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FEDERAL RESERVE BANK
OF ST. LOUIS
NOVEMBER 1972
Vol. 54, No. 11
The Federal Budget: From Surplus to Deficit
Fiscal M e a s u r e s
X HE MAGNITUDE of the Federal budget deficit
has been in the spotlight in recent discussions of
economic trends and prospects. Analyses of the Fed
eral budget indicate the likelihood of continuing
deficits for the next several years, given the current
structure of tax rates and existing Government spend
ing programs.1 Just a few years ago the concept of
“fiscal drag” was used to describe the tendency of the
budget toward chronic surplus.2 Why has there been
a shift in the assessment of the outlook for the Federal
budget?
The purpose of this note is to give a brief quantita
tive summary of the factors which have contributed
to the change in the budget position since early 1969.
These factors are divided into two primary effects:
(1) a discretionary effect relating to changes in tax
rates and expenditure programs, and (2) an economic
activity effect relating to the effect of the degree of
resource utilization on the size of the tax base and the
amount of unemployment benefits. The first half of
1969 is chosen as a base for comparison because this
period represents both a high-employment level of
economic activity and the most recent peak in the
time series of the net Federal budget position (the
excess of receipts over expenditures).3 Since early
1969, some tax rates have been reduced, expenditures
have continued to increase, and the rate of resource
utilization has remained below the level attained in
that period. What is the contribution of each of these
factors to the deficit as it currently exists, and, given
this background, what is the outlook for the Federal
budget?
(+ )S u rp lu s ; (-)Deficit
Latest data plotted: 3rd quarter preliminary
of deficit in the first half of 1972. The following
tables provide estimates of the contributions of various
factors to this shift from surplus to deficit.
Table I gives the Federal budget for the first half
of 1972 if the economy had continued to operate at
high-employment levels and the expenditure and reve
nue relationships of the first half of 1969 had been
maintained. In other words, given the schedule of tax
Table 1
C o n d itio n a l B u d get A — First H a lf 1 9 7 2
{Billions of Dollars)
$ 2 5 6 .6
Receipts
Factors Contributing to the Current
F ed era l B udget Deficit
The Federal budget (national income accounts
basis) moved from a $10 billion annual rate of surplus
in the first half of calendar 1969 to an $18 billion rate
1Recent analyses of the Federal budget are found in Charles
L. Schultze et al., Setting National Priorities, T he 1973
Budget (Washington, D.C.: The Brookings Institution, 1972),
and David J. Ott et al., Nixon, McGovern and the Federal
Budget, Domestic Affairs Study 8, American Enterprise In
stitute for Public Policy Research, Washington, D.C. (Sep
tember 1972).
2For a review of recent fiscal history, see Schultze et al.,
Setting National Priorities, chap. 12.
3Throughout this article all time references are to calendar
years, and all budget references are on a national income
accounts basis.
Page 2
Expenditures
Defense
Nondefense
Net Position
24 3 .2
101.0
142.2
$ 13.4
Hypothetical Federal budget in first half 1972, given actual
revenue and expenditure relationships in first half 1969
and assuming high employment
rates in early 1969, the magnitude of Government
expenditures relative to the size of the economy
(measured by potential GNP in current dollars) at
that time, and the maintenance of a high-employment
level of activity, extrapolation of these relationships
into early 1972 would have yielded the budget situa
tion as summarized in Table I. A $13.4 billion rate
of surplus would have prevailed, given these hypo
thetical conditions.
NO VEMBER 1972
FE D E R A L R E S E R V E BANK OF ST. LOUIS
Table II shows the Federal budget at an assumed
high-employment level of economic activity, but is
calculated by using the revenue and expenditure rela
tionships that prevailed in early 1972. The differences
between Tables I and II then, reflect changes in tax
rates and expenditure changes relative to the size of
the economy. Under these high-employment condi
tions the budget would have shown a $6 billion rate
of surplus.
Table II
—contributed $20.4 billion toward the decline in the
surplus, while overwithholding of personal income
taxes acted to increase the surplus (reduce the def
icit) at an annual rate of $8 billion. Discretionary
expenditures contributed toward an increase in the
surplus by $5 billion ($23.3-$18.3). This tendency
can be attributed solely to the slowdown of defense
spending which more than offset the tendency-towarddeficit effects of nondefense expenditure increases.
