Full text of Review (Federal Reserve Bank of St. Louis) : April 1987

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Review
Vol. 69, No. 4




April 1987

5 A Review o f th e Eighth D istrict’s
A gricultural E co n o m y in 1986
16 A Review o f th e Eighth D istrict’s
Ranking E c o n o m y in 1986
22 A Review o f th e Eighth D istrict’s
B usiness E co n o m y in 1986

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Fed eral R eserve Bank of St. Louis
R eview
April 1 9 8 7

In This Issue . . .




Broadly defined, agriculture accounts for approximately 20 percent of the
nation’s GNP. The im portance of agriculture is particularly strong in the Eighth
Federal Reserve District with its diverse mix of agricultural industries including
the production of farm inputs, food processing, agricultural transportation, farm
lenders and, of course, farmers. In the first article in this Review, Kenneth C.
Carraro reviews agricultural trends of 1986 as they affected farmers and farm
lenders in the District.
According to Carraro, the District experienced widely varying w eather condi­
tions that resulted in record crop yields in some regions but below-average yields
in others. One significant agricultural development is the expanding role of the
government in direct paym ents to farmers and reduced farm output. Livestock
producers enjoyed higher prices and lower input costs for the year. Agricultural
banks reversed a recent trend and posted improved profits and lower levels of
delinquent loans. While local Farm Credit System banks showed sm aller losses in
1986 than in 1985, farm loan quality continued to deteriorate.
The health of our nation’s banking industry has received increased attention
during this decade. Deregulation has challenged bank m anagem ent to run their
organizations with greater effectiveness and efficiency. Heavy em phasis on the
quality of earnings, margin stability, cost containm ent and stronger capital
positions have created a new playing field for the financial services industry.
In the second article in this Review, Lynn M. Barry exam ines the health and
recent perform ance of com m ercial banks in the Eighth Federal Reserve District.
Her analysis provides useful information on the financial condition, com pliance
with banking regulations and statutes, and operating soundness of the region’s
com m ercial banking industry. Barry concludes that, in general, Eighth District
banks outperform ed their peers across the nation in 1986. However, while most
District institutions are profitable and in good financial condition, agricultural
and other credit problem s continue to plague som e of the region’s banks.
In the third article in this issue, Thom as B. Mandelbaum discusses the magni­
tude and nature of last year's growth in the D istrict’s business econom y in the
context of the current recovery period. After an overview of broad trends of the
District econom y since 1982, the article highlights differences among the m ajor
industrial sectors of the regional economy, the states that dom inate the District
economy, and the District's four largest m etropolitan areas. Projections of eco ­
nom ic growth in District states by state universities and agencies provide a view of
future trends.
Mandelbaum describes 1986 as a year of m oderate growth for the District’s
economy, the second year of m oderate growth following a sharp expansion in
1984. The author found considerable variation, however, in,the perform ance of
the District's sectors and states. The analysis shows that T en n essee’s recent
econom ic growth leads the District states in m ost categories, while construction,
encouraged by declining interest rates, was the m ost rapidly growing regional
sector in 1986. Projections of the pace of regional growth in 1987 suggested that it
will be similar to that of the last two years, making 1987 the fifth successive year of
expansion for the Eighth District economy.
3

FEDERAL RESERVE BANK OF ST. LOUIS

The Eighth Federal Reserve District


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4
Federal Reserve Bank of St. Louis

APRIL 1987

APRIL 1987

FEDERAL RESERVE BANK OF ST. LOUIS

A Review of the Eighth D istrict’s
Agricultural Econom y in 1986
Kenneth C. Carraro

A
RICULTURE is one of the m ost im portant indus­
tries in the Eighth Federal Reserve District. The Dis­
trict is hom e to im portant food and feed processing
businesses in Arkansas and the St. Louis area, as well
as the extensive agricultural transportation networks
of the Mississippi, Missouri, Ohio, Arkansas and
Tennessee-Tom bigbee waterways. Ranging from farmlevel production through farm inputs and com m odity
processing up to final consum ption, the agricultural
sector accounts for more than 20 percent of the na­
tion’s gross national product.' Because of the high
concentration of agriculturally related business, agri­
culture likely accounts for an even higher percentage
of total District output.2
Eighth District agriculture consists of an extremely
diverse mix of crops, including such traditionally
“southern" crops as tobacco, rice and cotton as well as
the C om Belt crops of soybeans and com . Livestock
production ranges from racehorses in Kentucky and
the nation’s largest broiler industry in Arkansas to the

Kenneth C. Carraro is an economist at the Federal Reserve Bank of St.
Louis. Nancy D. Juen provided research assistance.

traditional hog and cattle operations throughout the
entire region. This article provides an overview of
District agricultural highlights in 1986.3

C R O P H IG H L IG H TS
Production
Since a veiy high num ber of farmers participated in
government price support programs, which mandate
acreage reduction, crop production dropped signifi­
cantly in the District. The num ber of crop-acres har­
vested in the four states that make up the bulk of the
D istrict’s econom y — Arkansas, Kentucky, Missouri
and Tennessee — fell from 32.3 million acres in 1985 to
30.8 million acres in 1986, a drop of 4.7 percent. This
decline followed a 5.5 percent decline in 1985.
W eather conditions varied widely across the Dis­
trict. Tennessee, Kentucky and Arkansas suffered from
particularly dry conditions early and midway through
the growing season. This dryness was a by-product of
the severe drought that was centered in the Carolinas
and Georgia. While late season rains and favorable
harvest conditions allowed m ajor crops to recover to

' Economic Report of the President, p. 148.
2The Eighth Federal Reserve District officially comprises all of Arkan­
sas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and
Tennessee. In most cases, this article uses data for the entire states
of Arkansas, Kentucky, Missouri and Tennessee to represent the
District. Due to the availability of comprehensive bank financial data,
the entire District is referred to in the section covering agricultural
lenders.




3Data for crop and livestock production were derived from the annual
reports of the four states’ agricultural statistics services. Price data
were obtained from the USDA's Agricultural Outlook publication
while farm income and assets data are from the USDA’s Economic
Indicators of the Farm Sector. Sources of farm lender data are
footnoted in the appropriate section.

5

FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1987

Table 1
Crop Yield Data1
ARKANSAS
1986
Cotton

KENTUCKY

1985

81 to 85
Average

1985

Corn

92

102

Soybeans

32

34

28

2081

2300

2161

33

34

37

605

767

622

5300

5200

4578

62

72

63

Tobacco

Soybeans

21

26.5

23

Wheat

Wheat

41

32

39

Rice
Sorghum

MISSOURI
1986

1985

81 to 85
Average

Corn

116

110

90

591

653

535

Soybeans
Wheat

90

TENNESSEE

Cotton
Sorghum

81 to 85
Average

1986

1986
Corn
Cotton

81

83

73

Soybeans

33.5

34.5

27

Tobacco

33

39

39

1985

81 to 85
Average

74

98

83

573

600

514

25

31

25

1720

2065

1991

'Crop yields are generally expressed as a unit of quantity per acre. Soybeans, sorghum, wheat and corn
yields are measured in bushels per acre, while rice, cotton and tobacco yields are measured in pounds
per acre.
SOURCE: Agricultural Statistics Service in each of the four states.

near their five-year average yields, the lower acreage
resulted in overall reduced crop production in the
District. Table 1 provides yield data for m ajor crops in
the four-state region for 1986, 1985 and the five-year
average yields from 1981 to 1985.

b en efited m ost from th e la te -se a so n favorable
weather, were above their five-year average, while
m ost other crops were close to their five-year average.

In Arkansas, rice and w heat yields surpassed both
their 1985 yields and their yield patterns of the past
five years. Total rice production increased by .9 per­
cent in 1986. Yields of other m ajor crops in the state,
such as soybeans, sorghum and cotton, were below
their 1985 levels but near the average yields over the
past five years. Total soybean production in the state
was 29.3 percent lower in 1986 than in 1985 because of
lower yields and sm aller acreage.

Of the four states, Tennessee was the m ost severely
affected by the year’s diy weather. Yields of all m ajor
crops were below their 1985 levels. Cotton yields,
however, were above the average of the past five years.
The soybean yield was approximately at the longerterm average for the state while corn, tobacco and
m ost other crop yields were below their five-year aver­
ages. Soybean production in 1986 was 17.1 percent
lower than in 1985, while corn production was 28.2
percent lower than 1985 due to sm aller yields and
reduced acreage for both crops.

Yields of all m ajor crops in Kentucky were below the
yields of 1985 but were near the five-year average
yields. Total production of the state’s most valuable
crop, tobacco, was down 22.7 percent because of pro­
duction controls and dry weather. The federal price
support program for tobacco, w hich controls its pro­
duction, was primarily responsible for a 14.6 percent
decline in harvested acreage, while dry w eather
caused below-average yields. Soybean yields, which

Missouri crop farmers benefited from the m ost fa­
vorable w eather in the District. All crop yields in 1986,
except for wheat, were above their five-year averages.
The 1986 corn yield of 116 bushels per acre was signifi­
cantly higher than the previous record set in 1985.
Total corn production was 2.9 percent higher. Sor­
ghum yields were slightly below their record yields of
1985. Although 200,000 acres of soybeans were lost to
late-season flooding, soybean yields were also at near-


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Federal Reserve Bank of St. Louis

APRIL 1987

FEDERAL RESERVE BANK OF ST. LOUIS

C h a rt 1

Crop Price C o m p ariso n s
Dollars per unit

Dollars per unit
10

d Z l 1 980 to 85 a v e r a g e

10

■ 11986
■

Feb.

