Regional Update (October-December 1997)


Cover Story - Southeast to Mirror Nation's Overall Balance in 1998

Alabama to Reap Benefits of New Industry

Florida Continues to Drive Southeast Economy

Moderate Growth Pushes Georgia Past Post-Olympic Slowdown

Louisiana Economy Sends Mixed Signals

Some Bright Signs to Emerge for Mississippi

A Good but Not Great Year Ahead for Tennessee

Southeastern Economic Indicators

Southeast to Mirror
Nation's Overall
Balance in 1998

F or both the national and regional economies, the key concept for 1998 is balance. The national economy, going into the eighth year of expansion, has strengths and weaknesses, but overall there seem to be no serious imbalances that would require or cause a dramatic downturn. In 1998 the nation should see slower real economic growth than in 1997, with inflation incrementally higher although still less than 3 percent as measured by the consumer price index (CPI).

The Southeast should witness essentially the same performance as the nation. After leading the United States in job growth for the first part of this expansion, the Southeast has now settled into a pattern of growth more or less in line with the rest of the country. This pattern is not surprising as rapid growth of the southeastern economy over the past several decades has made the region look and behave more like the rest of the nation. While certain industries and states may benefit or suffer disproportionately when compared to the rest of the economy in the coming year, in general the Southeast is likely to continue enjoying healthy and quite balanced growth in 1998.

The Nation in Balance

The U.S. economy should grow more slowly in 1998. This deceleration is not the result of imbalances other than a widening trade deficit, which is almost entirely related to a maturation of the business cycle. While forward momentum will continue, rapid growth will pause temporarily as a consequence of rapid investment gains in past years. Similar developments have been observed in previous long expansions, creating accelerations and slowdowns within the longer cycle.

By mid-1999, growth will likely strengthen somewhat as investment picks up moderately. Except for energy price increases, the latest price data have been mostly favorable, and inflation is likely to remain quite moderate over 1998 and 1999.

Over the next two years the consumer sector is expected to remain strong. Fundamentals for consumption are still healthy and have even strengthened in some areas. The unemployment rate reached its lowest point in decades. Growth in average hourly earnings remained strong, in real terms, in 1997, while wage and salary growth has been even stronger. Debt service as a percentage of disposable personal income held steady, indicating that debt problems have been stabilizing.

Employment Growth
Southeast vs. United States

Employment Growth Southeast vs. United States

Source: Calculated by the Federal Reserve Bank of Atlanta using data from Regional Financial Associates.

With a good balance being the predominant feature in the region's economy, job growth in the Southeast tracked very closely to job growth in the nation in 1997, although above- or on-par job growth was concentrated in Florida and Georgia, the two largest states.

Housing proved to be extremely resilient in 1997, reflecting strong overall economic growth, healthy demand for labor and favorable mortgage rates. In 1998 investment in multifamily housing should post a brief, shallow decline before resuming a marginal upward trend in 1999. Demographics argue for only modest growth in the long term while cyclical economic conditions suggest healthy levels of activity consistent with either a small decline or a small rise.

Nonresidential investment is likely to slow in 1998 as a result of the recent expansion of economic capacity. In 1999, once the unused capacity is largely absorbed, nonresidential investment will regain some strength.

Government spending should remain essentially flat. Deficit reduction efforts will limit federal spending increases, while spending at the state and local levels will rise in line with revenue growth.

Net exports, in contrast, are expected to worsen in 1998. Over the next two years, relatively strong income growth and the lagged effects of a stronger dollar should result in further widening of the trade gap. Declines in equity markets in Asia have been dramatic, but forecasts for economic growth for U.S. trading partners in that region have not been revised downward significantly although this outlook may change if turmoil persists.

Importantly, the economies of two primary destinations of U.S. exports are in excellent health. Consensus forecasts project that growth in Canada, notably strong among traditional large U.S. trading partners, will be just under 4 percent in 1998 as it will in 1997. Real GDP for Mexico will likely slow from a robust 6.5 percent in 1997 to around 4.5 percent for 1998. European economies are expected to grow moderately as is Japan's economy, after showing only negligible growth in 1997.

Overall, the U.S. economy is expected to post more moderate growth in 1998 than in 1997. Real GDP growth, from fourth quarter to fourth quarter, is expected to be in the 3.5 to 4 percent range in 1997, slow to around 2 percent in 1998 and then rebound in 1999.

While GDP growth will probably slow, the CPI increase is likely to accelerate as conditions that were favorable in 1997 wane. Both food and energy components were soft in 1997, and energy prices declined slightly. Food price inflation diminished in 1997 to a large degree as an offset to a spike in 1996. Domestic and foreign competition kept prices for consumer goods, excluding food and energy, almost flat. For 1998 some of these conditions will not be repeated.

