
associate’s degrees are paid only 4 percent
more than white high school graduates in
Seattle, but as much as 30 percent more in
Miami. For Hispanic men, the return to an
associate’s degree is 16 percent in Washington, D.C., but it is more than twice as much,
39 percent, in Atlanta. Cross-city differentials for white women are not as big, but they
are significant for minority women.
Table 2 also presents estimated returns to
an associate’s degree in four large metropolitan areas of the Eighth District. White men
with an associate’s degree earn on average
11 percent more in St. Louis, 16 percent more
in Memphis, 22 percent more in Little Rock
and 18 percent more in Louisville than similar men with only a high school diploma. For
black men, returns to an associate’s degree
are 13 percent in St. Louis, 22 percent in
Memphis and 17 percent in Louisville. Consistent with the rest of the country, women’s
returns are higher than men’s. For example,
black women in St. Louis with an associate’s
degree earn 43 percent more than black
women with only a high school education.
Why is there such a big variation in

TABLE 2

endnotes

Associate’s Degree Pays Off

Someone with an associate’s degree makes more money in every city listed than does the equivalent person with only a high
school diploma. The numbers could be interpreted as percentage increases in wages. For example, a white man in Atlanta
who has an associate’s degree makes 21 percent more than a white man in Atlanta with a high school diploma.
Men

United States

Women

White

Black

Hispanic

White

Black

Hispanic

0.18

0.25

0.27

0.29

0.30

0.29

20 Largest Metropolitan Areas
Atlanta

0.21

0.26

0.39

0.27

0.29

0.53

Baltimore

0.15

0.26

0.19

0.28

0.20

Boston

0.17

0.06

0.25

0.29

0.33

0.31

Chicago

0.10

0.21

0.19

0.25

0.23

0.21

Dallas

0.24

0.28

0.29

0.30

0.27

0.24

Detroit

0.21

0.22

0.34

0.32

0.19

0.25

Houston

0.19

0.21

0.27

0.24

0.45

0.20

Los Angeles

0.16

0.35

0.30

0.20

0.26

0.30

Miami

0.30

0.25

0.30

0.25

0.30

0.33

Minneapolis

0.17

0.27

0.32

0.23

0.28

0.24

New York

0.11

0.24

0.21

0.26

0.35

0.28

Philadelphia

0.15

0.17

0.32

0.28

0.24

0.38

Phoenix

0.18

0.42

0.24

0.33

0.18

Pittsburgh

0.16

0.17

–

0.29

0.19

–

Riverside-San Bernardino

0.20

0.15

0.24

0.31

0.40

0.36

San Diego

0.15

0.36

0.24

0.23

0.21

0.28

San Francisco

0.12

0.48

0.23

0.26

0.21

0.30

Seattle

0.04

0.22

0.17

0.25

0.29

0.39

St. Louis

0.11

0.13

–

0.24

0.43

–

Washington

0.18

0.22

0.16

0.23

0.26

0.37

Memphis

0.16

0.22

–

0.23

0.31

–

Little Rock

0.22

–

0.37

–

Louisville

0.18

0.17

–

0.32

–

other 8th District Large Metropolitan Areas

NOTE: Author’s calculation. Data from 2000 Public Use Micro Sample of the census. Results are missing if data were insufficient due to small sample size.

returns to an associate’s degree across cities?
Although no formal research has been done
on this topic, possible explanations might be
locational differences in labor market conditions and in industrial composition.
Conclusions

Community colleges play a significant
role in U.S. higher education. They offer
an opportunity to receive a postsecondary
education to many students who would not
have attended college otherwise. Today, the
number of U.S. undergraduates is at all-time
high as more and more people understand
the necessity of having higher education in
our technology-intensive world. Community

colleges are very important in helping to
absorb this increasing number of students.
In addition, historically, college enrollments
in general go up during times of economic
downturns. Currently, community colleges
have an additional appeal because tuition
and fees at four-year colleges continue to
increase while financial aid and student
loans are getting harder to secure. For many
students, community colleges offer the best
chance to obtain a college education.
Natalia Kolesnikova is an economist, and Luke
Shimek is a research analyst, both at the Federal
Reserve Bank of St. Louis. For more on Kolesnikova’s work, see http://research.stlouisfed.org/
econ/kolesnikova.

The term “junior college” originally referred
to any two-year postsecondary school. The
term “community college” became more
popular to describe public two-year institutions as it better conveys their mission to
serve local communities. The two terms are
still often used interchangeably.
These are the latest state-level statistics available. Source: the U.S. Department of Education, 2005.
Data in this section are from the National
Center for Education Statistics, 2003-04.
See Horn and Nevill.
See Kane and Rouse (1999) for a survey of these
studies and a more detailed description of data.
For more on nonparametric estimation of
returns to schooling, see Black et al.
Data are from 2000 Public Use Micro Sample
of the U.S. Census. See Ruggles et al.
Table 2 reports differences in mean log wages
between associate’s degree holders and high
school graduates. They approximate percentage differences.

References
Black, Dan; Kolesnikova, Natalia; and Taylor,
Lowell. “Earnings Functions When Wages
and Prices Vary by Location.” Journal of
Labor Economics, forthcoming.
Hoachlande, Gary; Sikora, Anna C.; and Horn,
Laura. Community College Students: Goals,
Academic Preparation, and Outcomes. NCES
2003-164. Washington, D.C.: U.S. Department of Education, National Center for
Education Statistics, 2003.
Horn, Laura; and Nevill, James. Profile of Undergraduates in U.S. Postsecondary Education
Institutions: 2003-04: With a Special Analysis
of Community College Students. NCES 2006184. Washington, D.C.: U.S. Department of
Education, National Center for Education
Statistics, 2006.
Jacobson, Louis S.; LaLonde, Robert J.; and Sullivan, Daniel G. “Estimating the Returns to
Community College Schooling for Displaced
Workers.” Journal of Econometrics, MarchApril 2005, Vol. 125, Issues 1-2, pp. 271-304.
Kane, Thomas J.; and Rouse, Cecilia Elena.
“Labor Market Returns to Two- and FourYear College.” The American Economic
Review, June 1995, Vol. 85, No. 3, pp. 600-14.
Kane, Thomas J.; and Rouse, Cecilia Elena.
“The Community College: Educating
Students at the Margin Between College and
Work.” Journal of Economic Perspectives,
Winter 1999, Vol. 13, No. 1, pp. 63-84.
Leigh, Duane E.; and Gill, Andrew M. “Labor
Market Returns to Community Colleges:
Evidence for Returning Adults.” Journal of
Human Resources, Spring 1997, Vol. 32,
No. 2, pp. 334-53.
Rouse, Cecilia Elena. “Do Two-Year Colleges
Increase Overall Educational Attainment?
Evidence from the States.” Journal of Policy
Analysis and Management, 1998, Vol. 17,
No. 4, pp. 595-620.
Ruggles, Steven; Sobek, Matthew; Alexander,
Trent; Fitch, Catherine; Goeken, Ronald;
Hall, Patricia; King, Miriam; and Ronnander,
Chad. 2004. Integrated Public Use Microdata
Series. Minneapolis, Minn: Minnesota Population Center. See http://usa.ipums.org/usa/.

The Regional Economist | www.stlouisfed.org 11

TABLE 2

endnotes

Associate’s Degree Pays Off

United States

Women

White

Black

Hispanic

White

Black

Hispanic

0.18

0.25

0.27

0.29

0.30

0.29

20 Largest Metropolitan Areas
Atlanta

0.21

0.26

0.39

0.27

0.29

0.53

Baltimore

0.15

0.26

0.19

0.28

0.20

Boston

0.17

0.06

0.25

0.29

0.33

0.31

Chicago

0.10

0.21

0.19

0.25

0.23

0.21

Dallas

0.24

0.28

0.29

0.30

0.27

0.24

Detroit

0.21

0.22

0.34

0.32

0.19

0.25

Houston

0.19

0.21

0.27

0.24

0.45

0.20

Los Angeles

0.16

0.35

0.30

0.20

0.26

0.30

Miami

0.30

0.25

0.30

0.25

0.30

0.33

Minneapolis

0.17

0.27

0.32

0.23

0.28

0.24

New York

0.11

0.24

0.21

0.26

0.35

0.28

Philadelphia

0.15

0.17

0.32

0.28

0.24

0.38

Phoenix

0.18

0.42

0.24

0.33

0.18

Pittsburgh

0.16

0.17

–

0.29

0.19

–

Riverside-San Bernardino

0.20

0.15

0.24

0.31

0.40

0.36

San Diego

0.15

0.36

0.24

0.23

0.21

0.28

San Francisco

0.12

0.48

0.23

0.26

0.21

0.30

Seattle

0.04

0.22

0.17

0.25

0.29

0.39

St. Louis

0.11

0.13

–

0.24

0.43

–

Washington

0.18

0.22

0.16

0.23

0.26

0.37

Memphis

0.16

0.22

–

0.23

0.31

–

Little Rock

0.22

–

0.37

–

Louisville

0.18

0.17

–

0.32

–

other 8th District Large Metropolitan Areas

NOTE: Author’s calculation. Data from 2000 Public Use Micro Sample of the census. Results are missing if data were insufficient due to small sample size.