1 987

8

Wheat
$/bu.

record levels in the state. Total soybean production
was only 1.6 percent sm aller in 1986 than 1985.

Soybeans
$ /bu.

Cotton
$/lb s.

Prices of food and feed grains fell sharply, despite
the lower average levels of output nationally. Soybean
and other oilseed crop prices were also below 1985
levels.

Sharply lower levels of price support loans provided
by the discretionary authority of the 1985 Farm Bill
were primarily responsible for the crop price declines.
The loan levels usually provide a lower bound for
com m odity prices. Chart 2 shows how the market
price for corn has fallen as the loan support price was
lowered sharply over the past two years. Food grain
prices fell 18.0 percent from 1985 levels; feed grain
prices were down 21.3 percent.

Chart 1, w hich com pares the prices for m ajor crops
in the Eighth District, shows that prices in 1986 were
below the average prices over the 1980-85 period.
Moreover, the m ost recent crop prices (February 1987)
in d icate that the p attern of falling p rices has
continued.

For some crops, such as com and wheat, market
prices have declined to levels well below their price
support levels. Some analysts have attributed this to
the governm ent’s use of generic com m odity certifi­
cates in lieu of direct cash payments to farmers to
reduce stocks of government-owned com m odities

Prices




7

FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1987

Chart 2

Corn: Target Price, Loan Rate a n d M a rk e t Price
Dollars per bushel

Dollars per bushel

Q. Set by the Secr et ary of Agriculture within man da t ed limits.
Source: U.S. Department of Agricul ture. See Economic Report of the President 1987, p .154.

(see shaded box on opposite page for more informa­
tion). The certificates have a stated value and allow the
holder to receive com m odities stored by the Com­
modity Credit Corporation (CCC). The com m odities
then may be sold at prevailing m arket prices. The
release of government stockpiles tends to increase
market supply and reduce market prices.

Production

Soybean prices also were below 1985 levels despite
lower total production in 1986 primarily because of
the large stocks that have been accum ulated in the
United States. As chart 3 indicates, while soybean
stocks held elsew here in the world rem ained level
over the last eight years, U.S. stocks of soybeans have
grown sharply since 1983 w hen a drought and the

District cattle and calf production, w hich declined
in both 1984 and 1985, bounced back in 1986, in creas­
ing by 2.2 percent. Cattle and calf production in­
creased in Arkansas and Kentucky, while declining in
both M issouri and Tennessee. District hog produc­
tion, w hich also declined in 1984 and 1985, continued
its desceht, closing at 6.5 percent lower in 1986 than in


8


Paym ent-In-K ind (PIK) program red u ced stocks
sharply.

L IV E ST O C K H IG H L IG H TS

APRIL 1987

FEDERAL RESERVE BANK OF ST. LOUIS

Generic Commodity Certificates
In 1983, the United States Department of Agricul­
ture (USDA) authorized the Payment-In-Kind (PIK)
program to red u ce the m ounting surplus of
government-owned com m odities. Farm ers were
given surplus com m odities in exchange for large
reductions in crop acreage. Farm ers then were free
to use the grain as feed or sell it at the prevailing
market price. The 1985 Farm Act makes similar
provisions for government-owned com m odities to
be used in partial payment of price supports. Under
the provisions of the Farm Act, the USDA issues cer­
tificates for a stated dollar value that can be ex­
changed for government owned com m odities.
The certificates can be redeem ed for any of the
num erous com m odities that the government has
acquired through the Commodity Credit Corpora­
tion, therefore the nam e “generic certificates.” Cer­
tificate holders are able to sell the certificates. In

fact, the certificates have becom e somewhat of a
com m odity of their own right. The M erchants’ Ex­
change of St. Louis, for example, has created a
market for the certificates. At one point in 1 9 8 6 , cer­
tificates sold at a premium of 30 percent over their
face value.
One im portant effect of the certificates has been
to increase the supply of com m odities and reduce
market prices. This has occurred because com ­
m odities that otherwise would not be available to
the market under the provisions of the government
storage programs, are being redeem ed by certificate
holders and sold on the market. The m echanics of
the generic certificate program have given farmers a
d e fa c t o marketing loan price support, w hich allows
them to receive a supported price for their com ­
modities and then sell them at world market prices.

C h a rt 3

Soybean Carryover Stocks
M i l l i o n s o f me t r i c t ons
24

U.S. stock

M i l l i on s of met ric t o n s

24

Rest of world stock
20

20

16

16

12

12




FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1987

C h a rt 4

Livestock Price Comparisons
Dollars per pound

Dollars per pound

1980 to 85 average

1985. Missouri, the m ost im portant hog-producing
state in the District, showed a decline of 10.9 percent
from 1,234 million pounds in 1985 to 1,099 million
pounds in 1986.
Poultiy production continued to grow, especially in
Arkansas, the nation’s leading producer of broilers.
Broiler production accounts for over 25 percent of all
farm cash receipts in Arkansas. Turkey production in
Missouri also has exhibited strong growth over the
past two years.

Prices
Livestock p rices rem ain ed below 1985 levels
through the first half of 1986, but price hikes during
the second half boosted the price index of meat ani­
mals up 2.1 percent in 1986. As chart 4 shows, over a

10


longer-term perspective, all m ajor livestock groups
except beef cattle registered prices in 1986 that were
higher than the average price over the 1980-85 period.
In addition, both beef cattle and hog prices in early
1987 have rem ained near or above their 1986 average
levels.

FARM FINANCES
Nationally, total net farm incom e has been esti­
mated at $33 billion to $37 billion in 1986, up from
$30.5 billion in 1985. Sharply lower production costs
are responsible for the increase. Net farm incom e is
forecast at the same level for 1987. Chart 5 shows the
relationship betw een the growth of District net farm
incom e and national net farm incom e growth from
1977 to 1985. Although 1986 net farm incom e data for

APRIL 1987

FEDERAL RESERVE BANK OF ST. LOUIS

C h a rt 5

N et Farm Income G row th

1977

78

79

80

81

82

83

84

1985

In 1985, farmers in the four-state District region
received payments of $626 million. This figure repre­

sented 20.1 percent of net farm incom e for the year.
Government paym ents to District farmers were un­
doubtedly even larger in 1986, for severed reasons.
First, price support loan levels were lowered, while
target prices were unchanged. The wider gap between
target and support prices caused a larger proportion
of crop payments received by farmers to com e from
direct government payments. Second, under a m arket­
ing loan program for rice and cotton, w hich are m ajor
crops in Arkansas, Missouri and Tennessee, farmers
repaid their price support loans at the lower world
com m odity price rather than at the higher price they
received for the original crop loan. This, of course,
implicitly allowed farmers to keep a portion of their
original CCC loan as a direct support payment.

4When net farm income data are adjusted for inflation, it becomes
apparent that farm income has been declining since World War II,
with the exception of the early 1970s. See Belongia (1986) for a
detailed examination of the long-term decline in the farm sector.

Meanwhile, farm production expenses dropped for
the second consecutive year in 1986. Lower levels of
farm debt, lower interest rates on such debt and re­
duced expenses for production inputs contributed to
the reduction. The ch ief areas of input price declines

individual states will not be available until this fall, the
close relationship betw een changes in national and
District farm incom e suggests that District net farm
incom e also rose in 1986 and will be unchanged in
1987,4
Government paym ents accounted for a growing
share of farm incom e both nationally and Districtwide. Nationally, government paym ents of $12 billion
represented approxim ately 34 percent of total net
farm incom e in 1986; they are expected to grow to $16
billion this year, almost half of projected net farm
incom e.




11

FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1987

C h a rt 6

Total Farm Assets
A r k a ns a s, K e n t u c k y , Missouri and Tennessee

were petroleum (used for fuel, fertilizers and chem i­
cals) and feed grains (used for animal feed).
As chart 6 shows, the value of totcil farm assets in the
four-state region of the District has been declining
steadily since 1981. In 1986, land Values in the District
continued to decline in Arkansas, Kentucky and Mis­
souri, but increased in Tennessee. Table 2 indicates
that, of the four-state region, Arkansas experienced
the largest land value decline in 1986, while M issouri
had the largest decline since the 1981-82 peak.

FARM L E N D E R S
The overall volume of farm loans outstanding in the
District continued to decline in 1986. This secular

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Federal Reserve Bank of St. Louis

decline is associated with lower input costs, falling
land values, increased government payments, and the
weakened financial position of many farm borrowers.
The two m ost im portant sources of credit for
farmers in the District are agricultural banks and the
Farm Credit System (FCS).5 The volume of farm loans
outstanding at District agricultural banks increased by
Agricultural banks are considered to be commercial banks with
above-average percentages of farm loans. At the end of 1986,
agricultural banks were those with more than 16 percent of their total
loans in farm loans. All bank data are derived from banks’ end-ofyear Reports of Conditions and Income, which FDIC-insured banks
must file. The FCS has offices in St. Louis and in Louisville. The St.
Louis District covers the entire states of Arkansas, Illinois and Mis­
souri. The Louisville District includes Indiana, Kentucky, Ohio and
Tennessee.

