Off to a Good Start, Again

Southeastern Insights
February 2013

Southeastern Insights provides a broad summary of economic intelligence gathered through our network of business contacts and other sources throughout the Southeast during the latest Federal Open Market Committee (FOMC) cycle. This report covers the period from December 13 to January 30.

The unexpected increase in optimism we detected among our business contacts late last year continued in January. Among the Atlanta Fed's directors (35 from our branch offices and nine from Atlanta), just over half expect their businesses to improve over the next three to six months—similar to the December poll reading, but well above the one in four who conveyed optimism in October (see chart 1). Our broader contact base also showed a generally optimistic but cautious tone.

chart 1

Broadly speaking, our business contacts reported that current economic activity in the Southeast shows slow growth overall, but with pockets of strength. In particular, residential construction continued to improve and the increase in activity is spreading in geographic terms. Builders and Realtors indicate the current recovery in this sector is real and sustainable, not the "starts and stops" we've seen on a couple previous occasions.

Energy exploration and extraction remained very positive, and auto manufacturing was strong. Contacts reporting on retail activity noted generally healthy trends, with the holiday shopping season largely meeting their expectations.

Tourism and travel spending remained solid as well. However, there was concern that rising out-of-pocket health care costs and higher taxes could constrain consumer activity going forward.

Optimistic, but guarded
Despite solid performance in some sectors and the positive tone among our business contacts, we found limited evidence that overall economic activity has broken out of the slow growth track the region has experienced over the last several years. To illustrate, see chart 2, which shows that the aggregated economic activity index for the six states in the Atlanta Fed's region has hovered near a 2 percent year-over-year growth rate for much of 2012.

chart 2

Along those lines, what's also missing is evidence that firms are taking concrete steps to increase payrolls beyond the modest pace of increase we are currently witnessing (see chart 3). Seasonal and part-time work is up, but hiring full-time workers was described as lagging. Firms remain very cost-conscious and several sources noted that companies were only adding employees when they felt it was absolutely necessary to maintain current operations. Recent data show slow but steady improvement in regional payroll employment gains since the summer months, but clearly no significant acceleration that would indicate a rapidly expanding economy.

chart 3

To gauge hiring intentions heading into the new year, we conducted a survey in early January of our business contacts in the Southeast. Of the 670 survey responses we received, 46 percent said they intend to increase employment over the next 12 months, and 42 percent intend to keep employment levels unchanged (see chart 4). While these results may be seen as generally positive, we view them with caution because there were similar signals in last year's survey—and we saw only slow job growth in the Southeast in 2012.

chart 4

Responses to other questions posed in the survey confirmed what we have been hearing for some time. Namely, firms that planned to add to payrolls cited a generally more optimistic sales outlook while those that anticipated a more challenging sales outlook did not plan to add to their labor pool. The need to keep costs down was also a commonly cited reason for hiring restraint.

Uncertainty regarding fiscal policy and the regulatory environment remains a part of the hiring decision process, according to our contacts. In addition, ambiguity surrounding health care costs appears to have increased, as few employers indicated that they have a clear understanding of the costs associated with health care reform. That said, many contacts believe there has been a decrease in uncertainty since November, but "the field of vision remained very short," as one of our contacts put it.

On prices, the year-ahead inflation expectations of businesses fell to 1.8 percent in January, from 1.9 percent in December, according to our most recent business inflation expectations survey. Longer-term unit costs are expected to increase 3 percent, according to our survey. Both results suggest inflation expectations among our business contacts have been little changed over the past six months.

The bandwagon will have to wait
Given some improvement in many of the uncertainty factors tied to fiscal policy, strong performance in several sectors, and the generally positive tone of many of our business contacts, it appears that regional economic activity may accelerate. But, like our business contacts, our optimism is being held in check by past experience.

To make this point, we have only to look at what we wrote last March in Southeastern Insights:

"The optimism we noted earlier in the cycle continued, and businesses appeared to be adjusting their business plans to the improved outlook. Several firms noted plans to add to their workforce, increase capital investment, and adjust inventories—all to match the real or expected increase in demand."

That sounds rather similar to what we are reporting now. Clearly, based on what we know about 2012—only slow economic growth and modest improvement in labor markets—more evidence that the optimism we are detecting early in 2013 is resulting in increased economic activity and hiring is needed.

Atlanta Fed President Dennis Lockhart put this in perspective in his address to the Atlanta Rotary Club in mid-January:

"The continuing theme is slow growth hovering around 2 percent. This rate of growth compares unfavorably with past recoveries. We remain in a long slog.

For 2013, we at the Atlanta Fed are expecting GDP growth in the range of 2 to 2 1/2 percent—basically more of the same.

However, there may be some upside depending on how fiscal policy deliberations go. A number of our business contacts across the Southeast believe that there is some amount of pent-up demand on the part of businesses and consumers resulting from deferred spending and that this demand could be unleashed with removal of fiscal uncertainties. I want to believe this is realistic."

We will continue to talk to our business contacts and review the data for signs that the regional economy is showing material improvement. Until then, our optimism will remained tempered by the fact that we've been here before in this recovery.

By Mike Chriszt, a vice president in the Atlanta Fed's research department, and Shalini Patel, a senior economic research analyst