Regional Update (October-December 1998)
Regional Update (October-December 1998)
Cover Story - Financial Crises Abroad Pose Many Uncertainties for Southeast in 1999
|Financial Crises Abroad
Pose Many Uncertainties
For Southeast in 1999
he pace of economic growth will slow in both the Southeast and the nation during the coming year. This slowing, by itself, is not surprising. Because of international economic turmoil, however, there is considerably more uncertainty about the near-term path of the nation's economy than there has been during most of the current expansion, now in its eighth year. While a mild reduction in growth is the probable outcome for 1999, the large amount of uncertainty in the economy adds to the potential for other outcomes, such as even slower growth or no slowing at all.
The State of the Nation
The main threat to the U.S. economic outlook appears to be the international situation. Forecasts for real gross domestic product growth continue to be revised downward for some of the United States' trading partners. The impact of the recent upheaval in global financial markets continues to move through the pipeline in many developing economies, and the ultimate scale of these effects remains uncertain. In fact, the international outlook has not been this uncertain since the early 1980s, and the effect on the U.S. economy will be negative. How negative remains an open question since the risks appear to be weighted more heavily toward the downside.
Consumer spending growth should moderate during 1999 as a result of slower but still positive employment growth, manufacturing weakness related to a worsening trade deficit and a softening in construction. Income and employment growth should be moderately healthy in 1999 although not as strong as in recent years. Nonetheless, income growth should continue.
Housing starts for 1998 were stronger than expected, with favorable affordability apparently providing a big boost. Next year a modest weakening should set in as income growth moderates as a result of weak growth in overseas economies.
The government sector should show small declines in real federal government consumption expenditures and investment and modest gains in state and local government spending. It should be noted, however, that any significant weakness in the U.S. economy would lead to federal budget surpluses disappearing quickly. States generally are in a good fiscal position, largely due to strong economic growth and low growth in spending. States appear to be holding the line on spending increases while approving moderate tax cuts.
On the inflation front, over the long run, the Federal Reserve has made a serious, public commitment to keeping inflation low. In the short run, this policy will be abetted by weakness in important relative prices (oil and other imports), which should continue to keep inflation under control for most of 1999.
Prices for commodities, including oil, are still soft, and slack worldwide demand will keep commodity prices weak, at least in the coming year. Beyond 1999, renewed growth abroad may strengthen commodity prices. A longer-run concern is the recent more rapid growth in the money supply. Nonetheless, inflationary expectations continue to decline, both as indicated in surveys and as inferred from financial market data.
Overall, the economic outlook for the nation is relatively positive, but an unusual degree of uncertainty persists, particularly about the international situation.
Since the end of the recession in 1991, the Southeast has, on average, outperformed the nation, at least in terms of job growth. This growth differential has narrowed in the last two years and may take a further hit in 1999.
Southeastern manufacturing is, to a relatively large extent, making products for new single-family homes. In 1999 this segment of the construction industry should slow. The southeastern apparel industry is also shrinking, and a growing auto industry may be hampered in the short run by a pullback by consumers. This situation is offset by the growth in the Southeast's much larger services sector. The question, however, is how the gains and losses in all of these businesses sectors will net out in the coming year.
Continued expansion in services. The Southeast's service sector was an important growth engine for the region in 1998 and should continue to be so in 1999, but at a slower pace more in line with national economic growth. Representing about 30 percent of the Southeast's employment, the narrowly defined services sector — which includes miscellaneous business services, health care, entertainment, and hotel and motel services — posted 4.2 percent employment growth from the third quarter of 1997 through the third quarter of 1998. Although slowing from 5.3 percent growth in 1997, service sector growth managed to outpace national growth by 0.2 percent from the third quarter of 1997 versus the third quarter of 1998.
Particularly strong regional gains were registered in business services such as computer-related and personnel supply services. Florida and Georgia registered substantial increases in this subcomponent, adding nearly 92,000 jobs over the year.
Employment gains in the region's large health services sector slowed to a moderate growth rate during 1998 as a result of consolidations and restructuring. Amusement and recreation services and hotel and motel services posted notable growth in 1998 largely because of new and expanded theme parks in Florida and Tennessee and casino expansions along Mississippi's Gulf Coast.
The 1999 outlook for regional business services is for moderate growth. As business activity slows, less demand for support services will result in deceleration of growth. The health services industry will provide stable growth as the pace of restructuring subsides. Recreational and amusement services employment will continue to increase on the strength of new and expanding facilities.
Strength in the tourism and hospitality industry should continue to help stabilize the regional economy. Continued expansions of central Florida theme parks and promotion of south Florida attractions should boost tourism to the state in 1999. However, weakening Latin American economies could cause a drop in the number of foreign visitors to south Florida.