APRIL 1987

FEDERAL RESERVE BANK OF ST. LOUIS

banks, while up sharply in 1985, declined slightly in
1986.

Table 2
District Farmland Values
February 1987
($/acre)

Change from
February 1986

Change from
peak value1

Arkansas

$ 634

-1 0 .1 %

-4 2 .2 %

Kentucky

791

-

9.1

-2 5 .2

552

-

8.9

Missouri
Tennessee

1,012

+ 2.0

-4 4 .2
-

5.4

'Land values peaked in Arkansas and Kentucky in 1982 and
peaked in Missouri and Tennessee in 1981.
SOURCE: Agricultural Statistics Service in each of the four
states.

.9 percent from 1985 but was 6.1 percent lower than in
1984. The slight increase at agricultural banks in 1986
can be attributed to the 13.1 percent growth in farm
loans secured by farm real estate.6
Total farm loans outstanding at the two FCS Dis­
tricts fell by 19.4 percent from 1985 and by 34.3 percent
from 1984, a m uch steeper drop than for most other
farm lenders. These declines in the share of farm debt
held by Farm Credit System lenders may be in­
fluenced by factors such as the higher interest rates
charged by FCS lenders relative to com m ercial banks
or concern on the part of FCS borrowers over the
possible loss of value of borrower stock.
According to preliminary data, the financial condi­
tion of agricultural banks in the District has begun to
improve. The delinquency rate on all loans at District
agricultural banks fell from 6.4 percent at the end of
1985 to 5.8 percent at the end of 1986. The delinquency
rate on agricultural loans fell from 6.6 percent of total
farm loans outstanding at the end of 1985 to 5.4 per­
cent at the end of 1986/ The proportions of total loans
and agricultural loans charged off at agricultural

6Melichar (1987) cites a Federal Reserve survey indicating that most
of the new farm loans secured by real estate have short maturities
and are for farm operating or other non-real-estate purposes. This
suggests that bankers may be demanding farmland as collateral for
operating and machinery loans.
T h e delinquency rate includes loans that are 30 days or more pastdue as well as nonaccrual loans. The agricultural loan delinquency
rate is calculated as delinquent agricultural loans over the sum of
farm non-real-estate loans and farm real-estate loans outstanding.
The delinquency rates on all loans and agricultural loans declined at
agricultural banks in each of the District states except Mississippi
where both rates increased slightly.




An additional indication of this improvement can be
found in the num ber of agricultural banks at which
the volume of past-due and nonaccrual loans exceeds
bank capital and loss reserves. Most banks that failed
in 1986 reported past-due and nonaccrual loans in
excess of the bank’s capital and reserves. The num ber
of agricultural banks in this position, w hich had been
steadily increasing for a num ber of years, peaked in
1985; by the end of that year, 17 agricultural banks in
the District were in this condition. Only 11 such Dis­
trict agricultural banks fell into this category in 1986.
Moreover, only three District agricultural banks failed
last year.
Profitability at District agricultural banks, as m ea­
sured by banks’ return on assets and return on equity,
improved in 1986 after stabilizing in 1985. Prior to 1981,
agricultural banks generally had enjoyed significantly
stronger earnings than similar-sized nonagricultural
banks. Since 1981, however, the earnings gap betw een
these kinds of banks first narrowed and then was
elim inated because of rising loan losses and provi­
sions to cover these loan losses at agricultural banks.
Chart 7 plots the profitability of nonagricultural banks
and sim ilar-sized agricultural banks.8
While agricultural banks have shown some im­
provement, problem s at the two Farm Credit Districts
in the area have continued to worsen. The rate of
nonaccrual and restructured loans at the two FCS
Districts com bined rose from 9.3 percent of all loans at
the end of 1985 to 14.3 percent at the end of 1986.9 The
com bined rate of loans charged off at the two Districts
rose from 1.8 percent to 2.5 over the same period.

T h is comparison was made by first calculating the average size and
standard deviation for agricultural banks. Banks were restricted to
those smaller than the average agricultural bank size plus one-half
standard deviation. For 1986, this size limit was $57.9 million in total
bank assets. Nonagricultural banks include banks with an agricul­
tural loan to total loan ratio of less than 5 percent.
9This rate is not strictly comparable to the delinquency rate for
commercial banks. It is calculated as the sum of nonaccrual and
restructured loans over total loans outstanding for the Federal Land
Banks, the Federal Intermediate Credit Banks and the Banks for
Cooperatives. In all cases, the amount of restructured loans are
extremely small relative to the nonaccrual loans. These data are
derived from the annual reports of the St. Louis and Louisville FCS
Districts. When more complete data from the Farm Credit Adminis­
tration’s Summary Report of Conditions and Performance are used,
the rate of nonperforming loans rose from 13.5 percent on Septem­
ber 30, 1985, to 24.6 percent one year later. Nonperforming loans
include nonaccrual and restructured loans plus “ other high-risk
loans."

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FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1987

C h a rt 7

District Bank Profitability
Return on Assets
ROA

ROA

Although loan chargeoffs increased in the District,
total net incom e improved at the local FCS lenders.
Losses at the Farm Credit Banks of St. Louis were $121
m illion in 1986, down from $254 million in 1985. Losses
at the Farm Credit Banks of Louisville fell from $294
million to $101 million over the same period. Nation­
ally, losses at the Farm Credit System were $1.9 billion
for all of 1986, down from the $2.7 billion loss in 1985.
While losses have decreased both nationally and
locally, the capital of the Federal Land Banks in both
St. Louis and Louisville has been reduced to the point
that their stock, w hich borrowers must purchase to
obtain a loan, has becom e impaired. This m eans that,
under generally accepted accounting principles, the
stock’s book value is less than the $5 full par value.
Currently, the stock is being redeem ed at full par value
thanks to the use of regulatory accounting principles
that were perm itted under the Farm Credit Act
Amendments passed by Congress in 1986.

14


Both the St. Louis and Louisville Farm Credit Banks
called upon the loss-sharing provisions of the Farm
Credit System to receive financial assistance from
other entities of the System in 1986. The Federal Land
Bank of Louisville received $140 m illion (net) from
other institutions, while the Louisville Federal Inter­
mediate Credit Bank and Bank for Cooperatives were
net contributors of financial assistance under the Sys­
tem ’s Bank Capital Preservation Agreement. The Fed­
eral Land Bank of St. Louis received $15.6 million in
financial assistance but contributed $18.4 m illion to
other institutions. The other two St. Louis FCS banks
were net contributors as well.

SUMMARY
District agricultural conditions in 1986 exhibited a
large degree of variability due to w eather conditions.
While record yields of some m ajor crops occurred in

FEDERAL RESERVE BANK OF ST. LOUIS

Missouri, Tennessee yields were below average due to
dry weather. In general, however, District-wide yields
were near their five-year trend levels.
Government farm policy had a m ajor effect on agri­
culture. In part because of government price support
programs that require acreage reductions, harvested
acreage fell by 4.7 percent in 1986 after falling 5.5
percent in 1985. Despite the reduced acreage, crop
surpluses continued to m ount causing crop prices to
fall. Falling crop prices in turn led to high levels of
direct government price support paym ents. Such pay­
m ents to District farmers were particularly high for
cotton and rice, the two crops supported by the gov­
ernm ent’s marketing loan program.
While crop producers were faced with falling m ar­
ket prices, livestock producers experienced steady or
rising prices and increasing profits due to lower feed
costs.
As was true for the nation, District net farm incom e
is predicted to increase from 1985. Farm debt contin­
ued to decrease in 1986 as a result of lower production
levels and lower input costs. Despite the low er debt
levels, farmers' debt-to-asset ratios have deteriorated
because of falling asset values.




APRIL 1987

During 1986, agricultural banks generally reversed a
five-year pattern of declining profitability and rising
delinquency rates. While the Farm Credit System had
smaller losses in 1986 than in 1985, loan delinquency
rates rose sharply and the two local Farm Credit
System Districts required financial assistance from
other Districts.

REFEREN CES
Belongla, Michael T. “The Farm Sector in the 1980s: Sudden Col­
lapse or Steady Downturn?" this Review (November 1986), pp.
17-25.
Economic Report of the President 1987.
Office, 1987).

(U.S. Government Printing

Farm Credit Administration. “ Summary Report of Condition and
Performance of the Farm Credit System,” Quarter Ending Sep­
tember 30, 1985 and 1986.
Melichar, Emanuel. “ Farm Credit Developments and the Financial
Condition of Agricultural Banks” a preliminary report for the Na­
tional Agricultural Credit Committee (Board of Governors of the
Federal Reserve System, March 16,1987).
U.S. Department of Agriculture. Economic Research Service, Agri­
cultural Outlook, various dates.
________ _ Economic Research Service, Economic Indicators of
the Farm Sector, various dates.