Table IV
C o n d itio n a l B u d get B —
Sum m ary o f Factors Contributing to
C h a n g e s in the Federal Budget
First H a lf 1972
(Billions of Dollars)
$ 2 4 4 .2
Receipts
Expenditures
Defense
Nondefense
First Half 1 9 6 9 to First Half 1972
(Billions of Dollars)
238 .2
7 7 .7
160.5
Net Position
$
6.0
Hypothetical Federal budget in first half 1972, given actual
revenue and expenditure relationships in first half 1972
and assuming high employment
Table III gives the actual budget for the first half
of 1972. The differences between Tables II and III
represent the effects of a change in the relative rate
of resource utilization on the budget. Expenditures
and revenues deviated from their hypothetical highemployment values because the economy was operat
ing below that hypothetical level of activity. The bud
get was in deficit at an annual rate of more than $18
billion.
Table III
A ctu al Federal Bu dget —
First H a lf
1972
(Billions of Dollars)
$2 2 3 .2
Receipts
Expenditures
Defense
Nondefense
Net Position
24 1 .4
7 7 .7
163.7
$ — 18.2
The information in Tables I-III is combined in
Table IV to summarize the factors which contributed
to the shift from a substantial surplus to a substantial
deficit. Table IV is interpreted as follows. The surplus
was $31.6 billion less in the first half of 1972 than it
would have been if the revenue-expenditure relation
ships of first half 1969 had been maintained along with
high employment. The slowdown of economic activity
contributed $24.2 billion ($21 + $3.2) to the $31.6
billion decline in the surplus (the shift to deficit). The
remaining $7.4 billion ($12.4 —$5.0) is attributable to
the effect of discretionary fiscal actions. Tax rate
changes —reflecting removal of the tax surcharge, the
Tax Reform Act of 1969, and the Revenue Act of 1971
Receipts
Economic Activity Effect
Discretionary Effect
Tax Rate C han ge
Overw ithholding
Expenditures
Economic Activity Effect
Discretionary Effect
Defense
Nondefense
$ -3 3 .4
-2 1 .0
-1 2 .4
— 20.4
+ 8.0
+
—
+
1.8
3.2
5.0
+ 2 3 .3
— 18.3
Net Position
$ -3 1 .6
N O T E : A negative sign indicates the factor was operating to de
crease the surplus (increase the deficit). A positive sign
indicates the factor was operating to increase the surplus
(decrease the deficit).
Prospects for the F ed eral Budget
Given this background of recent budget experience,
what are the prospects for the future? Table V gives
estimates for 1975 as prepared by the American
Enterprise Institute.4 These figures are based on the
assumption that high employment will prevail in 1975
and that prices will be increasing at a 2.5 percent
an nual ra te . The rev en u e estim ate is based on the
prospects for tax rates as of late August 1972. Ex
penditure estimates represent a projection of existing
Government programs along with allowance for
pending legislation as of August 1972. Thus the $21.5
billion deficit represents only a projection of the bud
get situation at that time and does not allow for possi
ble expansion of Government spending programs.
Table V
Federal Budget in C a le n d a r 1975
(Billions of Dollars)
Receipts
$ 2 9 2 .0
Expenditures
3 1 3 .5
Net Position
$ -2 1 .5
4Ott et al., Nixon, McGovern, and the F ederal Budget. The
estimates are those for the Nixon Administration’s budget
which, when based on an assessment in August 1972, is
consistent with a $250 billion estimate of expenditures in
Page 3
F E D E R A L R E S E R V E B A N K OF ST. LOUIS
NO VEM BER
1972
Future budget prospects raise questions about the
options available to policymakers in dealing with the
problem of expenditure growth in excess of receipts.
First, there is the option of reducing existing expendi
ture programs. Second, there is the consideration of
growth in new programs which yield an even larger
deficit than that shown in Table V, other things equal.
Third, there is the option of raising tax rates. Changes
in the effective rate for social security taxes are sched
uled, but these are not large enough to erase the
deficit by 1975. Once the decision about expenditures
and taxes has been made, any deficit that remains is
financed by the sale of Government bonds to the
private sector of the economy, at least initially. How
ever, the ultimate effects of the deficit depend on how
much of the Government debt is subsequently mone
tized by the Federal Reserve System.5
side of the budget. They indicate a substantial budget
deficit, even under conditions of high employment, as
compared to the hypothetical surplus shown in Table
II. Gains in the budget position from reduced defense
spending, like those shown in Table IV, do not appear
to be in prospect for the future. The existing tax
structure would not be sufficient, given existing ex
penditure programs, to bring the budget into balance,
even if the economy returns to high employment.