The Regional Economist | www.stlouisfed.org 11

m o r t g a g e s

By Yuliya Demyanyk

credit score measures the creditworthiness of individuals or businesses. Lenders
increasingly use these scores to assess credit
risk; they also use them to calculate how likely
it is that borrowers eventually will be delinquent (late with payments) or in default. By
design, the higher the score, the less likely
it is that a borrower will miss payments or
go into default on a loan within one or two
years after the score has been calculated.
Bill Fair and Earl Isaac developed the first
commercial credit scoring system in 1958. A
credit score based on this system has developed
into a FICO (Fair, Isaac and Co.) score, and it
became a standard measure of consumer credit
risk in 1989. Fannie Mae and Freddie Mac recommended the FICO score for use in mortgage
lending in 1995. The data for individual credit
scores come from the three national credit
bureaus and contain information—positive
and negative—about how the potential
borrower is using credit now and how he has
used it in the past.
Given the nature of FICO scores, one might
expect to find a relationship between borrowers’ scores and the incidence of default
and foreclosure during the ongoing subprime
mortgage crisis. Analysis suggests, however,
that FICO scores have not indicated that
relationship: Default rates have risen for all
categories of FICO scores and, moreover,
higher FICO scores have been associated with
bigger increases in default rates over time.

their loan contracts only
months after their loans
were originated in 2006
or 2007. More precisely,
18 percent of loans that were
originated in 2006 and 14 percent
of loans that were originated in 2007
were either past due for more than two
months or were already in foreclosure within
one year after the loans were originated. In
comparison, only from 2 to 6 percent of loans
originated in years from 2001 to 2005 were
delinquent or in foreclosure during the first
year after origination.
Researchers, policymakers and the media
have offered many explanations for this crisis.

The first
explanation
is the resetting
of mortgage rates from low “teaser” rates
into much larger adjustable rates for the
hybrid mortgages. With higher interest
rates, monthly mortgage payments became
larger; borrowers could not afford the new
payments and defaulted on their loans. The
second suggested reason was a tendency for

Mortgage Loans Can Be Labeled
Subprime for Many Reasons
The term “subprime” describes a loan that in some way is worse than a prime loan. Borrowers may find these loans worse because of high interest rates or high fees that lenders
charge. Lenders also may charge exorbitant penalties for late payments or pre-payments.
A subprime loan is worse in the eyes of a lender because it is considered riskier than a prime
loan—riskier because there is a greater chance the loan will never be repaid—so lenders
require those higher rates and fees to compensate for an extra risk, compared to prime loans.
And, it can be worse for everybody and for the economy overall if the risk does materialize.
A loan can be called subprime if:
• it is made to a borrower with a poor credit history (such as a FICO score below 620);
• it is issued by a lender who specializes in high-cost loans;
• it became part of a so-called subprime pool of loans, to be traded on a secondary

Delinquencies and Defaults in
the Subprime Mortgage Crisis

The subprime mortgage market boomed
during the first six years of the decade and
collapsed in 2007. Many borrowers with
subprime mortgage loans could not make
timely monthly payments and defaulted on
12 The Regional Economist | October 2008

market; or
• it is made to a borrower with “prime” credit characteristics (e.g., a high FICO score) but is a
subprime-only contract type, such as a 2/28 hybrid, a product not generally available in the
prime mortgage market. (A 2/28 hybrid mortgage carries a fixed rate for the first two years;
after that, the rate resets into an index rate [usually a six-month LIBOR] plus a margin.)

Serious Delinquency Rate of Subprime Loans
One Year after origination by five credit score groups

25
SERIOUS DELINQUENCY RATE (%)

Did Credit Scores Predict
the Subprime Crisis?

borrowers to refinance into larger loans and
take out cash, basically taking out the equity
from their homes and spending it. Negative equity could lead to default. A third
popular explanation involved loosening the
underwriting standards. If borrowers did
not pay any down payments, they had nothing to lose in case of adverse personal or
economic circumstances, which could make
defaults almost costless.
A paper written in 2008 by Yuliya
Demyanyk and Otto Van Hemert shows
that contrary to popular beliefs described
earlier in this article, the subprime crisis
did not confine itself to a particular market
segment, such as no-documentation loans,
hybrid loans, cash-out refinance loans, etc.
It was a (subprime) market-wide phenomenon. For example, borrowers with mortgages that carried a fixed-interest rate—the
rate that will not reset through the entire
term of a loan—had very similar problems
to borrowers with hybrid mortgages. Borrowers who obtained a subprime mortgage
when they bought a home had the same
problems in 2006 and 2007 as those who
refinanced their existing mortgages to
extract cash. Borrowers who provided full
documentation and no documentation followed the same pattern.
Demyanyk and Van Hemert also show
that throughout the boom and subsequent
collapse of the subprime mortgage market,
borrowers with low FICO credit scores were
more likely to miss their mortgage payments
or default on their loans. However, as the
data show, borrowers who took out subprime loans in 2006 and 2007 had higher
or similar FICO scores, not lower, than
borrowers who took out their mortgages
in earlier years.
The figure shows how the serious delinquency rate has changed for five groups of
borrowers who had different FICO credit
scores when their loans were made. Their
mortgage loans were originated in 2005,
2006 and 2007. A mortgage loan is seriously
delinquent if a borrower has missed more
than two monthly payments, has defaulted
on a loan or if the property has gone into
foreclosure. Each bar on the graph represents an origination year. The height of
each bar shows the percentage of loans that
were seriously delinquent within the first
year after the loans were originated.

2005

2006

2007

600-620

620-675

675-700

20
15
10

R EFE R E N CE S
Demyanyk, Yuliya and Otto Van Hemert. “Understanding the Subprime Mortgage Crisis.”
Working paper (2008), available at the Social
Science Research Network. See ssrn.com/
abstract=1020396.
Fishelston-Holstein, Hollis. “Credit Scoring Role
in Increasing Homeownership for Underserved Populations.” Working paper, Harvard
University, 2004. See www.jchs.harvard.edu/
publications/finance/babc/babc_04-12.pdf.

5
0

500-600

>700

SOURCE: Author’s calculations based on First American CoreLogic
LoanPerformance data

For each group of borrowers, with low
and high FICO scores, loans that originated
in later years had larger serious delinquency
rates one year after origination. Moreover,
the higher the credit score, the larger
the increase in serious delinquency rates
between 2005, 2006 and 2007. For example,
for borrowers with the lowest credit scores
(FICO scores between 500 and 600), the
serious delinquency rate in 2007 was twice
as large as in 2005—an increase of nearly
100 percent over the two years. For borrowers with the highest credit scores (FICO
scores above 700), the serious delinquency
rate in 2007 was almost four times as large
as in 2005—an increase of nearly 300 percent. In addition, the serious delinquency
rate in 2007 for the best-FICO group was
almost the same as the rate in 2005 for the
worst-FICO group.
The evidence presented above seems to
suggest that the credit score has not acted as
a predictor of either true risk of default of
subprime mortgage loans or of the subprime
mortgage crisis. The subprime mortgage
crisis is still a black box, and it requires more
analysis to fully understand how the developments in the subprime mortgage market
and a subsequent crisis have “subprimed”
so many issues that used to be considered
fundamental, like credit scoring.

Yuliya Demyanyk is an economist at the Federal
Reserve Bank of St. Louis. For more on
Demyanyk’s work, see http://www.stlouisfed.org/
banking/PDFs/CVs/Demyanyk_vitae.pdf.

The Regional Economist | www.stlouisfed.org 13

m o r t g a g e s

By Yuliya Demyanyk

Delinquencies and Defaults in
the Subprime Mortgage Crisis

Serious Delinquency Rate of Subprime Loans
One Year after origination by five credit score groups

25
SERIOUS DELINQUENCY RATE (%)

Did Credit Scores Predict
the Subprime Crisis?

2005

2006

2007

600-620

620-675

675-700

20
15
10

5
0

500-600

>700

SOURCE: Author’s calculations based on First American CoreLogic
LoanPerformance data

Yuliya Demyanyk is an economist at the Federal
Reserve Bank of St. Louis. For more on
Demyanyk’s work, see http://www.stlouisfed.org/
banking/PDFs/CVs/Demyanyk_vitae.pdf.

The Regional Economist | www.stlouisfed.org 13

TRADE
One of Missouri’s top exports to China is scrap metal. At Grossman Iron
and Steel in St. Louis, scrap is dumped onto a conveyor belt for processing.
Once processed, the metal is loaded onto barges on the Mississippi River
and shipped to China and elsewhere.

District Tops U.S.
in Growth of
Exports to China
By Cletus C. Coughlin

veryone knows that imports of merchandise from China have been mushrooming over the past two decades. Little
attention has been paid, however, to the
increase in shipments going the other way,
from the United States to China. Even less
talked about is the fact that exports to China
from the states in the Eighth Federal Reserve
District have been growing faster than
exports to China from the U.S. as a whole.