15

FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1987

A Review of the Eighth District’s
Banking Econom y in 1986
Lynn M. B arry

D

uring a year of continuing econom ic expansion,
banks in the Eighth Federal Reserve District showed
m oderate earnings improvement in 1 9 8 6 Reported
earnings rose at many District banks: profitable invest­
m ent decisions and lower interest rates, w hich re­
duced the cost of deposit liabilities, m ore than offset
loan losses. Though m ost institutions are profitable
and in good financial condition, agricultural and other
credit problem s continue to trouble som e District
banks.
Bank failures, while up sharply nationwide, de­
clined in the Eighth District. Nationally, 138 banks
insured by the Federal Deposit Insurance Corporation
(FDIC) failed in 1986, the largest num ber to fail since
the FDIC was formed in 1933. Five banks in the District
failed in 1986 com pared with six in 1985 — one na­
tional bank and four state banks not m em bers of the
Federal Reserve System.2 These five banks represent
less than 1 percent of the total num ber of banks in the
District and had com bined total assets of $72.7 million,
only 0.2 percent of all District bank assets.3
This article exam ines the overall condition of Eighth
District banks by assessing several m easures of bank

Lynn M. Barry is an economist at the Federal Reserve Bank of St.
Louis. Rosemarie Mueller provided research assistance.
'The Eighth Federal Reserve District consists of the following states
and parts of states:
Arkansas, entire state; Illinois, southern 44 counties; Indiana, south­
ern 24 counties; Kentucky, western 64 counties; Mississippi, north­
ern 39 counties; Missouri, eastern and southern 71 counties and the
City of St. Louis; Tennessee, western 21 counties.
20 f the five District commercial bank failures in 1986, three were
agricultural banks (banks with more than 25 percent of their total
loans to farm borrowers).
3See Carrara (1986/1987).


16


performance, including earnings, asset quality and
capital adequacy. An evaluation of these m easures
provides useful inform ation on the financial condi­
tion, com pliance with banking regulations and stat­
utes, and operating soundness of the regional banking
industry.

EARNINGS
The num ber of District banks with negative earnings
fell last year from 127 banks in 1985 to 113 (or from 9.2
percent to 8.5 percent of District banks) in 1986. A
notable improvement occurred in the sm allest bank
category (less than $25 million in assets), in w hich the
num ber of banks with negative net incom e declined
by seven.
Two key m easures of bank earnings and m anagerial
perform ance are the return on assets (ROA) ratio and
the return on equity (ROE) ratio. The ROA ratio, calcu ­
lated by dividing a bank’s net incom e after taxes by its
average assets, gauges how well a bank’s m anagem ent
is employing its assets. The ROE ratio, obtained by
dividing a bank’s net incom e by its equity capital,
indicates the return on the shareholders’ investm ent.4
District banks generally had higher returns on as­
sets and equity in 1986 than in the previous two years.
As table 1 indicates, Eighth District banks earned an
average 0.90 percent ROA and an 11.53 percent ROE in
1986, both up from their 1985 perform ance. The 1986
figures for District banks com pare favorably with the
national average ROA of 0.64 percent and ROE of 9.83
percent.

"Equity capital includes common and perpetual preferred stock, sur­
plus, undivided profits and capital reserves.

APRIL 1987

FEDERAL RESERVE BANK OF ST. LOUIS

Table 1

Table 2

Return on Average Assets and
Return on Equity____________

Net Interest Income as a Percent of
Average Assets1_____________________

12/1986
Return on
Average Assets
United States
Eighth District
< 25 million in assets
25-50
50-100
100-300
300 million-1 billion
> 1 billion
Return on Equity
United States
Eighth District
< 25 million in assets
25-50
50-100
100-300
300 million-1 billion
> 1 billion

12/1985

12/1984

0.64%
0.90
0.76
0.85
0.95
0.90
0!74
0.98

0.69%
0.84
0.70
0.80
0.96
0.97
0.54’
0.87

0.64%
0.84
0.68
0.81
0.92
0.96
0.90
0.72

9.83%
11.53
8.06
9.80
11.18
11.35
9.79
14.59

10.67%
10.88
7.63
9.29
11.45
12.49
7.08'
13.47

10.06%
10.93
7.37
9.36
11.30
12.17
12.18
11.55

'Reflects substantial loan losses that occurred when a nowdefunct government securities group was unable to honor the
obligations of a large commercial bank in Arkansas.
SOURCE: Federal Deposit Insurance Corporation, “ Consoli­
dated Reports of Condition and Income for Insured
Commercial Banks," 1984-86.

Increased profitability at District banks arose pri­
marily from both wider net interest margins and im ­
proved asset quality (which resulted in fewer chargeoffs). Net interest margin, roughly sim ilar to a
business’ sales margin, m easures the spread between
a bank’s interest incom e and interest expense. The
decline in interest rates during 1986 reduced debtservicing costs and increased the lending spread com ­
pared with the previous two years. As table 2 shows,
the average spread betw een interest incom e and ex­
pense as a percent of average assets is 4.05 percent in
the District, com pared with 3.77 percent in the nation.
Bank earnings in the District were boosted during
the past year as the largest banks continued to expand
their noninterest sources of incom e by pricing m ore of
their products explicitly. M ajor incom e sources in­
cluded fee incom e associated with deposit, trust and
mortgage services. Sm aller banks, however, have had
m uch slower growth of noninterest incom e. As table 3



United States
Eighth District
< 25 million in assets
25-50
50-100
100-300
300 million-1 billion
> 1 billion

12/1986

12/1985

12/1984

3.77%
4.05
4.31
4.19
4.24
4.13
4.11
3.74

3.76%
3.92
4.18
3.88
3.85
4.18
4.20
3.56

3.69%
3.95
4.23
4.10
4.07
4.10
4.00
3.49

'Interest income has been adjusted upward for the taxable equiva­
lence on tax-exempt state and local securities.
SOURCE: Federal Deposit Insurance Corporation, “ Consoli­
dated Reports of Condition and Income for Insured
Commercial Banks," 1984-86.

Table 3
Noninterest Income as a Percent of
Average Assets_________________
United States
Eighth District
< 25 million in assets
25-50
50-100
100-300
300 million-1 billion
> 1 billion

12/1986

12/1985

12/1984

1.27%
1.01
0.55
0.52
0.52
0.72
1.25
1.69

1.18%
0.94
0.55
0.52
0.53
0.74
1.14
1.63

1.08%
0.92
0.58
0.51
0.53
0.68
1.10
1.74

SOURCE: Federal Deposit Insurance Corporation, “ Consoli­
dated Reports of Condition and Income for Insured
Commercial Banks," 1984-86.

indicates, noninterest incom e relative to average as­
sets has rem ained essentially unchanged at District
banks with assets less than $100 million.

ASSET QUALITY
Asset quality is a prim aiy factor influencing the
banking industry’s earnings pattern. Concern among
regulators about the quality of bank assets has in­
creased in recent years, given its direct effect on bank
profitability.

17

FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1987

Table 4

Table 5

Net Loan Losses as a Percent of
Total Loans1_________________________

Nonperforming Loans as a Percent of
Total Loans

United States
Eighth District
< 25 million in assets
25-50
50-100
100-300
300 million-1 billion
> 1 billion

12/1986

12/1985

12/1984

0.93%
0.86
1.24
1.16
1.03
0.95
0.88
0.57

0.81%
0.89
1.51
1.38
1.09
0.72
0.78
0.59

0.72%
0.60
1.15
0.92
0.69
0.47
0.53
0.39

United States
Eighth District
< 25 million in assets
25-50
50-100
100-300
300 million-1 billion
> 1 billion

12/1986

12/1985

12/1984

2.77%
2.16
2.68
2.61
2.49
2.05
2.23
1.81

2.83%
2.50
3.26
3.05
2.67
2.11
2.68
2.19

3.05%
2.50
3.03
2.95
2.49
2.11
2.08
2.62

'Total loans and leases charged-off due to uncollectibility, less
amounts recovered on previous charge-offs.
SOURCE: Federal Deposit Insurance Corporation, "Consoli­
dated Reports of Condition and Income for Insured
Commercial Banks," 1984-86.

SOURCE: Federal Deposit Insurance Corporation, “ Consolidated Reports of Condition and Income for Insured
Commercial Banks,” 1984-86.

Changes in asset quality typically are m onitored by
two indicators. The ratio of net charge-offs to total
loans is a traditional m easure of loan quality, showing
the percentage of net loans (adjusted for recoveries)
actually w ritten off as losses.

toted loans was lower at year-end 1986 than one year
earlier for all size categories in the District except for
banks in the $100 m illion-$l bdlion asset range. Small
banks, those with assets less than $25 million, showed
a large decline during this period, with the charge-off
ratio falling from 1.51 percent to 1.24 percent. For the
largest banks in the Eighth District, the charge-off ratio
fell only slightly. Chart 1 com pares loss rates of differ­
ent loan types. As one can see from the chart, the loss
rate was highest for District banks’ agricultural loans,
with com m ercial loans a close second.

