Optimism Takes Root in the Spring
Recent data and reports from our business contacts confirm that spring has sprung in the Southeast.
Regional employment growth has rebounded after decelerating in late 2013 and declining in January 2014. February and March gains have averaged 41,000 net new jobs created, and the aggregate unemployment rate for the six states in the Atlanta Fed's region has fallen to 6.5 percent, down from 6.7 percent in December of last year. Perhaps more importantly, reports from business contacts across all sectors were optimistic and most expect near-term activity to continue to expand.
Two steps forward, but...
We've experienced fits and starts when it comes to building momentum in the regional economy during recent years. For example, last fall we contended with a bout of uncertainty tied to fiscal policy, and the ensuing severe winter weather disrupted economic activity across much of the country in January and early February. As Atlanta Fed President Dennis Lockhart noted in an April 2 speech in Miami:
Weather seems to have been a significant factor in the disappointing first-quarter growth. In our contacts with business people across the Southeast, we heard accounts of weather-related losses in production, retail sales, shipment time, work days on construction sites, and visits to hotels and restaurants.
Our most recent Beige Book report captured the increase in activity as well:
District merchants reported an uptick in activity from mid-February through March following sluggish sales in January, which were widely attributed to the severe winter weather.... Hospitality contacts in areas negatively impacted by the adverse winter weather saw improvements in activity.
Looking at labor markets
Before addressing the obvious question of whether the regional economy will maintain its hard-won momentum, let's take a look at just how far we've come since the recession. Using employment data as a proxy for broader economic activity, the region still has not fully recovered. The six states in the region lost a total of 1.7 million jobs during the downturn. Since then, they have regained 1.2 million jobs. The region has 500,000 fewer people employed than it did before the recession began.
Let's dig a little deeper. We know that the downturn hit construction and manufacturing jobs very hard. The chart below shows that regional construction employment fell nearly 38 percent, and although the sector has added jobs since during the recovery, it's probably not realistic (or even desirable) to expect the region's total employment in the construction sector to reach the heady levels experienced during the unsustainable housing boom.
What to make of manufacturing
Manufacturing employment shrank nearly 24 percent during the downturn. While surveys show manufacturing activity rising in the region, the increase is unlikely to lead to a boom in factory-related employment. Manufacturing employment has trended down for decades for reasons not related to the recession, namely the replacing of labor with technology and offshoring of some production activities.
By subtracting the construction and manufacturing sectors—the goods producing sectors—out of the employment totals, we see that total services employment has actually surpassed its pre-recession level (see the chart). The region has clearly made significant progress on the employment front, and the momentum witnessed in the February and March reports is a positive signal in that respect.
The question at hand is whether the momentum we see building in recent data—and the optimism detected from conversations with our business contacts—will lead to continued or even improving economic activity going forward. I'll turn to President Lockhart again, who said in Miami that:
My key working assumption is that growth will accelerate in the second quarter and repeat in subsequent quarters. I expect stronger growth will help to absorb underutilized resources in the economy, especially labor resources.
Although his comments were directed toward the national economy, this outlook holds for the region as well. In addition to the fact that winter weather was a temporary shock, there are other reasons for this outlook. President Lockhart noted in a March 6 speech at Georgetown University that he believed the economy's fundamentals are stronger, and the headwinds that have buffeted the economy and restrained growth are weaker. He continued:
Let me expand on my claim that the economy's fundamentals are stronger. I think basic conditions in several key sectors of the economy are much improved compared with earlier in the recovery period. I would cite banking, housing, energy, and manufacturing as examples.
Household balance sheets are much healthier now thanks to reduced debt, higher saving, and stronger asset prices, including higher home values.
Business and financial-system leverage has been significantly reduced from levels precrisis that were demonstrated to be unsustainable. Business profitability is good, and firm balance sheets are generally liquid.
Likewise, fiscal imbalances, while not solved for the long term, are somewhat less a near-term concern.
Finally, employment markets are unquestionably in a better state compared to even a year ago.
Regional economic data and intelligence gathered from our business contacts support these broad themes, all of which will help serve as tailwinds for the Southeast's economy in 2014.
By Mike Chriszt, vice president in the Atlanta Fed's public affairs department
May 2, 2014