Recent History

Beginning in the late 1970s, China
embarked on a series of market-oriented
reforms, many of which contributed to it
becoming the leading supplier of merchandise imports to the United States. These
imports have attracted much attention,
often in the form of criticism, zeroing in on
such things as the safety of Chinese goods,
the size of the U.S. bilateral trade deficit
with China and the possibility of an undervalued Chinese currency.
Noteworthy, but less well-known, are
developments related to goods produced
in the U.S. for export to China. Last year,
China was the third-leading market (after
Canada and Mexico) for exports of U.S.
merchandise, compared with 15th in
1989. The number of U.S. firms exporting to China jumped more than six times
between 1992 and 2006, from 4,092 to
25,873, according to the International Trade
Administration.1 Most of these firms are
relatively small; 90 percent of them in 2006
employed fewer than 500 workers.
Many exporters to China are located in
states in the Eighth Federal Reserve District.
(The District encompasses Arkansas and
parts of Missouri, Illinois, Indiana, Kentucky, Mississippi and Tennessee.) Given
14 The Regional Economist | October 2008

the prospects for increased trade flows,
leaders in St. Louis are pushing for the area
to become a transportation hub for trade
with China. A memorandum of understanding was signed in March by Chinese
and Missouri officials to study the feasibility
of developing an air freight hub at Lambert
Airport in St. Louis.2
Reasons for Increased Exports

Two factors have fueled the rapid increase
of U.S. exports. Both factors are directly
related to the reforms begun by China in
the late 1970s. One factor is that China has
experienced substantial economic growth,
which has increased the demand for goods
from suppliers throughout the world. This
growth has dwarfed that of many U.S. trading partners. For example, the compound
annual growth rate of real GDP between
1980 and 2007 was 9.9 percent in China
versus 2.8 percent in Canada, 2.6 percent
in Mexico, 2.6 percent in the United Kingdom, 1.9 percent in Germany and 2.3 percent in Japan.
The second factor propelling U.S. exports
has been a significant reduction in Chinese
import barriers; this change has reduced
the cost of buying goods from U.S. suppliers. Throughout the 1970s, the quantities
of most Chinese exports and imports were
tightly controlled as part of China’s planned
economy.3 A small number of foreign
trade organizations that were controlled
by the Ministry of Foreign Trade executed
the plans. Trade reforms during the 1980s
and early 1990s involved the replacement
of quantitative trade planning by tariffs,
quotas and trading rights. But changes
producing a significantly more open trading
environment did not occur until the early

1990s. The average tariff rate of 43 percent
in 1992 declined to roughly 15 percent in
late 2001, when China became a member
of the World Trade Organization.
Similar changes occurred for goods
subject to either quotas or import licenses.
During the 1980s, the range of goods
subject to either quotas or import licenses
increased. (By the late 1980s, roughly half
of Chinese imports were so affected.) But in
the 1990s, such restrictions declined markedly. The share of affected imports declined
to 18 percent by 1992 and declined further
to slightly more than 8 percent in 2001.
Finally, the number of firms with trading
rights increased substantially throughout
the 1980s and 1990s, from an initial level of
12 firms in the late 1970s to 35,000 in 2001.
To gain membership in the World Trade
Organization, China committed to sweeping
changes that further liberalized its import
environment.4 China committed to lower
trade barriers throughout its economy, to
treat foreign firms identically to domestic
firms and to protect intellectual property
rights according to international standards.
The average tariff level dropped to less than
10 percent by 2005. Other changes involved
reducing the impact of quotas, licenses
and state trading; these changes liberalized
substantially the importation of agricultural
and other commodities. Foreign direct
investment opportunities were opened up in
a number of service sectors, such as telecommunications, distribution, banking, insurance, asset management and securities.
Exports from Eighth District States

Last year, merchandise exports from
three states in the Eighth District exceeded
$1 billion—Illinois ($2 billion), Tennessee

($1.1 billion) and Missouri ($1 billion).
These sales are merchandise exports; so,
only exports of goods that have been grown,
produced or manufactured are included.
Exports of services are not included.
A variety of goods are exported from
District states. Leading export categories
include machinery manufactures, chemical
manufactures, mining commodities, and
agricultural-related production, such as
crops and processed foods. A few specifics:
• Frozen chicken cuts were the top export
to China from Arkansas in 2006, with much
of those coming from Tyson Foods.5

Figures for the other Eighth District
states are not as dramatic as those for Missouri, but also show changes that often
exceed what has taken place nationally. For
example, every state has seen China become
an increasingly important export market,
jumping between 11 (Tennessee) and 19
(Arkansas) places for the period 1989-2007.
China is now the third-leading export market for firms in Tennessee, Mississippi and
Arkansas. For firms in Indiana, China is
the sixth-leading export market; for firms in
both Illinois and Kentucky, China is No. 8.
Export growth to China relative to
income growth is not only booming in
Missouri but is greater in each of the other
Eighth District states than it is in the U.S.
as a whole. Export growth exceeded income
growth by a factor of five in Arkansas. Even

Exports to China by Eighth District States

Rank: Export Markets*
District State

Annualized Growth

Exports ($m)

1989

2007

Exports

Income

Arkansas

27.72%

5.53%

2007
307.5

Illinois

17.91%

4.73%

1,958.8

Indiana

20.46%

4.76%

758.1

Kentucky

20.16%

5.12%

578.3

Mississippi

15.38%

5.49%

349.2

Missouri

31.83%

4.82%

1,015.0

Tennessee

18.30%

5.60%

1,135.3

United States

14.38%

5.33%

65,238.3

endnotes
1
2

3
4
5
6
7

See http://ita.doc.gov/td/industry/otea/
sme_2006/SME_index_2006.html.
See press release from Missouri’s governor on
March 26, 2008, at http://governor.mo.gov/
press.htm.
See Branstetter and Lardy for additional
details and insights.
See www.brookings.edu/testimony/2001/
0509foreignpolicy_lardy.aspx?p=1.
See Smith.
See Thimangu.
See 2007 National Trade Estimate Report on
Foreign Trade Barriers.

References
Branstetter, Lee; and Lardy, Nicholas. “China’s
Embrace of Globalization.” National Bureau
of Economic Research Working Paper 12373,
July 2006.
Smith, David. “China a Growing Market for
State; Nation of One Billion Forming a Taste
for Arkansas Goods.” Arkansas DemocratGazette, Jan. 21, 2007, p. 7.
Thimangu, Patrick L. “St. Louis Companies
Cash In as Missouri’s Exports to China Top
$1 Billion.” St. Louis Business Journal, April
21, 2008. See http://stlouis.bizjournals.com/
stlouis/stories/2008/04/21story2.html.
U.S. Trade Representative. 2007 National Trade
Estimate Report on Foreign Trade Barriers.
See www.ustr.gov/Document_Library/
Reports_Publications/2007/2007_NTE_
Report/Section_Index.html.

* The countries used in this ranking are the top 50 U.S. export markets in 2005. Therefore, of these 50 countries,
China was the 22nd leading export market for Arkansas in 1987 and third in 2007.
SOURCES: WISER/Haver Analytics; International Trade Administration; Bureau of Economic Analysis.

• Scrap copper, bronze and aluminum
that can be recycled into materials for Chinese manufacturing and construction are a
leading export for the District as a whole.6
• The leading category of exports from
Missouri in 2007 was waste and scrap
chemicals, foods and metals.
As shown in the table, states in the Eighth
District have been able to take advantage of
the rapidly expanding Chinese market. The
most dramatic change has been experienced
by Missouri, whose annual rate of growth
in exports to China has exceeded 31 percent
since 1989. China rose from being Missouri’s 35th-leading export market in 1989
to its fourth-leading export market last
year. Missouri’s export growth to China
has expanded faster than Missouri’s overall
income growth by a factor greater than six.

though Mississippi had the lowest value
in this measure, its value of 2.8 was still
slightly above the U.S. value of 2.7.
Looking Ahead

Prospects for increased exports to China
are bright. Not only is China likely to continue to grow rapidly in the near future, but
China appears to be on course to become
increasingly integrated into the global
economy as part of its accession into the
World Trade Organization. As a result, foreign firms should find the Chinese market
easier to penetrate.
The integration process, however, is far
from complete.7 Of the many simmering
issues, two stand out. First, the ineffective
continued on Page 16
The Regional Economist | www.stlouisfed.org 15

District Tops U.S.
in Growth of
Exports to China
By Cletus C. Coughlin

Recent History

Last year, merchandise exports from
three states in the Eighth District exceeded
$1 billion—Illinois ($2 billion), Tennessee

Exports to China by Eighth District States

Rank: Export Markets*
District State

Annualized Growth

Exports ($m)

1989

2007

Exports

Income

Arkansas

27.72%

5.53%

2007
307.5

Illinois

17.91%

4.73%

1,958.8

Indiana

20.46%

4.76%

758.1

Kentucky

20.16%

5.12%

578.3

Mississippi

15.38%

5.49%

349.2

Missouri

31.83%

4.82%

1,015.0

Tennessee

18.30%

5.60%

1,135.3

United States

14.38%

5.33%

65,238.3

endnotes
1
2

3
4
5
6
7

though Mississippi had the lowest value
in this measure, its value of 2.8 was still
slightly above the U.S. value of 2.7.
Looking Ahead

e c o n o m y

a t

n a t i o n a l

g l a n c e

o v e r v i e w

Eleven more charts are available on the web version of this issue. Among the areas they cover are agriculture,
commercial banking, housing permits, income and jobs. Much of the data is specific to the Eighth District.
To go directly to these charts, use this URL: www.stlouisfed.org/publications/re/2008/d/pdf/10-08-data.pdf.