Continued expansion and popularity of the cruise ship industry should bring more visitors to the Southeast in 1999. The opening of new casinos along Mississippi's Gulf Coast will continue to spur employment and revenue growth in the area unless these trends are constrained by a cooling economy. New convention facilities and airport expansions in the region hold promise that more business travel will be routed to the Southeast in 1999.
Manufacturing to moderate. Manufacturing in the region should slow somewhat in the new year although areas of strength will remain. Factory employment growth declined slightly from the third quarter of 1997 through the third quarter of 1998. While durable goods industries, with about 53 percent of the region's factory workers, added about 13,000 people to their payrolls, nondurables industries lost over 27,000 workers, including 20,000 in the beleaguered apparel industry. Strength in durables included gains in industrial machinery and transportation equipment employment.
Although a deceleration in consumer spending growth may adversely affect the region's auto and parts suppliers in 1999, large military, commercial aerospace and ship contracts will help prop up the transportation equipment sector. The expansion of the region's chemical industry will accelerate in 1999 as new projects get under way. New orders for high-tech equipment should continue to grow.
In contrast, the lumber and wood and paper industries will likely continue to be affected by weaker domestic construction and crises in some overseas markets, which will adversely affect exports. Cheap imports will hurt the region's metal producers. Likewise, the region's apparel industry will continue to shrink mostly as a result of foreign competition and imports. Any slowing in national housing markets will also result in less production for the capital-intensive textile producers of household products such as carpets and curtains. The Asian crisis will also limit Asian investments in manufacturing projects in the Southeast, which have been substantial over the past few years.
International trade outlook is clouded. The fundamentals for the region's international trade outlook are changing rapidly as the favorable trade conditions of recent years are giving way to troubling news about falling demand from struggling Asian economies and an evolving global economic slowdown. While the impact of these developments has so far been limited to certain areas and industries, major risks for the near term are the possibilities of a spillover effect on the economies of the region's major trading partners.
The Southeast's top export markets are Canada and Japan, accounting for 20 and 10 percent of the region's shipments, respectively. Although no single Latin American country can match these levels, the Latin American region as a whole now accounts for nearly two-fifths of the Southeast's total export shipments. In recent years the Southeast's economy has benefited from the growth in manufactured exports to Mexico and Canada as trade liberalization by the North American Free Trade Agreement has encouraged production sharing and exports. The region's manufactured products companies also have enjoyed strong demand for their products from the rest of Latin America. But the outlook for export growth in 1999 is clouded by risks of the continued fall of commodity prices and financial problems that could seriously limit the purchasing power of key Latin American countries.
Construction to slow. After shrinking overall in 1997, the region's single-family residential building permits rebounded in 1998. The growth rate for the region in the third quarter measured year over year equaled the national rate of 11.8 percent. Georgia's housing market — which accounts for close to 30 percent of the Southeast's market — was the fastest growing in the region, followed closely by Florida's, with just over 40 percent of the region's market. Mississippi's housing market also had a strong year.
The weakest state in terms of construction growth was Tennessee, which accounts for about 13 percent of the region's market. New home demand was generally for low- to moderate-priced homes, and most builders reported little evidence of overbuilding within the Southeast. Existing single-family home sales were strong during 1998, and many realtors complained that listing inventories were too low to keep up with demand. In the coming year new home construction will remain healthy but at slightly lower levels as current demand is met.
The multifamily housing market in the Southeast seems to be past its construction peak. After experiencing strong permit growth in the first quarter of 1998, this market saw activity drop sharply in the second quarter and rebound in the third quarter. Year-over-year, permits in the Southeast increased at a higher rate during the third quarter (18.1 percent) than the national rate of 10.9 percent. In 1999 the Southeast's multifamily housing construction market will remain healthy, but growth will continue to moderate as a result of a fundamentally sound but somewhat slower economy.
The Southeast's commercial construction market remained generally healthy in 1998, and construction levels were higher than in the previous year. Speculative construction was present in many markets in the region. Some signs of impending softness materialized in several key markets, and investors' interest in many southeastern markets has waned as a result.
In terms of square footage, commercial construction was up during the first quarter of 1998 compared to the same period the year before but declined during the second quarter and rebounded strongly in the third quarter. Through the third quarter of 1998, commercial construction grew slightly in the Southeast but was well above the national growth rate, which was also slightly positive. Commercial construction should decrease in the coming year, but levels of construction will remain relatively strong along with the overall regional economy.
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 Tennessee. This issue of Regional Update was written by Tom Cunningham, David Avery, Whitney Mancuso, Edgar Parker and Gustavo Uceda of the Atlanta Fed research department's regional research group, along with Mary Rosenbaum of the macropolicy group.