The second m easure of asset quality, the nonper­
forming loan rate, indicates the level of problem loans
as well as the potential for future loan losses. Problem
assets include the following com ponents: loans
greater than 89 days past due, nonaccrual loans and
renegotiated loans.
Since year-end 1982, all FDIC-insured com m ercial
banks have reported delinquencies (loans m ore than
30 days past due), nonaccrual and renegotiated loans,
and loan charge-offs on a quarterly basis. Nonaccrual
loans are those with scheduled paym ents due and
unpaid for m ore than 90 days, for w hich full paym ent
of interest or principal is unlikely. Nonaccrual loans
may also include loans that the bank decides to clas­
sify as nonaccrual (that is, the recent decisions by
m ajor banks with respect to Brazilian loans). Renegoti­
ated loans are loans that have been restructured to
provide a reduction of either interest or principal
because of a deterioration in the borrow er’s financial
position. The information now reported permits a
com prehensive analysis of the degree and breadth of a
bank’s loan quality problems.
As table 4 indicates, the ratio of net loan losses to
Digitized for
18FRASER


As table 5 shows, the nonperform ing loan rate de­
creased in the District during 1986, falling from 2.50
percent in 1985 to 2.16 percent in 1986. This pattern
was mirrored across all size categories of District
banks.
Because of deteriorating asset quality during the
past several years, banks in the Eighth District and the
nation have increased their allowance for loan losses
as a share of th e ir total loans outstanding. This action
has been taken as a precautionary m easure to absorb
expected future loan losses. Table 6 indicates that
medium-size banks, in particular, increased their loan
loss allowance accou nt in response to an acceleration
in their level of nonperform ing loans. As a percent of
total loans, Eighth District banks’ loan loss allowance
increased from 1.31 percent at year-end 1985 to 1.39
percent in 1986, while nationally this ratio rose from
1.42 percent to 1.62 percent.

APRIL 1987

FEDERAL RESERVE BANK OF ST. LOUIS

Chart 1

Loan Loss Ratios by Category
Eighth District

Dec. 84

D e c . 85

D e c . 86

CAPITAL ADEQUACY
Table 6

Allowance for Loan Losses as a Percent
of Total Loans
United States
Eighth District
< 25 million in assets
25-50
50-100
100-300
300 million-1 billion
> 1 billion

12/1986

12/1985

12/1984

1.62%
1.39
1.56
1.42
1.39
1.30
1.39
1.40

1.42%
1.31
1.59
1.26
1.22
1.19
1.35
1.41

1.24%
1.20
1.41
1.17
1.09
1.07
1.09
1.39

SOURCE: Federal Deposit Insurance Corporation, “ Consoli­
dated Reports of Condition and Income for Insured
Commercial Banks,’’ 1984-86.




Capital — the difference betw een a bank’s assets
and its liabilities — supports a bank’s operations and
provides a cushion for losses that may arise. Bank
capital traditionally has been seen as a way to protect
a bank and its creditors from failure. For a given
quality of assets, the lower the capital base, the greater
the risk of insolvency. The level of capital also serves to
m aintain public confidence in the soundness of indi­
vidual banks and the banking system as a whole.
The am ount of capital by itself does not necessarily
provide useful inform ation to regulators; capital must
be m easured relative to those balance sheet items
w hose fluctuations bank capital is intended to cush ­
ion. Regulators generally are concerned with the
amount of primary and total capital relative to some

19

APRIL 1987

FEDERAL RESERVE BANK OF ST. LOUIS

m easure of the bank's asset base.5 The regulatory
agencies do not assum e that a bank’s capital is ade­
quate simply because it m eets the m inim um capital
requirem ents. Banking organizations w hose opera­
tions involve higher than normal degrees of risk are
expected to hold additional capital. Areas that merit
particular attention in analyzing risk are the loan and
investment portfolios, the level of liquid assets in rela­
tion to total assets, the volume and nature of offbalance sheet risk exposure, the level and character of
intangible assets and the extent and nature of all
nonbanking activities.6 Federal banking regulators will
require specific banks to m eet higher capital ratios if
their assets are considered to be risky, that is, to have a
relatively high probability of significant decline in
value.7
Improvement in bank capital ratios in recent years
is apparent throughout the range of institutions. One
m ajor reason for the increased levels of capital has
been the adoption of capital adequacy guidelines by
the three federal agencies that regulate U.S. com m er­
cial banks: the Federal Deposit Insurance Corpora­
tion, the Federal Reserve System and the Office of the
Com ptroller of the Currency.8 In November 1983, Con­
gress enacted the International Lending Supervision
Act of 1983, w hich directed the federal banking agen­
cies to establish minim um levels of capital for banks.
As a result, these agencies have set m inim um stand­
ards of 5.5 percent primary capital to assets and 6.0

5The components of primary capital as reported in the FDIC Consoli­
dated Report of Condition and Income are: common stock, perpetual
preferred stock, surplus, undivided profits, contingency and other
capital reserve, qualifying mandatory convertible instruments, allow­
ance for loan and lease losses, and minority interests in consolidated
subsidiaries, less intangible assets excluding purchased mortgage
servicing rights. (For the purposes of this paper, only the goodwill
portion of intangible assets was deducted.) Secondary capital is
limited to 50 percent of primary capital and includes subordinated
notes and debentures, limited-life preferred stock and that portion of
mandatory convertible securities not included in primary capital.
Each bank’s secondary capital is added to its primary capital to
obtain the total capital level for regulatory purposes.
6Off-balance sheet activities are discussed most often in terms of loan
commitments, standby and commercial letters of credit, foreign
exchange contracts, financial futures and forward contracts and
interest rate or foreign currency swaps. These transactions all in­
volve contracts for the future purchase or sale of assets and include
relatively new activities for banks.
T h e Federal Reserve Board has developed a proposal for the adop­
tion of risk-based capital standards. The proposed guideline would
assign weights based on relative risk to assets and certain offbalance sheet items. The sum of these weighted asset values is the
weighted risk asset total against which actual primary capital would
be compared.
“See Gilbert, Stone and Trebing (1985).

Digitized20
for FRASER


Table 7
Total Capital Ratios
United States
Eighth District
< 25 million in assets
25-50
50-100
100-300
300 million-1 billion
> 1 billion

12/1986

12/1985

12/1984

8.18%
8.56
10.07
9.29
9.16
8.62
8.43
7.62

8.01%
8.47
9.90
9.25
9.00
8.50
8.54
7.21

7.52%
8.31
9.83
9.19
8.80
8.52
8.08
6.72

SOURCE: Federal Deposit Insurance Corporation, “ Consoli­
dated Reports of Condition and Income for Insured
Commercial Banks,” 1984-86.

percent total capital to assets. The m inim um capital
ratios are the same for all federally supervised banking
organizations regardless of size, type of charter or
mem bership in the Federal Reserve System.
As indicated in table 7, total capital ratios are well
above the minim um standards established by the
bank regulatory agencies both for banks in the Eighth
District and the banking industry as a whole. The
average total capital ratio (the sum of the individual
banks’ total capital divided by the sum of the individ­
ual banks’ total adjusted assets) was 8.56 percent for
Eighth District banks com pared with 8.18 percent for
all U.S. com m ercial banks. In 1986, total capital ratios
rose across all asset size ranges except those District
banks in the $300 million to $1 billion range. For banks
with assets greater than $1 billion, the average total
capital ratio rose from 7.21 percent in 1985 to 7.62
percent in 1986. As of D ecem ber 1986, approximately
1.6 percent of all District banks did not m eet the
minim um regulatory totcil capital standards, w hile for
the nation, slightly m ore than 3.8 percent of the com ­
m ercial banks had deficient total capital ratios.

SUMMARY
Overall, District com m ercial banks showed im ­
proved profitability in 1986, outperforming their peers
across the nation. District banks, in general, earned
higher returns on assets and equity than in the p re­
vious two years. Net interest margins also improved at
banks in the region.
Asset quality continues to be a m ajor factor in ­
fluencing the banking industry’s level of earnings.

APRIL 1987

FEDERAL RESERVE BANK OF ST. LOUIS

While the ratios of loan charge-offs and nonperform ­
ing loans to total loans declined in the District, banks
did, however, increase their allowance for loan losses
in order to absorb additional loan losses in the future.
A majority of Eighth District banks improved their
capital ratios during 1986 and are positioned well
above the m inim um standards established by bank
regulators. On the whole, District banks outperformed
the nation in term s of their capital adequacy position.

REFEREN CES
Barry, Lynn M. “ 1985 — Eighth District Bank Performance,” Bank­
ing and Finance — An Eighth District Perspective (Spring 1986).




Board of Govenors of the Federal Reserve System.
Capital Adequacy Guidelines, April 18, 1985.

Press Release,

Carraro, Kenneth C. “ Uneven Trends in Eighth District Bank Profit­
ability,” Banking and Finance — An Eighth District Perspective
(Spring 1985).
________ _ "Bank Failures in the 1980s — Another Perspective,”
Banking and Finance — An Eighth District Perspective (Winter
1986/1987).
Gilbert, R. Alton, Courtenay C. Stone, and Michael E. Trebing. “The
New Bank Capital Adequacy Standards,” this Review (May 1985).
Waldrop, Ross. “ Commercial Bank Performance in 1985,” Banking
and Economic Review, Federal Deposit Insurance Corporation,
Vol. 4, No. 3, April 1986, pp. 19-24.
________ _ “ Commercial Banking Performance, Mid-Year 1986,”
Banking and Economic Review, Federal Deposit Insurance Corpo­
ration, Vol. 4, No. 8, November/December 1986, pp. 13-19.

FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1987

A Review of the Eighth D istrict’s
Business Econom y in 1986
Thomas B. Mandelbaum

JL

OR the second successive year, econom ic growth
was generally m oderate for both the nation and the
Eighth District. Against this background of m oderate
growth, however, expansion in some regions and
sectors was quite vigorous. This article describes the
District's econom ic growth in 1986 in the context of
the current recovery period. In addition, some re­
cent projections of regional econom ic growth are
discussed.

CO N SU M ER INCOME AND SPEN D IN G
District nonfarm incom e growth, adjusted for in­
flation, has followed national trends throughout the
current recovery period; it accelerated in 1984, but has
grown m ore slowly in recent years (chart 1). Real
incom e has grown m ore slowly in the District than
nationally each year of the recovery.
Real District nonfarm personal incom e grew by 3
percent in 1986, somewhat slower than the nation’s
3.4 percent expansion.1Each of the m ajor com ponents
of personal incom e — earnings, transfer payments,
and dividends, interest and rent — grew m ore slowly
regionally than nationally.
District retail sales, after growing close to the na-

Thomas B. Mandelbaum is an economist at the Federal Reserve Bank
of St. Louis. Thomas A. Pollmann provided research assistance.
'Annual growth rates in this article compare data for the entire year
with the previous year.


http://fraser.stlouisfed.org/
22
Federal Reserve
Bank of St. Louis

tional pace in the first three years of the recovery
period, were considerably m ore sluggish in 1986: they
grew by only 0.5 percent, after adjusting for inflation,
com pared with 2.4 percent growth in national retail
sales. Consistent with national trends, sharp increases
in District car sales in Septem ber and D ecem ber
boosted retail sales in the second half of the year.
District retailers generally reported m oderate gains in
Christmas sales over last year. Changes in the federal
tax code, w hich elim inated the deductibility of sales
taxes after year’s end, contributed to vigorous sales of
autos and consum er durables in December.

LA BO R M A R K ET S
District em ploym ent growth has followed a similar
pattern to that for the nation during the recovery
period (chart 2). As with personal incom e, the most
rapid growth occurred in 1984: since then, both Dis­
trict and national em ploym ent have grown only m od­
erately. District nonfarm em ploym ent grew by 2.3 per­
cent in 1986, slightly less than the nation's 2.6 percent
growth.
After falling rapidly in 1983, the District unem ploy­
m ent rate has declined more slowly each subsequent
year of the recovery, following the national pattern. In
1986, the 1.8 percent growth of the District’s total
civilian employment was only slightly greater than the
growth of the labor force, but sufficient to allow the
District unem ploym ent rate to drop slightly to 7.8
percent. In general, unem ploym ent is higher in the

APRIL 1987

FEDERAL RESERVE BANK OF ST. LOUIS

Chart 1

Growth of Real Nonfarm Personal Income
Percent

P I Arkansas
5

-

Percent

Annual Percent Growth

issouri

(Kentucky

Tennessee

1983

1984

D istrict’s nonm etropolitan areas, as a result of weak­
ness in agriculture- and energy-related businesses.

- — U.S.
--D is tric t

1985

1986

ployment dropped considerably less than nationally,
each of the District’s sectors grew about as rapidly as
its national counterpart.

SE C T O R A L D IF F E R E N C E S
Throughout the recovery, District em ploym ent
growth has been divided unevenly among sectors.
Mining employment has fallen sharply, while the
m anufacturing, governm ent and transportation/
communications/public utilities sectors have grown
sluggishly; trades, finance and services have grown
moderately, while construction has expanded more
sharply. Except for the m ining sector, in w hich em ­



Goods-Producing Sectors
M ining. The plunge in oil prices in the first half of
1986 had an adverse effect on some District com m uni­
ties dependent on oil extraction. The negative im pact
on the general regional econom y was limited, how ­
ever: only 1 percent of the D istrict’s nonfarm workers
are engaged in m ining activities and far fewer are
employed in oil-extractive operations.

23

APRIL 1987

FEDERAL RESERVE BANK OF ST. LOUIS

Chart 2

G row th of Nonfarm Employment
Percent

Percent

B A rkansas
Kentucky

Missouri

— U.S.

Tennessee

--D is tric t

District m ining em ploym ent — heavily co n cen ­
trated in Kentucky coal production — fell 3.4 percent
in 1986 and at a 5.1 percent annual rate since 1982.
Employment in the nation’s m ining industry — more
heavily engaged in oil extraction — fell m ore steeply
during both periods. In 1986,171.9 million tons of coal
were m ined in the four m ajor District states, up 3.9
percent from its 1985 level and 7.0 percent above 1982.
Productivity gains in coal m ining allowed m ore coal to
be produced with a declining work force.

sumers and exports less expensive in foreign markets.
A recent survey of District m anufacturers, however,
suggests that the shrinking value of the dollar had
little effect on either employment or output in 1986. In
most cases, m arket-specific factors were more im por­
tant than the dollar’s decline in influencing growth.
One reason for this is that many District producers are
com peting against, or buying im ports from, nations
whose currencies have not substantially appreciated
against the dollar, such as Taiwan and South Korea.

M anufacturing. Many analysts expected the de­
clining exchange value of the dollar since early 1985 to
stimulate dom estic m anufacturing activity in 1986 by
making im ports m ore expensive to dom estic con ­

District manufacturing employment expanded at a
1.2 percent annual rate betw een 1982 and 1986, ex­
ceeding the nation’s 0.5 percent pace. Em ployment in
the District’s transportation equipm ent, fabricated


http://fraser.stlouisfed.org/
24
Federal Reserve Bank of St. Louis

APRIL 1987

FEDERAL RESERVE BANK OF ST. LOUIS

Chart 3

Real Value of Construction Contracts

1982

1983

1984

metals and printing/publishing industries grew fastest
over this period, while regional producers of chem i­
cals and textile/apparel reduced their work forces.
District m anufacturing em ploym ent dropped 0.6
percent in 1986, sim ilar to the national decline in such
employment.2 Of the District’s m ajor industries, only
the printing/publishing, food processing and trans­
portation equipm ent sectors increased their work
forces over the year. Employm ent in the production of
textiles and apparel leveled off in 1986 after a sharp
drop in 1985.
District defense contractors, primarily m anufactur­
ers, benefited from the acceleration of federal defense
spending in the first half of the 1980s. The real value of
defense contracts received in the District grew at an

2The decline in manufacturing employment does not necessarily
imply a decline in manufacturing output, however. Increases in
worker productivity have allowed the nation to produce increasing
output with fewer workers in recent years. See Tatom (1986) and Ott
(1987).




1985

1986

8.8 percent annual rate betw een 1982 and 1985. Re­
cently, however, growth in defense contracts has
waned. While the inflation-adjusted value of defense
contracts awarded nationally declined slightly in
fiscal 1986 from the previous year, District contracts
dropped almost 17 percent to $7.3 billion, in 1982
dollars, because of a sharp decline in Missouri.
C o n stru ctio n . After increasing sharply in 1983,
District construction activity has grown more slowly
each year of the recovery. Chart 3 shows that the real
value of construction contracts awarded in the Eighth
District and in the nation followed sim ilar growth
paths through 1984. Contracts expanded more slowly
in the District than in the nation in 1985 and 1986,
however, primarily because of slower District growth
of residential construction.
Residential construction, w hich accounts for about
half of the value of regional construction contracts,
grew more slowly in the District than in the nation
throughout the recovery. Following a large increase in
the first year of the recovery, single-family housing
perm its issued in the District grew m oderately

25

FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1987

through 1985. In 1986 they jum ped 24.8 percent, as
mortgage rates declined to their lowest level since the
late 1970s. Permits for multi-family dwellings ex­
panded rapidly in 1983 and 1984 but have subse­
quently declined.

gage refinancing as interest rates dropped. District
gains have been considerably weaker than the n a­
tional average since 1985. In 1986, the sector grew by
3.1 percent regionally, com pared with 5.9 percent
nationally.

Due primarily to a stronger upturn in 1983, the
expansion of District nonresidential building ex­
ceeded the nation’s growth in the current recovery
period. Between 1982 and 1985, the real value of Dis­
trict nonresidential contracts grew at a 14.4 percent
annual rate, exceeding the nation’s 11.1 percent pace.
The pace of nonresidential building slowed in 1986,
however. District nonresidential construction con ­
tracts declined 0.2 percent in 1986, com pared with a
more severe 6.6 percent drop nationally.

Following m oderate gains in 1984, employment
growth in both the District's and the n ation ’s tran s­
portation , co m m u n ica tion an d utilities sector has been
sluggish. Deregulation and consolidations of com ­
m unications and transportation firms curbed the
growth of this sector. Although it did not result in
substantial em ploym ent gains, barge traffic on the
M ississippi River was up in 1986, the first increase
since 1983. The weight of shipm ents passing through
the locks at Alton, Illinois, increased 7.6 percent last
year due to larger shipm ents of grain, coal, chem icals
and petroleum .

Nonbuilding construction (primarily public works
and utilities) expanded m ore slowly in the region than
in the nation throughout the recovery period. While
the real value of District nonbuilding contracts de­
clined at a 2.9 percent rate betw een 1982 and 1986, a
2.3 percent increase was posted for the nation as a
whole. District nonbuilding contracts fell 6.4 percent
in 1986 com pared with a slight increase nationally.