8
7
6
5
4
3
2
1
0
–1
–2

CONSUMER PRICE INDEX

PERCENT

REAL GDP GROWTH

6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5

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

10-Year

3.0

20-Year

3.00

2.8

2.75

2.6

2.50

2.4

2.25

Sept. 5

6.0

5.0

PERCENT

5.0

8/5/08

9/12/08

Sept. 08 Oct. 08 Nov. 08 Dec. 08 Jan. 09 Feb. 09

3.0
Fed Funds Target
1-Year Treasury

1.0
Aug.

0.0

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

U . S . A G R I C U LT U R A L T R A D E

Aug.

170

FA R M I N G C A S H R E C E I P T S
Trade Balance

Imports

Exports

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

Crops

160
BILLIONS OF DOLLARS

50
40
30
20
10

Livestock

150
140
130
120
110
100

June

espite the economic turmoil emanating from rising oil prices, the collapse
in housing activity and financial market
turbulence, the U.S. economy expanded at a
modest pace over the first half of 2008. But
larger-than-expected increases in inflation,
continued declines in payroll employment
and a marked slowing world economic
growth have further raised the threat level
facing the economy. Most Federal Reserve
policymakers and forecasters expect that a
gradual slowing in inflation will commence
later this year, followed by a return to trendlike economic growth by mid-2009. But
others warn that the cumulative effects of
past actions to strengthen aggregate demand
growth have the potential to further destabilize an economy being buffeted by rising price
pressures and elevated inflation expectations.

Not Price Stability
10-Year Treasury

2.0

4.5

BILLIONS OF DOLLARS

6/25/08

4.0

5.5

NOTE: Data are aggregated over the past 12 months.
16 The Regional Economist | October 2008

I N T E R E S T R AT E S

6.5

CONTRACT MONTHS

continued from Page 15

Cletus C. Coughlin is an economist at the
Federal Reserve Bank of St. Louis. For more
on his work, see http://research.stlouisfed.org/
econ/coughlin.

4/30/08

NOTE: Weekly data.

4.0

2.2

1.6

C I V I L I A N U N E M P L O Y M E N T R AT E

enforcement of intellectual property rights
continues to be a major problem. The
economic performance of many U.S. firms
suffers because of unacceptably high levels
of counterfeiting and piracy. Second,
China continues to inhibit agricultural
imports under the guise of safety standards
by delaying or stopping shipments of agricultural products.
Despite the problems, the market
opportunities in China for U.S. firms are
abundant. Firms in Eighth District states
appear to be well-positioned to continue
to take advantage of the expanding export
opportunities.

1.8

1.75
1.50

Aug.

2.0

2.00

At Grossman Iron and Steel in St. Louis, scrap metal is separated for
processing before being shipped to China and elsewhere. Scrap food and
chemicals are also among the more than $1 billion in exports to China
from Missouri last year.

All Items Less Food and Energy

RATES ON FEDERAL FUNDS FUTURES ON SELECTED DATES

PERCENT

5-Year

By Kevin L. Kliesen
CPI–All Items

NOTE: Percent change from a year earlier.

I N F L AT I O N - I N D E X E D T R E A S U RY Y I E L D S P R E A D S
3.25

Threats to the
Economy Don’t Let Up

May

NOTE: Data are aggregated over the past 12 months.

Most of the inflation news is bad, not just
in the United States, but globally. After
increasing last year at a 17-year high of
4.1 percent, the all-items Consumer Price
Index (CPI) has increased at about a
5.25 percent annual rate over the first eight
months of this year. An important factor
behind this acceleration was the more than
40 percent increase in the price of crude oil
between January and June. Further compounding the economic woes facing U.S.
households, prices of food and imported
goods are accelerating at their fastest rates
in several years. Accordingly, some measures of consumer inflation expectations
have risen sharply this year.
Likewise, many firms, which are also battling higher fuel and transportation costs,
have also been hit by sharp increases in the
prices of commodities and certain finished

products, such as steel and petrochemicals.
Throttled by pressures on their profit margins,
producers are increasingly willing and able to
pass along input price increases to their customers, business surveys suggest. As a result,
price increases outside of food and energy
have started to accelerate. After increasing
at a 1.8 percent annual rate over the first four
months of 2008, the core CPI (minus food
and energy) has increased at a 3.2 percent
rate over the four months ending in August.
Many forecasters remain confident that
both the headline and the core inflation rate
will begin to moderate in the fourth quarter
of this year. Moreover, a key inflation
barometer—the yield on the 10-year U.S.
Treasury security—remains relatively low
and stable. Some favorable developments,
if sustained, enhance the credibility of this
forecast. First, crude oil and commodity
prices have retreated significantly from their
summer peaks. Second, the value of the dollar has posted an impressive rebound, which
will help to reduce import price inflation.
Third, labor productivity growth has been
quite strong for the past several quarters,
helping to constrain the growth of unit labor
and nonlabor costs.
The Fed’s Dilemma

The pace of U.S. economic growth has
gradually accelerated since the fourth quarter
of 2007, when real GDP—according to newly
revised estimates—declined at a 0.2 percent
annual rate. Following a 0.9 percent rate of
growth in the first quarter of 2008, the Bureau
of Economic Analysis reported that real GDP
grew at a healthy 3.3 percent annual rate in
the second quarter—much stronger than
expected. The consensus of most forecasters is
that the second quarter will be the high-water

mark for growth this year: The August Survey
of Professional Forecasters projects that real
GDP growth will slow to 1.2 percent in the
third quarter and then slow even further over
the final three months of 2008 (0.7 percent).
Much of the economy’s recent strength
stems from a robust export sector. But with
the renewed strength in the U.S. dollar and
weakening economic growth in Japan and
many European countries, the outlook for
exports is unsettled.
And then there is housing. Overall, residential housing construction and sales remain
moribund, and national house price indexes
continue to decline on a year-to-year basis.
Most forecasters do not expect a rebound in
construction to commence until next year,
while the bottom in national home prices
could extend even longer. With little or
no lending in the nontraditional mortgage
market and with the inability of some buyers
to secure funding for higher-priced homes
(jumbo mortgages), new and existing home
sales this year are on a pace to be the weakest
in more than a decade.
Federal Reserve policymakers face a
dilemma: how to counter the threat from
rising inflation in the face of an expected
slowing in economic growth and unsettled
financial market conditions. The consensus
of most forecasters is that economic conditions may spur the Federal Open Market
Committee to reduce its federal funds rate
target by the end of this year. However, this
outcome will most likely depend on a sharp
slowing in the inflation rate.
Kevin L. Kliesen is an economist at the Federal
Reserve Bank of St. Louis. Joshua A. Byrge
provided research assistance. For more on
Kliesen’s work, see http://research.stlouisfed.org/
econ/kliesen/index.html.
The Regional Economist | www.stlouisfed.org 17

e c o n o m y

a t

n a t i o n a l

g l a n c e

o v e r v i e w

8
7
6
5
4
3
2
1
0
–1
–2

CONSUMER PRICE INDEX

PERCENT

REAL GDP GROWTH

6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5

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

10-Year

3.0

20-Year

3.00

2.8

2.75

2.6

2.50

2.4

2.25

Sept. 5

6.0

5.0

PERCENT

5.0

8/5/08

9/12/08

Sept. 08 Oct. 08 Nov. 08 Dec. 08 Jan. 09 Feb. 09

3.0
Fed Funds Target
1-Year Treasury

1.0
Aug.

0.0

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

U . S . A G R I C U LT U R A L T R A D E

Aug.

170

FA R M I N G C A S H R E C E I P T S
Trade Balance

Imports

Exports

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

Crops

160
BILLIONS OF DOLLARS

50
40
30
20
10

Livestock

150
140
130
120
110
100

June

Not Price Stability
10-Year Treasury

2.0

4.5

BILLIONS OF DOLLARS

6/25/08

4.0

5.5

NOTE: Data are aggregated over the past 12 months.
16 The Regional Economist | October 2008

I N T E R E S T R AT E S

6.5

CONTRACT MONTHS

continued from Page 15

Cletus C. Coughlin is an economist at the
Federal Reserve Bank of St. Louis. For more
on his work, see http://research.stlouisfed.org/
econ/coughlin.

4/30/08

NOTE: Weekly data.

4.0

2.2

1.6

C I V I L I A N U N E M P L O Y M E N T R AT E

1.8

1.75
1.50

Aug.

2.0

2.00

All Items Less Food and Energy

RATES ON FEDERAL FUNDS FUTURES ON SELECTED DATES

PERCENT

5-Year

By Kevin L. Kliesen
CPI–All Items

NOTE: Percent change from a year earlier.