Stabilization Im plications
What conclusions can be drawn? First, the cur
rent budget deficit is attributable in large measure
to a slowdown in economic activity, but tax changes
and a rapid growth of nondefense expenditures have
also contributed to the situation. Defense expenditure
trends have actually worked to reduce the deficit,
mainly due to reductions in Vietnam expenditures.
fiscal 1973. Calendar 1975 is chosen for illustrative purposes
because it is far enough into the future to allow a focus on
fundamental budget trends while providing sufficient time
to actually achieve the assumed high-employment level of
activity. The American Enterprise Institute study presents
projections through 1980.
Page 4
The alternative of raising tax rates to increase reve
nues has to be weighed against any tendency of such
an action to perpetuate existing Government pro
grams, whether or not they are justified on a costbenefit basis. Furthermore, there is the question of
whether new programs are scrutinized as carefully
when revenues are “available” to be spent.
The alternative of financing the excess of Govern
ment expenditures over receipts by debt sales to the
private sector means, other things equal, a rise in
interest rates in the short run. Monetization of such
debt by the Federal Reserve System, on the other
hand, reduces interest rates in the short run from what
th ey w ould oth erw ise be, but o v er a longer horizon
can lead to more price inflation and, ultimately, higher
interest rates. Curtailing growth of new Government
programs and cutting back existing programs would
be a step in the direction of avoiding higher tax rates,
higher interest rates, and more rapid inflation. Such
a course of action, however, has to be assessed against
the foregone benefits of the programs themselves.
5A11 of the options ignore the feedback of these budget
alternatives on the course of the economy. Thus implicitly
there is the assumption that monetary actions can be im
plemented in such a way as to achieve high employment
by 1975, given the particular budget alternative which is
followed. Comparing the consequences of the budget alterna
tives probably implies different courses of monetary action.
More detailed study of the impact of these various alterna
tives would probably require the use of an econometric
model.
The Economic Outlook
Remarks by DARRYL R. FRANCIS, President,
Federal Reserve Bank of St. Louis,
Before the Financial Analysts Federation Conference,
Cincinnati, Ohio, October 9, 1972°
I AM PLEASED to have this opportunity to present
to you my views regarding the economic outlook. My
remarks will first be devoted to a brief presentation
of the general outlook. Then, I will discuss some of
the problems facing the nation because of a Federal
budget which is generally acknowledged to be “run
ning out of control.” Decisions made in response to
these budget problems will have a great effect on the
course of our economy over much of the 1970s.
General Outlook
Let us now examine the general economic outlook
for the next few quarters. The President’s Council of
Economic Advisers, in their Annual Report of last
January, projected a rapid advance in total spending
(GNP) for 1972. They projected strong real product
growth and a significant decline in the rate of inflation
by the end of the year.
Progress in Achieving the 1972 F orecast
Substantial progress has been made in achieving
this optimistic forecast. Total spending has advanced
rapidly since late 1971, largely in response to stimula
tive monetary and fiscal actions taken earlier. Growth
in the money stock has been uneven, but has averaged
a 7 percent annual rate since early 1971. In compari
son, money increased at a 4.5 percent rate from early
1969 to early 1971. Fiscal actions have also been ex
pansionary, with Federal expenditures rising at a 9
percent rate since the first quarter of 1971, faster than
the 7 percent rate of increase in the previous two
years.
erate. Real product growth accelerated to a 7 percent
increase from third quarter 1971 to third quarter
1972, more than triple the increase in the previous
year. The rate of inflation, as measured by the GNP
price deflator, has been at about a 3 percent rate since
mid-1971, compared to a 5 percent increase in the
preceding year.
The rapid rise of real product has fostered a strong
advance in employment. Payroll employment has in
creased at a 3.5 percent annual rate since last fall,
compared to little growth in the previous year and a
trend rate of growth of 2 percent from 1957 to 1971.
The relative strength of these employment gains is
noteworthy since the population of working force age
is estimated to be growing at less than a 2 percent
annual rate. Total employment in mid-summer was
over 64 percent of the population of labor force age,
higher than in the prosperous year of 1965.