Service-Producing Sectors
Three of the service-producing sectors — trades,
finance and services — accou nt for more than half of
the District’s nonfarm work force and were responsi­
ble for m ost of the D istrict’s job growth since 1982.
The s e r v ic e s sector was the second-m ost rapidly
expanding portion of the District econom y, growing at
a 4.8 percent annual rate betw een 1982 and 1986,
w hich is only slightly less than its growth nationally.
Employm ent in the District’s services sector acceler­
ated slightly in 1986, growing by 5.4 percent. M uch of
the growth of the regional services sector was con cen ­
trated in business and health services, mirroring n a­
tional trends.
Employm ent in reta il a n d w h o lesa le tra d es grew at a
4.3 percent annual rate in the recovery period with
progressively slower growth since 1984, reflecting the
deceleration of District retail sales. Because of particu­
larly swift growth in Tennessee, the sector has ex­
panded faster in the District than nationally during
the last four years.
T h e fm a n c e sector includes financial, insurance and
real estate firms. Nationally, em ploym ent in the sector
accelerated throughout the recovery, culm inating in a
5.9 percent jum p in 1986. Employment gains in 1986
were stim ulated by extensive hom ebuilding and m ort­

26


G overn m en t sector employment grew little during
the expansion period, both regionally and nationally.
In recent years, however, government spending con ­
tributed heavily to the growth of the District econom y.
Despite a drop in Department of Defense contracts,
federal government expenditures in District states
grew to $56.5 billion in fiscal year 1986, a gain of 3.7
percent from a year earlier, after adjusting for inflation.

IN T E R ST A T E C O M PA R ISO N S
Econom ic growth varied somewhat among the Dis­
trict’s states. This section highlights differences
among these econom ies. For sim ilar com parisons
among the District’s m ajor m etropolitan areas, see
pages 28 and 29.

Arkansas
A rkan sas’ n on farm in co m e and em p loym en t
growth was moderately strong in 1983 and 1984, but
weakened considerably in succeeding years (charts 1
and 2). As employment growth slowed, the state’s
unem ploym ent rate dropped only slightly from its
1984 level (chart 4).
In 1986, real nonfarm personal incom e grew 2.7
percent in Arkansas, slightly slower than the District
and national averages. A drop in real incom e from
dividends, interest and rent contributed to the slug­
gishness in Arkansas. Arkansas' nonfarm employment
expanded by 2.1 percent in 1986. Employment in con ­
struction and most service-producing sectors grew
slower than the District’s average pace, while m anu­
facturing grew m ore rapidly.

APRIL 1987

FEDERAL RESERVE BANK OF ST. LOUIS

Chart 4

Unemployment Rates in Eighth District States

Of the four District states, Arkansas is m ost depen­
dent on manufacturing as a source of jobs; m anufac­
turing em ploym ent accounts for m ore than a quarter
of the state’s 1986 nonfarm work force. Manufacturing
employm ent grew 1.2 percent in 1986 and at a 2.1
percent rate over the recovery period, the m ost rapid
manufacturing growth of the District states. Employ­
ment in the state’s relatively large food processing
industry grew by 8.3 percent last year and has ac­
counted for m uch of the growth in Arkansas m anufac­
turing since 1982. Most of this growth was at poultry
processors, who have benefited from the shift away
from red m eat consum ption in favor of poultry in
recent years.
Industries related to forest products also are quite
important to Arkansas’ industrial base. Employment
at furniture and paper product firms increased last
year, while em ploym ent in lum ber and wood prod­
u cts declined. Historically, m uch of the lum ber and
wood products were purchased by the oil-patch
states, where econom ies are currently weak. Sluggish
construction activity within Arkansas also hindered
the expansion of the lum ber industry.



Construction activity in Arkansas has been weaker
than in other District states (chart 3) and the nation.
The real value of construction contracts declined 12.1
percent in 1986 and at a 3.2 percent annual rate
betw een 1982 and 1986. While nonresidential building
grew at near the national pace throughout the recov­
ery, the expansion of contracts for nonbuilding proj­
ects and for residential construction trailed the na­
tional average. Multi-family residential growth was
particularly slow.

Kentucky
Kentucky rebounded from the last recession more
slowly than the other District states. This can be seen
clearly in charts 1, 2 and 4. Kentucky’s real nonfarm
incom e was weak in 1983, while nonfarm employment
declined and the unem ploym ent rate rose. In subse­
quent years, em ploym ent in Kentucky grew at near
the D istrict’s average pace, but the unemploym ent
rate rem ained relatively high and real incom e growth
was weak.
M uch of the state’s sluggish growth can be traced to

27

APRIL 1987

FEDERAL RESERVE BANK OF ST. LOUIS

Major Metropolitan Areas in the Eighth District
Much of the District’s econom ic activity is con ­
centrated in four m etropolitan areas: Little Rock,
Louisville, Memphis and St. Louis, w hich account
for about a third of the D istrict’s nonfarm work
force and personal incom e. This section com pares
the recent growth of em ploym ent and construction
in these four m etropolitan areas.

Little Rock
After three years of m oderate growth, nonfarm
em ploym ent growth in Little Rock dropped sharply
in 1986 to 1.3 percent (chart 1A).1 The primary
source of Little Rock’s em ploym ent growth — con ­
struction and service-producing sectors — during
the recovery m atched those of the District’s other
m ajor m etropolitan areas. Little Rock’s largest em ­
ploym ent gains in 1986 were in business and health
services and retail trade; the sharpest declines oc­
curred in the m anufacture of durable goods, partic­
ularly electronic equipm ent. The slow job growth in
1986 caused the Little Rock unem ploym ent rate to
rise to 6.9 percent from 6.4 percent in 1985.

losses in m anufacturing more than offset by gains
in service-producing sectors, particularly finance,
insurance and real estate and trade. Unemploy­
m ent has declined from 11.7 percent in 1982 to 7.0
percent in 1986. C onstruction activity has been
m oderate in recent years, growing at near the aver­
age of the four m etropolitan areas (see chart 2A). In
1986, however, construction activity declined as
vigorous homebuilding was offset by declines in the
nonresidential sector.

Memphis
Among the four m etropolitan areas, M emphis
has had the fastest growing nonfarm work force
since 1984. In 1986, em ploym ent grew by 3.9 per­
cent with strong gains in m ost service-producing
sectors. Business and health services grew particu­
larly rapidly. M em phis’ unem ploym ent rate edged
up slightly to 6.8 percent in 1986 as the area’s labor
force grew even more rapidly than employment.

As chart 2A shows, construction activity has been
sluggish throughout the recovery in Little Rock,
trailing the other m etropolitan areas.2 1986 was no
exception, as a slight gain in the real value of nonresidential building contracts was counterbalanced
by losses in the residential sector.

Moderate growth in the nonresidential sector
and an extremely strong residential expansion al­
lowed Memphis to post the m ost rapid con stru c­
tion growth of the four m etropolitan areas in the
1982-86 period. In 1986, construction growth was
brisk, with a m oderate expansion in the con stru c­
tion of nonresidential and single-family hom es and
a decline in multi-family residential building.

Louisville

St. Louis

Louisville has enjoyed a m oderately strong,
steady expansion throughout the recovery, with

'Employment data for 1982 do not include Jersey County, Illinois,
as part of the St. Louis metropolitan area. In addition, Shelby
County, Kentucky, and Harrison County, Indiana, are not in­
cluded as part of the Louisville metropolitan area in the 1982
data. These exclusions cause the 1983 growth rates for these two
metropolitan areas to be higher than if consistent definitions had
been used.

Employment in St. Louis, the largest and m ost
diversified econom y in the District, has grown more
slowly than the average of the four m etropolitan
areas m ost years of the current recovery (chart 1A).
An even slower expansion of the area’s labor force,
however, allowed the unem ploym ent rate in St.
Louis to gradually decline to 7.0 percent in 1986
from its 10.7 percent peak in 1983. M anufacturing
employment in the St. Louis area grew slightly
between 1982 and 1986, largely because of gains in
the production of m otor vehicles.3 Employment in

2The construction contract data for all years are based on the 1982
definitions of the metropolitan areas. They therefore exclude
several counties added to the metropolitan areas in 1983: the
Little Rock area excludes Faulkner and Lonke counties in Arkan­
sas; Louisville excludes Harrison County, Indiana, and Shelby
County, Kentucky; St. Louis excludes Jersey County, Illinois.

3ln order to maintain a consistent definition of manufacturing,
Missouri Division of Employment data were adjusted for changes
in industrial categories.


28


APRIL 1987

FEDERAL RESERVE BANK OF ST. LOUIS

traditional industries like textile and apparel pro­
duction, m etals fabrication and shoe production
continued to decline throughout the period. In
1986, manufacturing em ploym ent dropped slightly,
with declines concentrated in the production of
primary metals and chem icals.

1986, twice the average of the four m etropolitan
areas. Nonresidential building grew m ore slowly.
The real value of nonresidential construction con ­
tracts increased m ore slowly in St. Louis than in the
other m etropolitan areas since 1986. The value of
nonresidential contracts was flat in 1986, following
strong growth in 1985. Reflecting this growth, a
large volume of office space was com pleted in 1986,
resulting in a sharp rise in office vacancy rates in
the St. Louis area.

