Regional Update (October-December 1996)

Index Southeastern economic indicators

Cover Story - Southeast to Keep Pace with the Nation in 1997

Alabama is Poised for Improvement

Florida's Pace to Slow but Remain Strong

A Slower but Positive Pace in Store for Georiga

Resource Base Likely to Work in Louisiana's Favor

Mississippi Set to Emerge from Its Post-Boom Hangover

A Good but Unspectacular Year Ahead for Tennessee

Southeast to Keep Pace
with the Nation in 1997

he Sixth Federal Reserve District should enjoy moderate growth through the coming year. During 1996 growth rates were healthy but decelerated generally across southeastern states, despite some exceptions. This trend should continue in 1997, resulting in overall performance that matches or falls marginally below the nation's. Given that the Southeast has outpaced the nation since the beginning of the recovery more than six years ago, this slowdown to growth just under the national average is not surprising.

Over a longer period of time jobs in the region should increase more rapidly than in the nation. At this point in the nation's overall economic expansion, however, the Southeast is likely to lag behind, particularly as California and the Northeast corridor states boost their recent performance. While long-term factors that propelled the South's relatively rapid economic development are still present, short-term decreases in the rate of in-migration from the rest of the country and some specific sectoral or geographic weaknesses are temporarily checking progress. In a larger view, however, recent growth in the Sixth District, which accounts for about one-seventh of the nation's economy, has simply served to tie the region's growth more closely to the nation's. Consequently, changes in the national outlook will play a dominant role in shaping the outlook for the Southeast as a whole.

Nation to sustain moderate growth path

The nation should continue along its current moderate growth path, slipping only slightly in the coming year. After a rather strong first half of 1996, expansion slowed due to some deceleration in personal consumption, a reduction of business investment from its very strong first-half rates, and a peaking of housing investment. These trends should continue throughout the coming year, resulting in gross domestic product (GDP) growth rates down from annual average rates of just under 2.5 percent in 1996 to just over 2 percent in 1997. Because economic growth will be in line with its long-term potential, the unemployment rate should remain relatively stable. Inflation, too, however measured, should remain fairly stable.

Personal consumption makes up about two-thirds of GDP and is by far its most important component. While a general slowdown in personal consumption is anticipated, timing is somewhat uncertain. Consumers are not facing immediate constraints on their purchasing power so that even though debt service levels, for example, do not indicate much upside potential for spending, at the same time they won't immediately retard consumption. Business investment is in a similar situation. Recent high rates of investment growth resulting in noticeable capacity expansion suggest an approaching cycle of moderating investment growth, but these circumstances do not necessarily imply a major slowdown in the very near term.

Housing has shown surprising strength in 1996, particularly later in the year. With a declining rate of household formation, however, the nation's demographics preclude this trend continuing much longer. Developments in national housing markets are especially important for the Southeast because the Sixth District's manufacturing industries, relative to those of the nation as a whole, are heavily concentrated in building-related products: in addition to the obvious wood and building materials, the South also focuses on production of fabrics, carpets, furniture, and appliances. In the early 1990s, when housing was strong both regionally and nationally, this orientation helped the Southeast outperform the nation. Now concentration in building products will no longer provide a disproportionate boost to the region.

Government spending is another tough call in the coming year. Attempts to rein in federal spending have recently turned toward the idea of handing over various programs to the states. This move has two direct consequences for the outlook. First, it suggests that a surge in government consumption spending is unlikely at the federal level. Second, the states, too, may feel constrained in their current spending; they may be hesitant to commit to, say, a long-term infrastructure rebuilding project when in the very near future they may be called upon to take over operation of what could be some very expensive programs. Uncertainty, more than anything else, is the problem at the state and local level. While many states, including some in the Southeast, have enjoyed rather robust tax revenue growth in the last few years, states may be prudent in undertaking major expenditure programs until they have a better understanding of what they will be called upon to do as a consequence of federal belt-tightening.