These developments through the third quarter in
dicate that substantial progress has been made toward
realizing the Council’s goals for 1972. Moderated
growth of both total spending and real product in the
final three months of the year, and continuation of
price increases at about the average rate of the past
three quarters would be consistent with attainment of
the goals.
Evaluation o f D evelopm ents in 1972
A significant portion of the recent advance in total
spending has been manifested in real product growth,
with the associated rate of price inflation being mod-
In evaluating the healthy turn of the economy thus
far in 1972,1 will now present briefly my views regard
ing the prospects for sustaining such a rapid expansion
of output, the advisability of relying solely on mone
tary and fiscal actions to bring the unemployment rate
down much further, and the contribution of controls
to reducing inflation.
*This presentation has been revised to take into account the
most recent data available.
First, the very rapid growth of real output in the
first nine months of the year is probably not sustaina
Page 5
FE D E R A L R E S E R V E BANK OF ST. LOUIS
ble over the longer-run. There is some evidence that
a slowing has already occurred. For example, real
output has grown at a 6 percent rate in the last
quarter, compared to an 8 percent growth rate from
fourth quarter 1971 to second quarter 1972. Also, in
dustrial production has grown at a 7 percent rate
since April, down from a 14 percent rate over the
preceding four months. Payroll employment has risen
at a 3.6 percent rate since April, after rising at a 4
percent rate from December to April. These slower
rates of increase are desirable, I believe, because they
are more consistent with preserving the gains that
have been made in slowing the rate of inflation than
would be an attempt to continue the faster growth
rates experienced earlier in the year.
Some will criticize this slower rate of employment
growth because the unemployment rate has fallen
only to the neighborhood of 5.5 percent. These critics
cite as a desirable goal an unemployment rate of 4
percent or less. As laudable as such a goal may be,
these critics overlook the costs of attaining such a
target through the use of overall economic stimulus.
Post-war experience demonstrates that whenever the
unemployment rate has moved below 5 percent, infla
tion has become a serious problem. Given the struc
ture of our labor markets and the way they function,
using monetary and fiscal actions exclusively to achieve
significant further reductions in unemployment runs
a serious risk of renewed inflationary pressure.
On this point I am in agreement with the Chairman
of the Council of Economic Advisers, who, in an inter
view with First National City Bank last August,
pointed out that “there are a number of other policies
which may be involved in getting the rate of unem
ployment down__ ” He indicated that what he had
in mind was various types of manpower programs.
Apparently there was a realization of this point
when price and wage controls were instituted fifteen
months ago as part of a program designed to promote
economic recovery and a slowing of inflation. Some
have cited the 3 percent increase in the consumer
price index for the year ending with September as
evidence of the contribution of these controls to price
stability. This was down from a 4.5 percent increase
in the year prior to controls. It is not clear whether
this reduction in the rate of inflation has been due to
controls or to natural economic forces set into motion
by the monetary restraint of 1969 followed by mod
erate growth in money in the period immediately
thereafter.
I tend to place emphasis on this latter development.
Inflation reached a peak in early 1970. In February
Page 6
N O VEM BER 1972
of that year the consumer price index was over 6 per
cent higher than a year earlier. The rate of inflation
has been decelerating since then, declining to 4.5 per
cent in the year ending August 1971 when the con
trols were imposed. The deceleration in consumer
prices was only a little more in the following twelve
months than in the year prior to controls.
O utlook Through 1973
With regard to the economic outlook for the bal
ance of this year and through 1973, most private
economic forecasters expect a continuation of strong
economic expansion through the end of next year.
They do not, however, expect the expansion to con
tinue at the rapid rates of earlier this year. These
forecasters generally do not expect much further im
provement in the rate of inflation. In fact, many fore
cast the reemergence of accelerating inflation by the
second half of next year.
I am in agreement with the general contours of
output and price movements projected by most private
forecasters. However, the course of monetary expan
sion, especially as related to Federal budget develop
ments, can alter this outlook considerably.
Our research indicates that the average rate of ex
pansion of the money stock over a period of five or
more years is the major determinant of the rate of
inflation. This research also indicates that a change in
the rate of money growth for a period exceeding two
quarters exerts a significant short-run, but temporary,
influence on growth in output and employment. So
let us look at some implications of recent monetary
developments in light of these findings.