Residential construction in the St. Louis area,
which has grown rapidly since 1982 (chart 2A), grew
particularly sharply in 1986. The real value of resi­
dential construction contracts grew 32.1 percent in




C h a r t 1A

G r o w t h of N o n fa rm E m p lo ym en t
in District M e tr o p o lit a n A rea s
£ e rte n *
0

o

Little

A n n u a l Rates o f G r o w t h

Rack

Louisville

Memphis

Pe l

S t . Louis

Ch a rt 2A

G ro w th of Real V a lu e of
Construction Contracts in District
M etrop olitan A reas
Percent

Annunl

Pntpt

rtf f i r r t w t h

PCTCCI l t

29

APRIL 1987

FEDERAL RESERVE BANK OF ST. LOUIS

Kentucky’s three largest sectors: trades, services and
manufacturing. Each has grown more slowly than in
other District states since 1982. Manufacturing em ­
ploym ent fell 1 percent in 1986, with losses con cen ­
trated in production of durable goods, including pri­
m a ry m e t a ls , n o n e l e c t r i c a l m a c h in e r y a n d
transportation equipm ent.
One bright spot in the state econom y was the strong
job expansion in the financial industries. Between
1982 and 1986, em ploym ent in this sector grew at a 4.2
percent rate, leading the District states.
C onstruction em ploym ent in Kentucky also ex­
panded m oderately since 1984. The real value of con ­
struction contracts expanded slowly, however, in­
creasing 2.6 percent in 1986 and at a 1.9 percent rate
since 1982 (chart 3). Although nonresidential con ­
struction expanded slightly faster than the regional
and national averages, residential and nonbuilding
construction was substantially weaker in the state.

growth in this sector in 1987.
Defense contracts awarded in Missouri — recipient
of two-thirds of the District’s total — fell 27.8 percent
in fiscal 1986, after adjusting for inflation. The $5.5
billion in contracts were primarily for the production
of aircraft in the St. Louis area. Despite the recent
decline, the backlog of uncom pleted contracts and
federal defense expenditures not yet spent im plycon tinued high levels of defense activity for 1987.
Construction activity in M issouri has been strong
since the trough of the last recession (chart 3). The real
value of construction contracts grew at a 13.3 percent
annual rate betw een 1982 and 1986. Following little
growth in 1985, construction grew sharply last year in
Missouri, led by gains in single-family hom e con stru c­
tion. In contrast to falling growth in the nation as a
whole, nonresidential construction and multi-family
residential construction in M issouri also grew vigor­
ously in 1986.

Tennessee
Missouri
M issouri’s general econom ic growth m atched the
District 's average in the first three years of the recovery
period, with stronger construction activity offset by
weakness in manufacturing. In 1986, a slowdown in
m ost sectors of the econom y resulted in slower
growth of real incom e and nonfarm employm ent. Due,
in part, to slow labor force growth, however, em ploy­
m ent grew rapidly enough to allow the state’s unem ­
ploym ent rate to drop steadily from 9.9 percent in 1983
to 6.1 percent in 1986 (chart 4).
Most of the District’s 1986 decline in manufacturing
jobs was concentrated in Missouri, w here m anufac­
turing em ploym ent fell 1.9 percent. The largest de­
clines occurred in M issouri’s fabricated m etal and
electrical and nonelectrical m achinery industries.
The transportation equipm ent industry, w hich is
particularly im portant to the state econom y, was a
source of strong growth in the first two years of the
recovery; it has declined slightly in the last two years.
In 1986, em ploym ent increases in aircraft m anufactur­
ing — spurred by defense spending — were offset by
job losses in m otor vehicle production. The decline in
auto em ploym ent was produced by tem porary layoffs
for plant m odifications and inventory reductions after
slow er-than-expected sales late in the year. Layoffs of
auto assembly workers early in 1987 and the sch ed ­
uled closing of an aging truck assem bly plant in St.
Louis by m id-1987 are likely to produce little job

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30
Federal Reserve Bank of St. Louis

T enn essee’s econom ic growth has exceeded that of
the District throughout the recovery. T en n essee’s u n ­
employment rate has fallen from 11.9 percent, highest
in the District, in 1982, to 8.0 percent by 1986, secondlowest of the District states. As chart 1 shows, the
state’s real nonfarm incom e growth was particularly
strong in 1986, reflecting its em ploym ent expansion
(chart 2). Nonfarm employment grew by 3.3 percent in
1986, making Tennessee the District’s fastest-growing
state. The trades and services sectors, accounting for
almost half of nonfarm employment, have been re­
sponsible for m uch of the job gains in recent years.
Employment growth in the state's manufacturing
sector has m irrored the District average each year
since 1983. M anufacturing em ploym ent dropped
slightly in 1986; gains in food processing, fabricated
metals, printing/publishing and transportation equip­
ment were offset by losses in most other industrial
sectors. Employm ent in the state's largest m anufac­
turing industry, textile and apparel production, in­
creased steadily the second half of 1986, but at yearend rem ained below the level of a year earlier.
Following sharp growth in 1983 and 1984, con stru c­
tion activity in Tennessee leveled off at relatively high
levels in 1985 and 1986. Both residential and nonresi­
dential construction growth have been weak in the
past two years. In the residential sector, strong gains
in single-family hom ebuilding were nullified by losses
in the construction of multi-family units.

FEDERAL RESERVE BANK OF ST. LOUIS

APRIL 1987

O U TLO O K F O R 1 9 8 7
Projections from academ ic and government institu­
tions in District states suggest that this year’s eco ­
nom ic growth will be sim ilar to last year’s. Table 1
presents the actual growth rates for 1986 and p ro jec­
tions for 1987 for several econom ic indicators. For
com parison, projections of national growth m ade by
W harton Econom etrics are provided.

Table 1
Projected Growth in Eighth District
States
1986

1987

Unemployment rate

The growth of total personal incom e in the nation is
expected to slow in 1987; in contrast, it is expected to
accelerate in the District states. To som e extent, the
projected acceleration of District personal incom e
growth simply reflects higher expected inflation. Ken­
tucky’s estim ated incom e growth, however, repre­
sents a substantial increase over last year’s growth.

United States
Arkansas
Kentucky
Missouri
Tennessee

7.0%
8.8
9.2
6.1
8.0

Percent change1
1986

In Arkansas and Kentucky, nonfarm payroll em ploy­
m ent should grow more rapidly in 1987; in Missouri
and Tennessee, the growth of nonfarm payroll em ­
ployment is expected to slow. Projections of increased
growth in the m anufacturing sector are based partly
on the anticipated effects of the dollar’s declining
exchange value since early 1985.
The m ost rapid deceleration of payroll employment
is anticipated in Tennessee, w here em ploym ent is
projected to grow by 1.7 percent in 1987, following its
3.3 percent growth last year. Employm ent growth in
the Tennessee wholesale/retail trades sector is ex­
pected to slow as consum er spending slows. Con­
struction employment is also expected to expand
more slowly next year in response to the Tax Reform
Act of 1986.
Employment growth in Arkansas, Missouri and T en ­
nessee should be sufficient to allow a slight drop in
unemploym ent rates. Unemployment projections for
Kentucky are not available.

CONCLUSION
The District’s econom ic growth has been sim ilar to
the nation’s in 1986 and throughout the current recov­
ery period, with sharp 1984 gains followed by two
years of m oderate growth. Incom e and employment
growth generally has been strongest in Tennessee
among the District states, while the expansion of con ­
struction activity has been concentrated in Missouri
and Tennessee. Projections of econom ic growth in
District states suggest that the expansion will con ­
tinue, making 1987 the fifth successive year of growth
for the District economy.



6.7%
8.4
N/A
5.6
7.9

1987

Payroll employment
United States
Arkansas
Kentucky1
Missouri
Tennessee

2.6%
2.1
2.3
1.8
3.3

2.6%
2.5
3.4
1.2
1.7

-0 .7 %
1.2
- 0 .4
- 1 .9
-0 .1

N/A
2.3%
N/A
0.2
0.4

5.3%
3.4
2.2
3.9
6.1

5.0%
6.3
6.8
5.8
6.3

Manufacturing employment
United States
Arkansas
Kentucky
Missouri
Tennessee
Personal income (current dollars)
United States
Arkansas
Kentucky
Missouri
Tennessee

'Percent changes compare entire year with previous year, except
for Kentucky figures which reflect fourth quarter to fourth quarter
growth.
SOURCES: United States: Wharton Quarterly Model Outlook,
March 1987; Arkansas: University of Arkansas at
Little Rock, Arkansas Economic Outlook, January
1987; Kentucky: Kentucky Revenue Cabinet; Mis­
souri: College of Business and Public Administra­
tion, University of Missouri-Columbia, Missouri Eco­
nomic Indicators; 4th Quarter, 1986; Tennessee:
Center for Business and Economic Research, the
University of Tennessee, Knoxville, On the State
Economic Outlook.

REFEREN CES
Ott, Mack. “The Increasing Share of Services in U.S. Output — A
Long-Run View," this Review, forthcoming, 1987.
Tatom, John A. “Why Has Manufacturing Employment Declined?”
this Review (December 1986), pp. 15-25.

31