I N F L AT I O N - I N D E X E D T R E A S U RY Y I E L D S P R E A D S
3.25

Threats to the
Economy Don’t Let Up

May

NOTE: Data are aggregated over the past 12 months.

d i s t r i c t

o v e r v i e w
TABLE 1
ILLINOIS

INDIANA

E N D N OTE S

Residential Mortgage Delinquency Rates For Eighth District States

P ercent 9 0 + days D elin q uent or in F oreclosure , 2 0 0 8 – Q 2
St. Louis

All
Louisville

MISSOURI

KENTUCKY

ARKANSAS

Memphis

TENNESSEE

Little Rock

Eighth District States Weather
the Mortgage Foreclosure Storm

MISSISSIPPI

The Eighth Federal Reserve District
is composed of four zones, each of
which is centered around one of
the four main cities: Little Rock,
Louisville, Memphis and St. Louis.

By Yuliya Demyanyk and Michael Pakko

Prime

Subprime*

Mortgages

Total

FRM†

ARM†

Total

FRM

ARM

Missouri

3.1

1.5

1.1

4.7

13.2

7.2

20.8

Illinois

4.7

2.3

1.4

6.3

20.1

11.3

27.9

Indiana

5.7

2.9

2.2

9.2

18.5

12.3

27.8

Kentucky

4.0

1.9

1.4

6.4

15.8

9.9

26.1

Tennessee

3.7

1.7

1.3

6.4

12.6

7.8

20.4

Mississippi

5.0

2.5

1.9

10.1

16.1

11.6

25.1

Arkansas

2.7

1.5

1.0

6.1

11.4

7.8

18.1

U.S. Total

4.5

2.4

1.3

6.8

17.9

9.6

26.8

State

Mortgage Bankers Association. National
Delinquency Survey/ Haver Analytics.
A loan is called seriously delinquent if mortgage payments on it are past due for more
than two months, a property is in foreclosure
or is real-estate owned.
Authors’ calculations based on FirstAmerican
CoreLogic LoanPerformance securities data,
June 2008.
More information about subprime mortgages
by state can be found at the web site of the
Federal Reserve Bank of New York.
See www.newyorkfed.org/mortgagemaps.

* The Mortgage Bankers Association divides the sample of conventional mortgages into prime and subprime categories based on whether the servicer handles
primarily prime or subprime loans. Therefore, there are some prime loans in the subprime sample and some subprime loans in the prime sample.

ne of the symptoms of the ongoing problems in the nation’s housing
markets is a sharp rise in mortgage delinquencies and home foreclosures. From the
second quarter of 2007 through the second
quarter of 2008, homeowners with more
than three missed monthly payments or
in foreclosure rose from 2.5 percent to
4.5 percent of all outstanding mortgages.1
Table 1 summarizes the data for Eighth
District states as of the second quarter of
2008. The data show that our region has
suffered along with the nation. In fact, three
Eighth District states—Illinois, Indiana and
Mississippi—have had higher proportions
of delinquencies than the national average.
But the other states in the region—Arkansas,
Kentucky, Missouri and Tennessee—have
fared better than the national average.
Arkansas, in particular, has experienced a
much lower rate of delinquencies and foreclosures than the rest of the country has.
Historically, the leading factor in delinquencies and foreclosures is related to unemployment, with homeowners who lose their
jobs falling behind in their mortgage payments. In contrast, a distinctive factor in
the recent run-up in delinquency rates is
falling house prices. Hence, some of the
highest delinquency rates are in those states
that have suffered the largest declines in
house prices. For example, the comparable
rates for delinquency and foreclosure combined in Florida and Nevada are 8.4 and
7.6 percent, respectively.
In the Eighth District, however, the runup in house prices was more subdued and
the subsequent slowdown has been milder
18 The Regional Economist | October 2008

than in the country as a whole. Consequently, the share of mortgages in the District that are delinquent or in foreclosure is
less likely to be related to house price swings
and is more likely to be related to job losses.
This is particularly the case in those states
that have suffered large losses in manufacturing employment.
For the nation and the District, there are
distinct differences in the pattern of delinquencies across various types of mortgages.
Fixed-rate mortgages (FRM) have lower
delinquency and foreclosure rates than do
adjustable-rate mortgages (ARM). Almost
all ARMs in the subprime mortgage market
are so-called 2/28 or 3/27 hybrid loans, i.e.,
the rates are fixed for either two or three
years and then they reset to a higher rate.
These types of hybrid loans are generally
not found in the prime mortgage market.
Among prime mortgages, the rate of
delinquency and foreclosure is nearly five
times higher for ARMs than for FRMs.
Moreover, the rate of delinquencies and
foreclosure is much higher for subprime
loans than for prime loans, and the rates for
subprime ARMs are much higher than the
rates for subprime FRMs. These patterns are
clear in each of the Eighth District states. In
fact, those states that have delinquency and
foreclosure rates above the national average
for all mortgages taken together tend to have
rates above the national averages for each
category of mortgage loans.
Subprime Mortgages Failing Faster

Not only have subprime mortgages shown
higher delinquency rates than prime loans in

general, but subprime mortgage loans have
shown high rates of delinquency, foreclosure
and default only months after origination.
This has been true for borrowers across a
range of credit scores (see Yuliya Demyanyk’s
article elsewhere in this issue) and has also
held true for Eighth District states.
On average across the country, subprime
loans that were originated in 2006 and 2007
showed, respectively, 14 and 17 percent
serious delinquency rates within one year of
origination.2 In contrast, for subprime loans
that were originated in 2002, 2003 and 2004,
the serious delinquency rate was 5 percent.3
Analyzing serious delinquency rates for
subprime loans within the first year of origination, there are again differences between
the rates for FRM and ARM loans. Table 2
shows the percentage of subprime loans that
became seriously delinquent within the
first 12 months of origination. For every
origination year, FRM loans had lower
serious delinquency rates than ARM loans
of the same ages. However, even within the
relatively better performing FRM group,
loans originated in 2007 performed much
worse than those originated in 2005. The
serious delinquency rate for 2007 FRM
loans, 12 months after origination, is 2.7
times larger than that for 2005 loans.
Data for the Eighth District states show
that this region’s experience with subprime
loans was quite similar to the nationwide
trend. For both FRMs and ARMs, the
national trend has shown rising delinquency
rates over the three origination years from
2005 to 2007. However, Missouri, Illinois,
Tennessee and Arkansas had higher serious

† FRM = Fixed-Rate Mortgages

ARM = Adjustable-Rate Mortgages

SOURCES: Mortgage Bankers Association, National Delinquency Survey/Haver Analytics

TABLE 2
Subprime Securitized Loans, Serious Delinquency Rates (Percent) 12 Months After Origination*

Fixed-Rate Mortgages
Origination year

Adjustable-Rate Mortgages

2005

2006

2007

2005

2006

2007

Missouri

4.5

9.7

14.6

12.3

17.3

22.0

Illinois

5.2

9.4

14.0

8.5

12.8

18.6

Indiana

7.2

11.0

10.2

12.3

17.1

14.2

Kentucky

7.7

12.3

9.4

12.4

14.2

14.4

Tennessee

12.0

10.0

16.0

11.6

16.1

21.1

Mississippi

5.6

9.7

10.7

18.1

17.4

23.2

Arkansas

5.7

10.0

16.3

9.1

13.6

12.2

U.S. Total

4.2

7.7

11.2

8.1

15.0

18.7

* A loan is called seriously delinquent if mortgage payments on it are past due for more than two months,
a property is in foreclosure or the property is real-estate owned (taken over by a bank or trustee.)
SOURCE: Authors’ calculations, based on FirstAmerican CoreLogic LoanPerformance securities data.

delinquency rates for 2007-vintage FRM
loans than the national average. The ARM
and FRM rates for Indiana and Kentucky
and the ARM rates for Arkansas peaked for
loans originated in 2006 and have fallen or
leveled off in the next year.
On average in the U.S. and in every state
in the Eighth District, more than half of
all mortgages have rates that are scheduled
to adjust at some point. About 30 percent
of those are scheduled to reset before June
2009.4 This can, of course, be problematic
for borrowers whose rates (and payments)
adjust dramatically. However, given the
average initial mortgage interest for the
states in the Eighth District and the current level of interest rates, the typical reset
would mean an approximate increase in

the average interest rate of only one percentage point.

Yuliya Demyanyk and Michael Pakko are economists at the Federal Reserve Bank of St. Louis.
For more on Demyanyk’s work, see www.stlouisfed.
org/banking/PDFs/CVs/Demyanyk_vitae.pdf.
For more on Pakko’s work, see http://research.
stlouisfed.org/econ/pakko/index.html.

The Regional Economist | www.stlouisfed.org 19

d i s t r i c t

o v e r v i e w
TABLE 1
ILLINOIS

INDIANA

E N D N OTE S

Residential Mortgage Delinquency Rates For Eighth District States

P ercent 9 0 + days D elin q uent or in F oreclosure , 2 0 0 8 – Q 2
St. Louis

All
Louisville

MISSOURI

KENTUCKY

ARKANSAS

Memphis

TENNESSEE

Little Rock

Eighth District States Weather
the Mortgage Foreclosure Storm

MISSISSIPPI

The Eighth Federal Reserve District
is composed of four zones, each of
which is centered around one of
the four main cities: Little Rock,
Louisville, Memphis and St. Louis.

