Beyond Short-Term Interests
President and Chief Executive Officer
Federal Reserve Bank of Atlanta
Atlanta Regional Commission
State of the Region Breakfast
November 21, 2003
The last time I had the opportunity to make some remarks at an Atlanta Regional Commission (ARC) program was in March 2000. Chick Krautler was about to come on board as the ARC’s new director. We were at the height of the economic boom that started in the late 1990s, with the Nasdaq stock index near 5,000. The Atlanta region was in the forefront of a booming U.S. economy, and, as I recall, the theme of the ARC conference at that time was “Infinite Possibilities.”
The world certainly has changed a great deal since then. I think most of us are still going through some adjustment in expectations after the double whammy of recession and terrorist attacks in 2001. While the recession turned out to have been relatively mild and brief, the recovery for the past two years has been difficult, with fits and starts that only recently have begun to look like sustainable economic gains. Looking ahead, I’m optimistic that economic conditions will continue to improve, and that’s what I’d like to talk about for the next few minutes.
GDP, our shorthand for gross domestic product, roared ahead at more than 7 percent in the third quarter, a rate that is faster than at any time since 1984. I’m inclined to view this past summer’s surge of output as an exclamation point in a sequence of eight straight quarters of rising GDP, a period when output growth averaged more than 3 percent. While I expect GDP growth to continue, the pace probably will be less dramatic than reported for the third quarter.
Growth starts to spread
What strikes me after looking at recent data and talking to business folks in the Southeast is the now broad-based character of growth that’s unfolding. I think the economy is gaining a stronger foothold as weaknesses become increasingly confined. What we’re seeing is growth that is spreading across industries and across sectors, becoming more broad-based, or, to use a different word, balanced.
The kind of broad-based and balanced growth I’m talking about involves steady contributions across a broad range of the economy, including households, businesses, exporters and the government. When the economy is balanced, growth is more sustainable and resilient, able to withstand the shocks of one kind or another that inevitably occur in a rapidly changing and interconnected world. But, as we know from recent experience, imbalances and excesses can, and do, occur. In late 1999 and 2000, the expectations for future growth were extremely high, or as suggested by many at the time, infinite. But we now realize that bulked-up technology spending led to excess capacity and other problems that contributed to the recession and continue to hold back growth.
The dynamics of the economy have changed in recent years. Businesses today have become concerned more with efficiency and extraordinary cost control instead of market share and expansion. I’ll talk more in a moment about the corporate sector. But first I’d like to address consumer spending, which accounts for about 70 percent of GDP. In the third quarter this year, consumer spending was estimated to have grown at a whopping 6.6 percent, a torrid pace that is unlikely to continue. Certainly, the tax cuts and cash-outs from mortgage refinancing during the summer, when mortgage rates were extremely low, added a kick to spendable income. At our Federal Open Market Committee meeting in late October, we left the overnight funds rate at 1 percent, with inflation remaining in check and consumer prices rising at an annualized rate of only 1.3 percent.
It’s difficult to judge how long the boost from tax cuts will last or to measure the additional stimulus that will come from the still accommodative monetary and fiscal policy. But I think housing markets in growing places such as Atlanta will remain solid, and I have the sense that retailers will have reason to be upbeat this holiday season in the face of an improving labor market. Businesses, for their part, have done an excellent job of luring consumers through attractive pricing and financing terms. Sales of durables have been strong, and I see few reasons why the trend should abate. For instance, truck and auto sales this year have been generally solid. Appliances, electronics and furniture also are on a lengthening list of goods that are selling well. The pace of growth in consumer spending may ease somewhat in the coming quarters but is likely to remain strong, providing critical ongoing support for the economy.
Businesses pick up the pace
As I mentioned earlier, businesses also are driving growth, and I’d say the most important story in the economy right now probably is the recent surge of business spending. Business fixed investment plunged by 5 percent in 2001 as the economy went into recession and fell again at the same rate in 2002. But this downward trend appears to have reversed. Business spending on equipment and software grew in five of the last six quarters and surged 15 percent in the third quarter, the highest rate since early 2000.
Through hard decisions and perseverance, companies have strengthened their balance sheets, and I’m hearing reports from bankers that business customers are now beginning to talk about new projects and new loans. Cost control has paid off through improved productivity. Collectively, businesses have retooled, and those still around are smarter, leaner and in many ways more competitive than ever. Corporate profits have rebounded sharply this year. When viewed along with recent activity in the market for initial public offerings and favorable conditions in the bond market, the picture of a more vigorous corporate sector has begun to emerge.
Employment has been the economy’s missing ingredient for quite a while. Since 2001, the economy lost 2.4 million jobs, but finally the number of jobs has begun to increase. Between August and October this year, the economy added 286,000 jobs. That broad-based surge of hiring was enough to make a dent in the unemployment rate, which dropped a bit to 6 percent in October. Also, the number of new claims for unemployment has declined in recent weeks. In another encouraging sign, economists recently have been revising up their forecasts of job growth, which indicates labor markets may be stronger than previously thought.
Has the job market begun to stabilize? Layoffs continue, particularly in manufacturing. But even our beleaguered factories are making progress. Manufacturing production has increased over the past five months and is up 1.4 percent since its April low. Broader hiring to date has been reported in residential construction and the service sector. Many of the new positions added in recent months have been temporary, but I view this as a step toward increasing full-time payrolls. Job growth has been strong in fields such as healthcare and education that require specific training and skills. I expect to see additional hiring for permanent jobs as we move into 2004 and companies reach the limits of what they can accomplish by leveraging productivity gains and existing staff.