Southeast will stay on course

Manufacturing Steadies. While not as central to the Sixth District economy as it used to be, manufacturing is still relatively concentrated in the southeastern states with the exception of Florida. For the last few years one of the biggest problems for manufacturing in the region has been the disappearance of apparel manufacturing jobs, which have been flowing offshore. While these job losses have been a continuing drain on the manufacturing sector, fewer reports of shrinking employment rolls have issued from the apparel and textile industry, perhaps indicating that a large portion of the weaker firms have been culled out. On the more positive side, orders for industrial machinery and electronic equipment have recently picked up at regional firms, and some District chemical plants are running at 100 percent capacity and announcing expansions. The continued in-migration of plants to the region should sustain growth in the automotive support industry, boosting industrial activity in Tennessee, Georgia, and Alabama, affecting other southeastern states as well, but to a lesser extent.

Exports Diversify. The District's export activity will continue to act as an auxiliary engine to complement the region's economic growth. Traditionally, southeastern exports have been characterized by a relatively high volume of bulk and intermediate commodities such as chemicals, paper, forest products, and food. Although the value of the District's trade mix is still dominated by these commodities, the region's export trade is rapidly diversifying into exports generated by advanced manufacturing and service-producing industries. The liberalization of trade and robust economic expansion in most of the region's top export markets (mostly in Latin America and the Pacific Basin) have prompted substantial development in regional industries that export.

Even though the Olympics are over, tourism and convention activity will continue to play a major role in furthering the region's economy.
Tourism Flourishes. Even though the Olympics are over, tourism and convention activity will continue to play a major role in furthering the region's economy. Industry representatives are forecasting a record year for the tourism industry in central Florida. New attractions, expanded airline service, and brisk international traffic are filling theme parks and hotels. This strong showing is expected to last through 1997 as more new attractions come on-line and Disney World celebrates its highly promoted 25th anniversary. Resorts on Florida's Gulf Coast and in south Florida report robust winter bookings and expect the trend to carry over into the new year. Renovations of hotels and resorts and publicity about the trendy South Beach area are boosting tourism in the southern part of the state.

According to tourism officials, leisure visits are outpacing convention travel to Miami. More than 50 percent of the visitors to Miami in 1996 have been international, with European and South American tourists posting double-digit gains from a year ago. Although the end of the year is traditionally slow for Mississippi's Gulf Coast casino business, 1997 is expected to usher in the fruits of large casino construction projects. Increased airport passenger traffic due to improved jet services will also enhance Gulf Coast tourism.

Construction Will Be Mixed. Construction activity in the coming year will be mixed. Some slowdown is, of course, inevitable, as the surge in activity associated with the Olympics is not matched by the coming year's numbers. Nevertheless, overall construction will remain at historically healthy levels. One of the largest decelerations will be in single-family residences. A slowing of in-migration to the region is already making itself evident and, along with population demographics, suggests that the District, like the nation, has passed its peak in the single-family category. At the same time, however, multifamily building should remain strong, though it will not equal last year's record-breaking pace, as occupancy rates hold at high levels generally across the District.

Commercial real estate markets are also sustaining their solid pace throughout the region and should generally continue to do so. Suburban and central business district office markets continue to record rising occupancy levels and rental rates. However, constraints imposed by high occupancies are said to be holding absorption down. Large blocks of office space are still difficult to find in most areas of the District. Commercial construction continues to be dominated by build-to-suit projects, though more speculative construction is already under way this year and more is expected next year.

The most active construction industry in the District is the industrial market, with the warehouse and distribution category playing a major role. Retail construction seems to be mixed. Realtors in several markets complain of saturation, while others are excited about growth that is creating demand for more retail space. Although the bulk of retail development has moved away from large projects to smaller shopping centers, several large malls are under construction in the region. Overall, both developers and real estate agents can anticipate fairly good prospects in the coming year.

Financial Services Will Remain Healthy. The outlook for the financial sector remains cautiously optimistic. The financial services industry has continued to expand steadily in 1996. Banking consolidation trends persist, and moderate economic growth should facilitate only modest increases in financial sector employment. Consumer loan demand has fallen from high levels earlier in the year, but some strength is still evident in auto financing. Mortgage activity has also slowed somewhat in the second half of the year. Commercial loan demand has held relatively steady at a healthy level, despite a drop from high levels earlier in the year. In the coming year continued moderate economic growth is expected to help the financial services sector maintain a healthy and sustainable level of activity throughout the District.

Editor's Note: 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. Research for this issue was conducted by David Avery, Edgar Parker, and Whitney Mancuso. Commentary was written by Tom Cunningham, with Mary Rosenbaum.