By Yuliya Demyanyk and Michael Pakko

Prime

Subprime*

Mortgages

Total

FRM†

ARM†

Total

FRM

ARM

Missouri

3.1

1.5

1.1

4.7

13.2

7.2

20.8

Illinois

4.7

2.3

1.4

6.3

20.1

11.3

27.9

Indiana

5.7

2.9

2.2

9.2

18.5

12.3

27.8

Kentucky

4.0

1.9

1.4

6.4

15.8

9.9

26.1

Tennessee

3.7

1.7

1.3

6.4

12.6

7.8

20.4

Mississippi

5.0

2.5

1.9

10.1

16.1

11.6

25.1

Arkansas

2.7

1.5

1.0

6.1

11.4

7.8

18.1

U.S. Total

4.5

2.4

1.3

6.8

17.9

9.6

26.8

State

Not only have subprime mortgages shown
higher delinquency rates than prime loans in

† FRM = Fixed-Rate Mortgages

ARM = Adjustable-Rate Mortgages

SOURCES: Mortgage Bankers Association, National Delinquency Survey/Haver Analytics

TABLE 2
Subprime Securitized Loans, Serious Delinquency Rates (Percent) 12 Months After Origination*

Fixed-Rate Mortgages
Origination year

Adjustable-Rate Mortgages

2005

2006

2007

2005

2006

2007

Missouri

4.5

9.7

14.6

12.3

17.3

22.0

Illinois

5.2

9.4

14.0

8.5

12.8

18.6

Indiana

7.2

11.0

10.2

12.3

17.1

14.2

Kentucky

7.7

12.3

9.4

12.4

14.2

14.4

Tennessee

12.0

10.0

16.0

11.6

16.1

21.1

Mississippi

5.6

9.7

10.7

18.1

17.4

23.2

Arkansas

5.7

10.0

16.3

9.1

13.6

12.2

U.S. Total

4.2

7.7

11.2

8.1

15.0

18.7

the average interest rate of only one percentage point.

The Regional Economist | www.stlouisfed.org 19

c o m m u n i t y

p r o f i l e

Heal Thyself
Focus on Health Care, Entrepreneurs
and Tourism Rejuvenates Paris, Tenn.

The Henry County Medical Center is the heart of the burgeoning
health-care industry in Paris. The county’s decision to keep it
and expand it ignited a boom in health-care services
in this part of western Tennessee.

By Susan C. Thomson

n 1991, the Henry County Commission
spurned bids from out-of-town chains
for its county-owned, money-bleeding
hospital in Paris, Tenn. In deciding to keep
and expand it rather than sell it, the commission took a risk—one that, as County
Mayor Brent Greer observes, has “paid off
tremendously well.”
The renamed Henry County Medical
Center has gone on to become a powerhouse, economic as well as medical. The
hospital—with twice its former space,
patient capacity and physician staff—is
now but one part of a complex enterprise.
Also included are a cancer clinic, home
health agency, hospice service, nursing
home, wellness and rehabilitation center,
and the county’s ambulance operation.
Thomas Gee, the center’s chief executive, says Paris’ location has been key to the
center’s success. For one thing, anyone who
would want a larger medical facility would

20 The Regional Economist | October 2008

have to drive two hours, to either Nashville
to the east or Memphis to the southwest. For
another, just 17 miles away is Kentucky Lake,
a draw for active, health-conscious retirees
as well as high-quality physicians and other
medical specialists.
The center has succeeded not just in operating in the black. It has also attracted to
town a number of unaffiliated new medical
clinics, pharmacies, home-health agencies,
assisted-living facilities and other healthrelated businesses.
The emergence of health care as an industry has been a godsend for a community
suffering a decline in manufacturing, which
was its economic engine well into the last half
of the 20th century. Then came the plant
closings. In just the past four years, Emerson
Tool Co. and Manar Inc. have closed up shop
in town for a total loss of 450 jobs.
The next casualty could be Tecumseh Products’ engine-making plant. It’s for sale, the

Paris, Tenn., by the numbers
City Population..................................................... 9,920 *
County Population.............................................. 31,630 *

calculates that the remaining plants have shed
up to half their jobs over the past decade.
Dana Corp., a unit of an Ohio-based auto
parts maker, is the largest survivor. The
parent company emerged shrunken from
bankruptcy protection earlier this year, its
Paris operation deposed from its long-time
position as Henry County’s largest employer.
Together with the medical center and its
offshoots, a number of up-and-coming nonmanufacturing businesses have served to
stave off serious unemployment.
“We still have enough jobs here to support
31,000 people,” says David Flowers, president
of Commercial Bank and Trust Co. in Paris,
referring to the county population. The new,
more varied mix of employers is stabilizing,
he says. “It’s definitely better to have more
smaller industries. That way, if you lose one,
the economic impact is less.”
Changing times have left the small city and
surrounding county on their own for growth.
Greer says it’s been “at least 30 years” since the
community has reeled in a major employer
from beyond its borders.
Holder describes today’s pickings as
smaller and fewer than in the heydays of
1950s and 1960s, when Rust Belt companies
were eagerly opening plants of several hundred employees across the South.
Many of the rural communities that prospered from the trend don’t recognize that
the era has passed, he says. “They’re more
conservative socially, tend not to let go of any
old paradigm and are slow to embrace where
the economy is moving. They want more of
what they used to have.”

Yet his organization keeps the welcome
mat out for plants on the move. Earlier
this year, an American manufacturer was
poised to bring production and 150 jobs back
from China in exchange for low rent on a
60,000-square foot, city-owned industrial
building. Because the company was planning on buying its equipment in Italy, the
deal snagged on the dollar’s decline against
the euro.
Meanwhile, a maker of all-terrain vehicles
and a producer of kits for assembling small
aircraft have arrived, both from Canada.
Each employs just a handful of workers.
Entrepreneurial Spirit

In creating most of its own jobs, the area
has built on a history embodied in Harold
Plumley. He expanded the company that
Dana bought in 1995. In 1988, he started
auto-parts maker PML Inc. as a joint venture with the Japanese company that now
owns all of it.
Plumley retired to Florida, but the entrepreneurial spirit flourishes in businesses
created by the likes of Jim Arthurs, identical
twin brothers Ronnie and Johnny Allen and
husband-wife teams Barry and Tammy Revel
and Lisa and Roggero Ciarrocchi.
Arthurs presides over Institutional Casework Inc., the reincarnation of a maker of
school and laboratory furniture founded in
Paris in 1951. After a tornado flattened part
of the plant in November 2005, new owners
decided to close the whole operation.
An employee for more than 20 years,
Arthurs got a semblance of the company up

At Institutional Casework Inc. (lower left), Candace Steele
works a machine that sizes, glues and trims the edging of
doors and drawers.
At PML Inc. (below), Craig Moore inspects metal automotive
parts after they’ve been coated with adhesive.

County Labor Force............................................ 13,976 **
County Unemployment Rate.......................8.5 percent **
County Per Capita Income............................... $25,880 ***
* Census estimate, July 1, 2007
** Haver/Bureau of Labor Statistics, June 2008
*** Bureau of Economic Analysis/Haver, 2006

Top Five Employers#
Henry County Medical Center................................. 750
Dana Corp................................................................ 650
Wal-Mart...........................................................300 plus

Tecumseh Products Co........................................... 265
PML Inc.................................................................... 175
# Self-reported, July 2008
## A company spokesman declined to provide a more
specific number.

last plant standing in a division that its owner
has been selling off in pieces since last year.
Carl Holder, executive director of the Paris/
Henry County Economic Development Corp.,
The Regional Economist | www.stlouisfed.org 21

c o m m u n i t y

p r o f i l e

Heal Thyself
Focus on Health Care, Entrepreneurs
and Tourism Rejuvenates Paris, Tenn.

By Susan C. Thomson

20 The Regional Economist | October 2008

Paris, Tenn., by the numbers
City Population..................................................... 9,920 *
County Population.............................................. 31,630 *

R e a d e r
and running again. Sales have risen to
two-thirds their previous high, while
employment is back by half—to 150 people.
Arthurs says the company can do more
work with fewer people because it has
invested in hi-tech machinery.
In their own ways, Four Seasons Sales &
Service Inc. and Revel Enterprises are also
technologically sophisticated. The Allen brothers began Four Seasons in 1984 to supply
equipment and accessories to tanning salons.
The company, now with 160 employees, takes
orders through a call center and ships them
from a computerized warehouse. The Revels
started their company seven years ago, selling
auto parts on eBay. Today, their 40 employees
do more of
the same, using an 800 number and a web site.
Holder points to
Four Seasons and Revel
as new-economy kinds
of businesses—the sort
that can sprout and
prosper in isolated
rural areas like Paris.
Revel, Four Seasons,
Institutional Casework
and other businesses
have benefited from
packages of individually tailored economic inducements
put together for
them by the Henry
County Industrial
Board. These
have included
no- and low-cost
loans, deals on
land, and
infrastructure
improvements.
One of the
board’s
favorite

ask AN economist

Letters to the Editor

Rubén Hernández-Murillo is an economist in the
Research division at the Federal Reserve Bank
of St. Louis. In addition to his general research
responsibilities, he coordinates the production of
the St. Louis section of the Beige Book. He is also
a member of the team that compiles the Burgundy
Books, a sort of Beige Book for each of the four
zones in the Eighth District. In his spare time,
he writes poetry; he also collects hats. For more
on Hernández-Murillo’s research, see http://
research.stlouisfed.org/econ/hernandez/.