Money has grown at a 6 percent trend rate since
1966. Our research indicates that the rate of inflation
in the neighborhood of 4 percent expected by many
forecasters for late next year is consistent with this
trend in money growth. Over a shorter period, money
has increased at an 8 percent rate thus far in 1972. If
this rate of growth were to continue much longer, I
would expect inflation to intensify more next year
than is currently forecast. On the other hand, if we
were to revert abruptly to a considerably slower
growth rate of money, I would expect less expansion
of output next year from that expected by most fore
casters. You can see the problems facing those who
have responsibility for promoting both high employ
ment and price stability.
The Federal Budget and the Outlook
These problems are further complicated by the out
look for the Federal budget. The unified budget
FE D E R A L R E S E R V E BANK OF ST. LOUIS
moved sharply from a surplus in fiscal year 1969 to a
deficit in fiscal year 1971. This shift from surplus to
deficit reflected virtually no growth in receipts while
expenditures increased $27 billion. If the economy had
remained at a high level of resource utilization, and if
no change in tax laws had occurred, receipts would
have been $40 billion higher than was realized. Almost
half of this short-fall in receipts resulted from tax
changes following elimination of the income tax sur
charge and the Tax Reform Act of 1969. The re
mainder of the short-fall was due to the slowing in
economic activity during the recent recession. Some
have cited this move toward budget deficits, which
was augmented by further tax reductions in the Rev
enue Act of 1971, as a desirable development in view
of the softness in the economy existing at that time.
T he P roblem : B udget Deficits
Once getting into this situation, what are the pros
pects of getting out of it now that economic activity
is expanding quite rapidly? In the fiscal year ending
June 1972, the deficit was $23 billion. With increased
expenditures for existing programs only, including
recently enacted revenue sharing, and revenues from
existing tax laws, it is generally estimated that the
deficit will approach $35 billion in the present fiscal
year. The proposed ceiling of $250 billion on expendi
tures, which failed in Congress, would have reduced
this deficit to around $27 billion. This ceiling would
thus have contributed little to eliminating the deficit.
Looking further ahead, budget experts outside the
government estimate for fiscal year 1975 that existing
spending programs and taxing provisions will result in
a deficit of $15 to $20 billion if we have full employ
ment. I believe, along with many others, that the
Federal budget is virtually out of control.
Alternative Solutions to the Budget P roblem
Reduce Expenditures —Let us now examine the
alternatives which face us as a result of this bleak
budget picture. An obvious step would be to get the
budget back into balance this fiscal year by cutting
Government expenditures about 14 percent. This is
considerably more than the 3 percent spending cut
implied by the proposed ceiling. In view of the con
cern expressed over the proposed $250 billion ceiling
and the ever mounting pressures for expanded pro
grams, such a marked reduction in spending is
unlikely.
Increase Taxes —A budget balance could also be
achieved by increasing taxes. This would require a 16
NO VEM BER 1972
percent increase in Federal Government tax collec
tions from all sources. This alternative would also be
difficult to achieve in view of the pressures for tax
relief. Furthermore, it may not be desirable for longerrun control of the budget. I am afraid that expansion
of revenues to meet present levels of spending would
tend to reduce the prospects for close evaluation of
the appropriateness and effectiveness of existing spend
ing programs. Furthermore, such an expansion would
tend to establish a bad precedent for evaluating the
long-run costs of new programs.
Borrow From Public —If the prospects are not very
good for a marked reduction in forthcoming deficits,
what are the remaining alternatives? The inflationary
impact of the deficits could be reduced considerably
by financing the entire deficit by borrowing from the
public. To attract the funds required from competing
uses would, however, result in a marked rise in inter
est rates. If past experience is any guide, such a de
velopment would be strongly opposed by large seg
ments of the general public and by many politicians.
Accelerate Monetary Expansion —In the face of
such opposition, there would be considerable pressure
to finance the deficits by another alternative, that is
by monetary expansion. This is what happened in the
1965-1968 period when the Federal Reserve System
attempted to resist an upward movement in interest
rates by acquiring an ever increasing proportion of a
constantly growing national debt. Just as in this earlier
period, the rate of monetary expansion would acceler
ate under this alternative, resulting in accelerating
inflation and eventually in higher interest rates.