Outlook for the Atlanta area
The story of Atlanta’s economy is similar to that in the rest of the country although the business spending cuts of 2001 and 2002 hit our metro area especially hard. With its large base of corporate employment and aggressive pursuit of growth, Atlanta in many ways epitomized the boom years of the 1990s. Our area ranked consistently near the top in business relocation surveys. We began to get a larger share of jobs in the promising industries of telecom and technology. Commercial real estate developers were so bullish on Atlanta that they launched another building boom just before the slowdown became apparent. The office vacancy rate for metro Atlanta has now more than doubled from about 11 percent in early 2001 to nearly 24 percent this year. Although Atlanta will always need some speculative office space to accommodate new companies that make quick decisions to move operations here, everyone agrees we’ve got considerable excess office space to work off.
Another industry that has undergone considerable turbulence is travel and hospitality, which is critical to Atlanta. Nationally, several major air carriers filed for bankruptcy protection in recent years, and low-cost upstarts have added a new dimension to the air travel shakeout as they have expanded aggressively. My contacts in the airline business tell me they are working hard to adjust, but fundamental changes take time. My sense is that the airline recovery will be aided by growing domestic passenger traffic as both business and leisure travel pick up. As an aside, recovery in tourism is one reason why the Southeast as a region is now at the front of the national pack when it comes to growth and new job creation.
Despite the painful transition, the Atlanta area economy appears to be gaining momentum. State tax revenues increased 6 percent in October from a year earlier, and area businesses finally have begun to hire. In the Atlanta area, employment since January has grown at a brisk pace and as of this past September was back up to levels from early 2000. Much of the recent hiring in this area has been in residential construction and business services, including many temporary positions. During the same period, a large number of jobs in manufacturing, transportation, warehousing and telecom were lost. The composition of the Atlanta labor market has evolved as companies continue to adjust their models, new businesses form and additional people look for work.
Reflecting on the past several years, I think most of us have tempered our expectations and have been reminded of the need for patience. As a policymaker, I’ve been a bit humbled by the difficulty of forecasting the timing and characteristics of the economic recovery. We all have more hard work and difficult decisions ahead of us, and we need to keep in mind that we live in a world that’s capable of nasty surprises. It will take more time to rebuild an economy with strength across all sectors, to reach the nirvana of truly balanced growth. But almost all recent data suggest the economy is rebuilding successfully.
Aiming for the long term
Looking ahead to Atlanta’s future, it’s clear this region has a great deal going for it: the airport, a solid and diversified job base, and plenty of intangibles, including things such as moderate weather. I think we’ll hear more about the area’s quality of life from Ray Christman in a few moments. As I look ahead, I have no doubt the area will continue to grow and attract new businesses and create new jobs. The ARC projects population for the 10-county region will swell to 6 million by 2030. But the question is, Can the region develop into a more livable place so that we don’t someday look back and say our best days were behind us?
I’m certainly no expert on regional planning and subjects like water, air quality, transportation and education. But as I think about the long-range issues we are here to talk about today, it occurs to me there are some parallels between what I do in the business of economic policymaking and the broad issues of regional planning.
You see, there was a time some decades ago when we could look at the economy and at the banking industry on a highly local basis. As a matter of fact, earlier in our monetary policy-making history, we had different interest rate policies in different regions of the country. But over the years, the U.S. economy has become more national and international. Through this transition, it became clear that each regional Reserve Bank could no longer operate independently. Likewise, it’s clear to me that regional planning issues have become so big and so urgent that individual municipalities and counties cannot address them in isolation and look only at their specific areas of interest.
Now, I know it’s not easy to get hundreds of authorities with competing agendas on the same page and pulling in the right direction. As I look at this situation and the need for cooperation in our region, I am reminded of our monetary policy debates. At the Fed, we try to understand what’s going on at the moment in the economies of the 12 Federal Reserve districts. While there are clearly many differences, as policymakers we must step back and decide what is best for the nation. And that’s what has to happen for the Atlanta region to progress to the next level, where it needs to be.
Another parallel between what I do as a monetary policymaker and the business of regional planning is the necessity of staying focused on long-term objectives. While the Federal Reserve engages in short-term, countercyclical policy actions to try to cushion large swings in the economy, we are always looking at and talking about the longer-term implications of our short-run decisions. There are certainly times when the short-term interests of some industry, some region or some other constituency argue passionately for policies to benefit narrow interests. But I think overall the Fed has a pretty good track record for keeping the longer-term focus.
The way we were organized by the U.S. Congress nearly 90 years ago also provides the Federal Reserve the necessary protection from short-term political considerations that is necessary to make the tough decisions. I have to believe these same principles of long-term focus and nonpartisanship are every bit as necessary for optimal regional planning.
Omar Bradley, an American general in World War II, had the right idea when he said “We need to learn to set our course by the stars, not by the light of every passing ship.” There are a lot of distractions and temptations here in our Atlanta region, and those make it all the more important to stay focused on the big picture and to chart our growth intelligently to get where we need to be.
The U.S. economy is already growing in a way that appears broad-based and sustainable. Atlanta has a long list of “right stuff” attributes to continue to share in that growth and prosperity. If we can work better together, with a nonpartisan, long-term focus on community, the Atlanta region has a very promising future. And I believe that we are up to the challenge. Thank you.