This is in response to July’s article titled “Ethanol: Economic Gain or
Drain?” To read other letters, go to www.stlouisfed.org/publications/re.

What is the Beige Book, and how is it useful?
The Beige Book, officially called the Summary of Commentary on CurNathan Young Jr. fills bottles at the newly opened Paris Winery, just part of the tourist destination that Lisa and Roggero
Ciarrocchi are creating on the outskirts of town.

rent Economic Conditions, is an anecdotal description of economic activity in each of the 12 Federal Reserve districts. To produce the Beige Book,
each Federal Reserve Bank gathers information about its district through
a network of business contacts across many industries, such as manu-

tools is forgiveness of local property taxes for
employers that agree to maintain a certain
number of jobs. The Ciarrocchis have not
asked for any such incentives, just advice
from the Tennessee Department of Agriculture, for the Paris Winery they are developing
on 120 acres a few miles south of Paris.
The couple happened to land their twoengine Beech Bonanza at the Henry County
airport a few years ago when they were
out-flying a hurricane bearing down on
their Florida home.
Smitten with what they saw on their Tennessee stopover, the Ciarrocchis returned
to put down their personal roots and then
to sink their retirement savings into their
venture in viticulture. They planted 7,000
vines and around them created a working
farm with pigs, cows, ducks and rabbits, as
well as a stand of Christmas trees. They
plan a restaurant, cabins and carriage tours
of the premises—in Lisa Ciarrocchi’s vision,
“a tourist destination.”
As such, it will figure into what is shaping
up as the area’s new growth industry.
The winery opened the last weekend in
April, piggybacking on Paris’ current big
claim to tourism fame—“The World’s Biggest
Fish Fry.” Every year on the same weekend,
A 60-foot replica of the Eiffel Tower in Paris (France) stands
in a park in Paris (Tenn.). The tower was originally constructed
by engineers at Christian Brothers University in Memphis. It was
donated to the Tennessee town in the early 1990s.

the Paris-Henry County Jaycees stage a
parade, rodeo and carnival and fry five tons
of catfish for crowds they’ve estimated at up
to 85,000. Hotel and motel rooms book up
for miles around months in advance.
Of those rooms, 130 are in the hotel at Paris
Landing State Park on Kentucky Lake, Henry
County’s eastern boundary. The 841-acre recreational complex boasts 1.25 million visitors
a year. Many come to fish a lake famous for
bass, and many more are expected in coming
years as the park plays host to more and bigger
bass fishing tournaments.
These are being made possible by state
sales-tax rebates, targeted to tourist areas and
marked for tourism promotion. After starting the givebacks in the Smoky Mountain
region, Tennessee extended them in 2006 to
counties bordering Kentucky Lake. Henry
became the first new county to qualify.
For two years in a row now, the county has
received a $1 million refund. About half of
it has gone to develop a new tourism plan,
expand tourism marketing, improve the
Paris Landing marina and promote attractions and events like the fish fry and the
Fourth of July fireworks on the lake. The rest
has gone to promote fishing tournaments for
crappie, catfish and, especially, bass. Holder
says the investment has already lifted the
county into the tournaments’ “regional big
leagues” and, based on his research, holds
promise of “a return of 20-, 30-, 40-to-one
on the dollar.”

Susan C. Thomson is a freelance writer.
22 The Regional Economist | October 2008

e x c h a n g e

facturing, services, real estate, banking and agriculture. The contacts are
promised anonymity in return for accurate, honest and current information. Staff members at one of the 12 Federal Reserve banks compile the
district reports into the national summary of economic conditions. The
Beige Book is released two weeks prior to every scheduled meeting of the
Federal Open Market Committee. (See www.federalreserve.gov/FOMC/
BeigeBook/2008.)

Dear Editor:
The basic premise of the article is that increased ethanol production has
sequestered corn supplies away from food and feed production; thus, it is
bad. Interestingly enough, corn PRODUCTION increased right along with
increased ethanol production; so on a net basis, there was no impact on
the availability of corn for food or feed. One only has to look at the Federal
Reserve Bank’s failure to strengthen the dollar, the global dietary change
that is demanding more protein (thus increasing demand for grain and
other commodities) and the exponential increase in oil prices to see that a
near perfect storm has developed to create the atmosphere of near panic.
Release crude from the Strategic Petroleum Reserve and bump up the Fed
discount rate by 1 percent, and you most likely would see $50 a barrel
come out of the crude oil price, almost overnight.
Terry Ruse, a consultant in Raleigh, N.C.
A New Report from the St. Louis Fed
Now available online or in print is Earnings Inequality within the United
States, 2000 to 2006. The report was written by Christopher Wheeler, until
recently a St. Louis Fed economist. To read online, go to www.stlouisfed.org/
community/assets/pdf/income_inequality_report.pdf. To receive a paper
copy in the mail, call the Fed’s Cynthia Davis at 314-444-8761. You can also
e-mail her at communitydevelopment@stls.frb.org.

Although the Federal Reserve relies, for the most part, on formal data
and sophisticated statistical methods for conducting monetary policy,

Fed Flash Poll Results

anecdotal information—such as that collected for the Beige Book—is

Whenever a new issue of The Regional Economist is published, a new poll is
posted on the Bank’s home page, www.stlouisfed.org. The poll question is
always pegged to an article in that quarter’s issue. Here are the results of
the poll that went with the July issue. The question stemmed from the article
“Ethanol: Economic Gain or Drain?”

also used to confirm or to help understand trends that arise from the formal data. Formal statistics, such as the series on Gross Domestic Product
(GDP) and the Consumer Price Index, do not provide a perfect picture of
the economy, and informal or anecdotal information yields insight into
the formal statistics to help fill the gaps. For example, except for financial

What should be the federal government’s
roLe in ethanol production and use?

indicators, most formal data are released with a lag and, therefore, do not
necessarily present an up-to-date picture of the economy. The anecdotal
information collected from the people who are actually making day-to-

34%
2%

day business decisions provides timely information about some of the
trends in the data that may be occurring.
In my own research, I have used econometric techniques to analyze
the predictive power of the Beige Book. My co-authors and I found that
the Beige Book’s national summary and the district reports improve pre-

Phase out all subsidies and other tax breaks. Let the
markets take charge.

48%
15%

Do whatever it takes—taxpayer subsidies, mandates,
government ownership of plants, etc.
Encourage innovation by subsidizing alternatives to
corn-based ethanol.

1%
1,829 responses as of 9/15/2008

Force the oil companies to subsidize additional R&D
spending on ethanol.
Lift tariffs on imports of ethanol to lower price for consumers.

dictions of GDP and aggregate and regional employment.
At the Federal Reserve Bank of St. Louis, the Center for Regional
Economics—8th District (CRE8) has taken this analysis to a new level.
In March, the St. Louis Fed started publishing a quarterly summary of
economic conditions for each of the District’s four zones, which are
centered around St. Louis, Memphis, Louisville and Little Rock. These
reports, dubbed Burgundy Books, provide the same type of anecdotal
information as the Beige Book, but the analysis is broken down to give
a snapshot of local economic conditions. The Burgundy Books are available on the St. Louis Fed web site at http://research.stlouisfed.org/
regecon/district.html.

Submit your question in a letter to the editor. (See Page 2.)
One question will be answered by the appropriate economist in each issue.

This issue’s poll question:

What would you do about the growing income
gap in the United States?
1. Keep my mouth shut.
2. Shout from the mountaintop that income inequality has benefits and shows that
our economy is working.
3. Cut tax breaks, subsidies and the like for those on both sides of the gap to allow
the natural state of income inequality to surface.
4. Invest more in education and job training to lift the income of poor people at the
expense of those with higher incomes.
5. Pass even more legislation to bring us closer to equal distribution of income.
To vote, got to www.stlouisfed.org. Anyone can vote, but please do so only once.
(This is not a scientific poll.)

The Regional Economist | www.stlouisfed.org 23

ask AN economist

Letters to the Editor

This is in response to July’s article titled “Ethanol: Economic Gain or
Drain?” To read other letters, go to www.stlouisfed.org/publications/re.

Susan C. Thomson is a freelance writer.
22 The Regional Economist | October 2008

e x c h a n g e

Although the Federal Reserve relies, for the most part, on formal data
and sophisticated statistical methods for conducting monetary policy,

Fed Flash Poll Results

anecdotal information—such as that collected for the Beige Book—is

What should be the federal government’s
roLe in ethanol production and use?

34%
2%

Phase out all subsidies and other tax breaks. Let the
markets take charge.