Rely on Controls —In such a case, another alterna
tive is to rely on price and wage controls to reduce
the rate of price increase. Such measures, however,
merely treat the symptoms of inflation and not its
underlying cause, which is a rapid trend rate of mone
tary expansion. With a rapid rate of monetary expan
sion, controls would have to become progressively
more restrictive if continued progress were to be made
in reducing the rate of price increase. Past experience,
both here and abroad, indicates that price and wage
controls have not been every effective in reducing the
rate of inflation for any extended period of time.
Accept Inflation —Some have given up on the fight
against inflation, and recommend still another alterna
tive which I find to be particularly objectionable.
They suggest that the best course of action at this time
is to maintain the present trend rate of money growth
and to learn to live with the current rate of inflation.
Page 7
FE D E R A L R E S E R V E BANK OF ST. LOUIS
They argue that once a rate of inflation becomes fully
anticipated, as may be possible in the present situa
tion, individuals can take steps to protect the pur
chasing power of their income and savings from the
ravages of inflation. On the other hand, they argue
that the short-run costs in terms of reduced output
and employment, which would be expected to accom
pany steps taken to reduce inflation further, would
be too great to bear.
I do not accept this alternative. I see no evidence
that our labor, commodity, and financial markets are
such as to permit all individuals equal opportunity to
protect their purchasing power from erosion by infla
tion. Furthermore, it is not just the case of holding
the rate of inflation constant that the country now
faces, but the more likely case of accelerating infla
tion. There is no assurance that the economic policy
errors of the past which caused the present inflation
will not be repeated. If such errors were repeated
after we had decided to try to live with the present
inflation, the result would most likely be an even
higher rate of price advance.
Seek Economic Stability Without Inflation —There
is one final alternative that I would like to present.
This alternative is to decide to learn to live with eco
nomic stability without inflation. Our research indi
cates that it is possible, with appropriate monetary
actions, to achieve output and employment growth at
our economy’s potential without inflation. I see no
reason to settle for anything less than such a goal.
But I realize that attaining this objective in the near
future would entail some temporary, transitional costs
in terms of somewhat slower growth in output and
employment for a while.
Page 8
NO VEMBER
1972
The big question remains as to whether or not our
people have the intestinal fortitude to bear these shortrun costs. These posts of curbing inflation were borne
in the late 1950s and early 1960s. As a result, our
economy began to experience economic stability with
out inflation in about 1964. Then a stabilization mis
take occurred with the acceleration of Government
spending in the mid-1960s. Steps were taken to cor
rect this mistake by a sharp reduction in the rate
of monetary expansion in 1966 and again in 1969.
Twice, a large portion of the transitional costs of con
trolling inflation was borne. In each instance the stage
was set for a resumption of output growth at our
country’s potential without inflation, if money growth
had been resumed at a lower trend rate. Following
1966, however, prospective short-run costs were
deemed to be too great and the trend rate of mone
tary expansion was accelerated. Following 1969, there
was concern over the short-run costs that had oc
curred, and money growth was resumed at a moderate
rate for a while. But then it accelerated and the trend
rate established earlier was not altered.
Conclusion
In conclusion, the outlook for 1973 and beyond is
for continued strong growth in output and employ
ment. In view of Federal budget conditions, however,
there is also a very pessimistic aspect to the outlook.
Unless courageous steps are taken to bring Govern
ment spending under control, there is a great likeli
hood of rising taxes, higher interest rates, more infla
tion, or tougher controls —separately or in various
combinations.
Economic Expansion in the
Central Mississippi Valley
F o s t e r e d by expansionary monetary and fiscal
policies, a national economic recovery from the 196970 recession has been in progress for about two years.
Most measures of activity reflect a strong improve
ment from the recession and strike-depressed condi
tions of late 1970. Industrial production increased at
a 3.7 percent rate in 1971, then accelerated to an 8.9
percent rate in the first three quarters of 1972 (Chart
I). In contrast, this measure of real output fell at a
5.8 percent rate from mid-1969 to late 1970. Payroll
employment, which tends to lag general economic
activity, has grown at a 3.4 percent rate since the
third quarter of 1971, compared with a 0.7 percent
rate of growth in the previous two years (Chart II).