Like the nation, the region was characterized by balance in 1997, and the Southeast will probably mimic national performance in 1998.
Additionally inflation in the prices of services (excluding energy services) should increase moderately in 1998 as a result of continued strong pressure in housing rents and rising labor costs of producing services. Medical care costs are expected to accelerate moderately over the next two years. The overall CPI, and the CPI excluding food and energy, should rise from an expected 2.4 percent, annualized this year, to just under 3 percent by the end of 1999. (It is important to note that changes in the methodology the U.S. Bureau of Labor Statistics uses to calculate the CPI numbers will result in stated CPI numbers in 1999 that are about 0.6 percentage points [annualized] lower than they would be using the methodology employed for 1994.)

Finally, national labor markets remain tight. The current civilian unemployment rate is almost the lowest in the last quarter century. Wage costs as measured by average hourly earnings have been stable, discounting their usual volatility.

Southeast Should Fall in Line With Nation

Like the nation, the region was characterized by balance in 1997, and the Southeast (see editor's note) will probably mimic national performance in 1998, closely tracking the U.S growth rate.

Labor markets tight. Labor markets around the Southeast remain tight, but the severe shortages that characterized a few areas in recent years have abated. The shortages that now exist tend to be not simple shortages in the work force but rather skill-specific — information technology, construction and industrial fabrication are the most common areas where specific types of skills are commanding a premium.

Services strong. The service sector, generally aided by strong tourism, is giving the Southeast a firm foundation for growth, as is the energy sector along the Gulf Coast. The service sector has expanded rapidly, and it is notably powered by tourism in Florida, Tennessee and Louisiana and convention travel in Georgia. State and local governments in the region generally remain smaller than the average in the rest of the nation, and international trade is growing in importance.

Manufacturing mixed. For the region as a whole, manufacturing seems to be completing a transition from a low-skill business, like apparel assembly, to businesses using higher skills and paying higher wages, like autos and aerospace. The apparel industry's contraction is slowing, and overall transportation equipment is holding its own, with a moderation in autos offset by some strength in the aerospace and marine segments.

Financial sector strong. The outlook for financial sector employment remains optimistic. The financial industry has continued to grow steadily in 1997. Banking consolidation has continued, but moderate economic growth should facilitate modest employment increases.

While consumer debt is at historically high levels, bankruptcies and loan delinquencies, continued increases in real wages, consumer confidence and moderate economic growth should allow consumer loan demand to strengthen during the coming year. Lenders in the Southeast also expect mortgage demand to pick up, and the current level of interest rates should continue to motivate refinancing activity. Commercial loan demand is holding relatively steady at a strong level. Moderate economic growth in 1998 should help financial services maintain a healthy and sustainable level of activity throughout the region.

Agriculture healthy. Throughout the Southeast the outlook for agriculture remains mostly positive. Most crop production levels, as well as domestic and international demand, should continue to be healthy. The optimism about next year's crop is of course tempered with the usual uncertainties of weather, domestic and international supply and demand, and input costs.

Exports strong. The region enjoyed strong export expansion in 1997, led by robust demand from Latin America and the markets that make up the Association of Southeast Asian Nations. The Southeast Asian nations may not be as strong a source of demand in the coming year. Imports through regional ports grew even faster in 1997 than in 1996 thanks to the healthy pace of consumer spending nationwide.

The above-average economic growth in Latin America and Asia has boosted demand for several Southeast-based products. Although its exports are concentrated in intermediate and primary products, the region is now showing steady growth of higher-valued products such as autos, electronic machinery and computers, auto parts, and industrial machinery and equipment.

Despite a stronger U.S. dollar that made regional products less competitive in some markets, southeastern exports performed well in 1997, growing faster than in 1996. Although it is too early to assess the impact of NAFTA's (North American Free Trade Agreement) first two years of scheduled tariff reductions, most states report strong export gains to Mexico and modest increases with Canada.

Trade plays an important role in the growth of southeastern state's economies. In fact, during the last four years, exports' share of gross state product has risen in all District states. Clearly, more regional industries are now actively engaged in international trade, expanding both their production and marketing efforts from a local to a global competitive environment.

Editor's Note: Throughout this issue, Southeast refers to the six states that, in whole or in part, make up the Sixth Federal Reserve District: Alabama, Florida, Georgia, Louisiana, Mississippi and Tennesee. This issue was written by Tom Cunningham, David Avery, Whitney Mancuso, Edgar Parker and Gus Uceda of the regional research group, along with Mary Rosenbaum of the macropolicy group.