48%
15%

Do whatever it takes—taxpayer subsidies, mandates,
government ownership of plants, etc.
Encourage innovation by subsidizing alternatives to
corn-based ethanol.

1%
1,829 responses as of 9/15/2008

Force the oil companies to subsidize additional R&D
spending on ethanol.
Lift tariffs on imports of ethanol to lower price for consumers.

Submit your question in a letter to the editor. (See Page 2.)
One question will be answered by the appropriate economist in each issue.

This issue’s poll question:

The Regional Economist | www.stlouisfed.org 23

n e x t

i s s u e

Mountains of Debt
Await New Leaders

The federal budget deficit for
fiscal year 2008 is expected to
be one of the largest on
record, and the outlook for
2009 is even worse. Mean-

Local Business Cycles and Crime Rates

while, the public debt continues to accumulate. As a new

Tom Garrett, a St. Louis Fed economist, has studied the influence

president and Congress take
office, how will the deficit
and debt affect public policy?
What options are available
to reduce the red ink? In the
January issue of The Regional
Economist, read about some
of the economic implications

of local business cycles on crime rates in 23 major cities, including
the four main cities in the St. Louis Fed’s region. He will present
his findings Oct. 29 in St. Louis, Nov. 20 in Little Rock, Dec. 3 in
Louisville and Dec. 9 in Memphis. Each program will be free and
open to the public. For registration and more information, go to

of the federal budget.
www.stlouisfed.org/community/conferences.html.

PRSRT STD

Federal Reserve Bank of St. Louis
P.O. Box 442
St. Louis, Mo 63166

US POSTAGE
PAID

ST LOUIS MO

PERMIT NO 444

economy at a

The Regional

glance

Economist

OCTOBER 2008

8
7
6
5
4
3
2
1
0
–1
–2

6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5

CPI–All Items

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

20-Year

3.00

2.8

2.75

2.6

2.50

2.4

PERCENT

10-Year

2.25

4/30/08

Sept. 5

1.6

8/5/08

9/12/08

Sept. 08 Oct. 08 Nov. 08 Dec. 08 Jan. 09 Feb. 09

I N T E R E S T R AT E S

6.5

6.0

5.0
4.0

5.5

PERCENT

6/25/08

CONTRACT MONTHS

C I V I L I A N U N E M P L O Y M E N T R AT E

5.0

10-Year Treasury

3.0
Fed Funds Target

2.0
1-Year Treasury

4.5

1.0
Aug.

0.0

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

U . S . A G R I C U LT U R A L T R A D E

Aug.

170

FA R M I N G C A S H R E C E I P T S
Trade Balance

Imports

Exports

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

Crops

160

BILLIONS OF DOLLARS

Aug.

2.2

NOTE: Weekly data.

40
30
20
10
0

1.8

1.75

4.0

2.0

2.00

1.50

All Items Less Food and Energy

RATES ON FEDERAL FUNDS FUTURES ON SELECTED DATES
3.0

5-Year

NOTE: Percent change from a year earlier.

I N F L AT I O N - I N D E X E D T R E A S U RY Y I E L D S P R E A D S
3.25

VOL. 16, NO. 4

CONSUMER PRICE INDEX

PERCENT

REAL GDP GROWTH

Livestock

150
140
130
120
110
100

June

NOTE: Data are aggregated over the past 12 months.

May

NOTE: Data are aggregated over the past 12 months.

U.S. CROP AND LIVESTOCK PRICES / INDEX 1990-92=100
195
Crops

Livestock

175
155
135
115
95
75

Aug.

commercial bank performance ratios
U . S . B an k s by A sset S i z e / second Q U A R T E R 2 0 0 8
All

$100 million$300 million

Less than
$300 million

$300 million$1 billion

Less than
$1 billion

$1 billion$15 billion

Less than
$15 billion

More than
$15 billion

Return on Average Assets*

0.51

0.75

0.70

0.75

0.72

0.51

0.61

0.48

Net Interest Margin*

3.31

3.91

3.93

3.85

3.89

3.79

3.84

3.15

Nonperforming Loan Ratio

1.90

1.70

1.64

1.92

1.79

2.05

1.92

1.88

Loan Loss Reserve Ratio

1.79

1.31

1.32

1.37

1.34

1.53

1.44

1.93

R E T U R N O N AV E R A G E A S S E T S *
0.70

NET INTEREST MARGIN*

1.03
1.09

Indiana
1.10
1.11

1.00

1.25

1.50

PERCENT

N O N P E R F O R M I N G L O A N R AT I O

0.49

1.5

2.0

2.5

1.70

4.5

1.27
1.25
1.19
1.16

Kentucky

1.90

1.24
1.21

Missouri
3.16

.00 .35 .70 1.05 1.40 1.75 2.10 2.45 2.80 3.15 3.50

1.37

Tennessee
PERCENT

1.51

1.23
1.23

Mississippi

Second Quarter 2008

4.0

1.39
1.37

Indiana

1.34

1.09

3.5

1.23

Illinois

0.79

0.80

3.0

Arkansas

1.26
1.05

0.94

1.0

Eighth District

1.54

0.99

3.88

3.22
3.23

L O A N L O S S R E S E RV E R AT I O

1.83

1.16

3.60

Tennessee

.75

0.94

3.97
3.98

Missouri

1.08

.50

3.96
3.87

Mississippi

0.65

.25

3.87

3.58

Kentucky

1.02
1.12

.00

3.62
3.53

Illinois

0.89
0.94

0.07

3.95
4.05

Arkansas

0.97
1.01

0.50

3.69
3.75

Eighth District

0.99

0.97

.00 .25

.50

1.60
2.02

.75 1.00 1.25 1.50 1.75 2.00 2.25

Second 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

For additional banking and regional data, visit our web site at:
www.reserach.stlouis.org/fred/data/regional.html.

regional economic indicators
nonfarm employment growth * / second Q U A R T E R 2 0 0 8
year-over-year percent changE
United
States

Eighth
District

Arkansas

Illinois

Total Nonagricultural

0.1%

0.0%

Natural Resources/Mining

5.5

1.6

11.6

–3.2

Construction

–5.6

–2.3

–2.7

Manufacturing

–2.5

–2.4

Trade/Transportation/Utilities

–0.6

Information
Financial Activities

0.2%

Indiana

0.1%

Kentucky

–0.1%

Mississippi

Missouri

Tennessee

0.4%

0.3%

–0.1%

–0.2%

1.4

0.6

1.0

–0.6

#NA

–3.6

–2.6

1.6

0.5

–1.0

#NA

–3.6

–1.0

–2.5

–3.1

–3.6

–3.7

–2.4

0.3

–0.2

0.8

–0.5

1.3

0.5

0.0

0.1

–1.0

0.2

0.5

0.1

2.1

–1.0

–1.3

1.1

–0.8

–1.1

–0.8

0.9

–1.1

–0.5

1.0

–0.6

–1.2

–1.6

Professional & Business Services

0.3

0.4

1.8

0.8

–0.6

–0.2

1.8

0.7

–0.7

Educational & Health Services

3.0

1.8

1.9

1.7

2.5

0.0

2.2

1.6

2.4

Leisure & Hospitality

1.9

–0.2

1.7

–0.4

–0.3

0.4

0.7

–0.8

–0.2

Other Services

0.6

–0.3

1.2

–0.7

0.5

–0.2

1.6

–0.9

–1.2

Government

1.2

1.0

0.2

2.1

2.8

1.0

1.1

0.4

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

U nemployment R ates

district real gross domestic product by industry–2007
United states....$11,468 billion

II/2008

I/2008

United States

5.3%

4.9%

4.5%

Arkansas

4.9

5.2

5.4

Illinois

6.2

5.5

4.9

Indiana

5.3

4.7

4.5

Kentucky

6.0

5.4

5.5

Mississippi

6.6

6.0

6.3

Missouri

5.6

5.5

4.8

Tennessee

6.1

5.2

4.6

| district total....$1,394 billion

chained 2000 dollars

II/2007

Information 5.0%

Financial Activities

17.2%

Trade
Transportation
Utilities

21.2%

Professional and
Business Services

11.2%

Education and
Health Services

7.9%

18.0%
Manufacturing

10.0%

Leisure and
Hospitality 3.5%

Construction 2.9%

Other Services 2.2%

Natural Resources
and Mining 1.6%

Government

H ousing permits / S E C O N D quarter

REAL PERSONAL INCOME* / FIRST QUARTER

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

year-over-year percent change

–32.1
–25.5
–15.2

–26.0
–47.1

19.5

–60

–40
2008

–20

2007

All data are seasonally adjusted unless otherwise noted.

PERCENT

2.9

1.5

Tennessee

–17.6

2.9
2.1

Missouri

–25.7
–41.1

3.4
1.7

Mississippi

–40.0

2.6

1.0

Kentucky

–3.1

–40.7

3.3

0.7

Indiana

–17.3

4.0

1.5

Illinois

–31.9

3.9
1.9

Arkansas

–26.4
–34.0

1.4

United States

–2

–1
2008

3.3

2007

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

Full text of Regional Economist : A Quarterly Review of Business and Economic Conditions : October 2008, Vol. 16, No. 4

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