Against this background, the following article briefly
reviews the economic recovery of the Central Missis
sippi Valley compared with the nation as a whole.1
Chart I
Chart II
E m p lo y m e n t
R a tio S c a le
M illio n s o f P e r s o n s
95
R a tio S c a le
M i ll io n s o f P e rs o n s
Seasonally Adjusted
100
100
|
I
J_
_____ I ____i-
1964
1965
1966
1967
1968
1969
1970
1971
1972
surce: U.S. Department of Labor
Percentages are annual rates of change for periods indicated,
latest data plotted: October preliminary
In d u stria l P ro d u ctio n
states was less severe than in the nation. Furthermore,
the subsequent expansion may have been more pro
nounced for most of the CMV states than for the
nation. This conclusion is evidenced by recent trends
in several indicators including personal income, man
ufacturing employment, and the unemployment rate.
Personal Incom e
Percentages are annual rates of change for periods indicated,
latest data plotted: September
Region Versus Nation
The Central Mississippi Valley (CMV), like the
nation as a whole, underwent a significant slowing in
economic activity in the period from late 1969 through
1970. In general, however, the recession in the CMV
•The Central Mississippi Valley, as used in this article, con
sists of the states of Arkansas, Kentucky, Mississippi, Missouri,
and Tennessee.
Personal income has grown at a slightly higher rate
in the Central Mississippi Valley than in the United
States since the fourth quarter of 1970 (Chart III).
U.S. personal income grew at an 8 percent annual
rate from the fourth quarter of 1970 to the three
months ending July 1972. This rate of growth was
fairly constant over the period with variations from
the trend generally being of small magnitude and
short duration. During the same period CMV personal
income grew at an 8.8 percent annual rate. Personal
income in the CMV grew at an 8.2 percent rate from
the fourth quarter of 1970 to the fourth quarter of
1971, compared with a national growth rate of 7.5
percent. From the fourth quarter of 1971 to the three
months ending July 1972, CMV personal income
growth accelerated to an annual rate of 9.8 percent,
compared to the U.S. rate of 8.9 percent.
Page 9
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F E D E R A L R E S E R V E BANK OF ST. LOUIS
CHART
PERSONAL
CHART
I I I
PAYROLL
INCOME
IV
EMPLOYMENT
(SE ASO N ALLY ADJUSTED)
( SEASONALLY ADJUSTED )
1 8 6 7 “ I 00
1967-100
# CENTRAL M I S S I S S I P P I
*
CENTRAL M I S S I S S I P P I
VALLEY,
LATEST
DATA PLOTTED, JULY
Em ploym ent
Employment in the CMV states has generally risen
since the third quarter of 1971. However, total em
ployment in the CMV area has not grown as rapidly
as in the nation. This is attributed in part to the long
term decline in agricultural employment which con
tinued through this recession and subsequent recovery.
From the trough of the recession in the fourth quarter
of 1970 to the third quarter of 1972, total employment
in the CMV states and in the nation as a whole has
increased at annual rates of 1.1 and 2.5 percent,
respectively.
Since late 1970 payroll employment, which excludes
agricultural, unpaid family, domestic, and self-em
ployed workers, has increased in the CMV states at
an annual rate of 1.6 percent, and at a 2.3 percent
rate for the nation (Chart IV ). However, manufactur
ing employment has increased at a somewhat faster
pace in the CMV states than in the nation as a whole,
but the more rapid national rate of gain in the non
manufacturing sector has more than offset the slower
rate of manufacturing employment growth.
Unemployment
The CMV states have weathered the recent reces
sion with smaller increases in unemployment rates
Page 10
1972
VALLEY
than the nation (Chart V). This contrasts with the
1960s when the unemployment rate for the CMV states
was generally greater than the national average.2 The
U.S. unemployment rate rose to 5.8 percent in the
fourth quarter of 1970 and remained about 6 percent
through the fourth quarter of 1971 when a downward
trend began. The unemployment rate declined to 5.5
percent in September of this year. The CMV un
employment rate rose to a peak of 5.3 percent in the
first quarter of 1971. Since then, this rate has generally
declined, reaching 4.5 percent in the third quarter of
this year. Demand for labor in many CMV communi
ties has now reached a point where businessmen, in
response to informal business surveys, report labor
shortages.
CHART
V
UNEMPLOYMENT
RATE
(SEASON ALLY ADJUSTED)
PERCENT
PERCENT
U .S.
CMV*
c
t 1 1 1 1 1 1 1 1 1 1 1 1 1 1 I 1 1 11 1 1 1 L 1 1 1 1 1 1 1 1 1
1870
1971
1972
X CENTRAL M I S S I S S I P P I V A L L E Y ____________________
Average unemployment figures for the CMV con
ceal significantly different rates among the states. For
example, in the third quarter of 1972 the unemploy
ment rate in Missouri was 5.1 percent, Kentucky was
2These national and regional unemployment rates are ob
tained by different survey methods, thus are not necessarily
comparable.
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5 percent, Arkansas 4.9 percent, Mississippi 4.1 per
cent, and Tennessee 3.7 percent. Currently, the only
metropolitan areas in the CMV states which have un
employment rates greater than the national average
are St. Louis and Fort Smith. The rate for St. Louis
has generally remained near 6 percent since the
fourth quarter of 1970.
Diverse Rates of Expansion in the CMV States
While several indicators show that the expansion
following the 1969-1970 recession has been slightly
faster on average in the CMV than in the nation, the
recovery has been at diverse rates among the various
CMV states. Those states in the southern portion of
the region with per capita incomes below the CMV
average have generally experienced the more rapid
rates of expansion. For example, Mississippi, with the
lowest income per capita of any state in the nation,
has experienced the fastest growth in manufacturing
employment of any CMV state. Manufacturing em
ployment in Mississippi increased at the annual rate
of 5.7 percent from the fourth quarter of 1970 to the
third quarter of 1972 (Table I). Total personal income
in Mississippi increased at a 10.4 percent rate, well
above the regional and national averages (period
ending 11/1972). Arkansas, with next to the lowest
average per capita income in the nation, also has ex
perienced a high rate of growth; manufacturing em
ployment rose at the rate of 3.5 percent and total
personal income at a 10.9 percent rate. Both rates are
well above the regional and national averages.
In contrast to the relatively high rates of growth in
those CMV states having relatively low per capita
incomes, the expansion has been relatively slow in
Missouri and Kentucky where per capita incomes are
higher. Missouri, with average per capita personal
income of $3,877, almost equal to the national average,
has actually had some further decline in total and
manufacturing employment since late 1970. Total per
sonal income in Missouri increased at the rate of 7.2
percent from late 1970 to the second quarter of 1972,
the slowest rate of growth of the CMV states and
well below the national average. Kentucky likewise
1972
Table I
C en tral M ississip p i V a lle y Econom ic Indicators
A nnual Rates of Change:
IV / 1 9 7 0 to 111/1972
Personal
Income
Per Capita,
1971
Total
Employment
Manu
facturing
Employment
Personal
Income*
A rkansas
$ 3 ,0 3 6
2 .0 %
3.5 %
1 0 .9 %
Kentucky
3,288
1.2
1.0
9.2
M ississippi
2,766
2.2
5.7
10.4
M issouri
3 ,8 7 7
-1 .4
-0 .5
7.2
Tennessee
3,325
3.1
2.0
9.2
CMV
3 ,2 5 8 *
1.1
1.8
9.2
4,138
2.5
0.7
8.2
United States
♦Personal income from IV/1970 to 11/1972
** Unweighted average
Source: Personal income per capita, 1971, from U .S. Department of
Commerce, S urvey of C u rre n t B usiness (April 1972), pp. 1819. Basic employment data are from the respective State
Employment Security Offices and the United States D epart
ment of Labor. State personal income data are from B usi
ness Week.
experienced a relatively slow recovery with total and
manufacturing employment rising 1.2 and 1 percent,
respectively, and below the national average for total
employment.
Summary
The expansionary monetary and fiscal actions since
early 1970 have had similar impacts on the Central
Mississippi Valley states and the nation as a whole.
Total employment growth in the CMV has lagged the
national rate of gain, but manufacturing employment
has exceeded that of the nation and the unemploy
ment rate has been consistently lower.
The rate of expansion, however, has varied widely
among the CMV states. The southern states, where
per capita incomes are below average for both the
region and the nation, have recovered the fastest.
The increase in employment in these states has been
confirmed by businessmen. In fact, businessmen in
many local communities in these states have reported
shortages in both skilled and unskilled labor. In con
trast to the sharp gains in the southern part of the
CMV, the recovery in Missouri and Kentucky has
been less pronounced.
Page 11
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