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Economic Research

REIN

bullet imageRegional Update: Regional Economy Stabilizes
bullet imageData Corner: Southeast Purchasing Managers Index
bullet imageUniversity Studies: Universities Delve Into Regional Economies
bullet imageEcon 101: Personal Consumption Expenditure
bullet imageOn the Ground: An Interview with Julius Weyman, Regional Executive at Atlanta Fed's Birmingham Branch  
bullet imageThe D6 Factor


Regional Update

Regional Economy Stabilizes

image of Florida

The first half of the summer has witnessed further signs of economic stabilization in the Southeast. Data reports and information the Atlanta Fed research department gathers from business contacts show steady, albeit weak, economic activity in most sectors. While the regional economy is expected to improve throughout the rest of the year, the rate of improvement will likely be very modest.

The main reason for the sober outlook is the numerous headwinds businesses and consumers continue to face. In particular, consumers are not expected to embrace additional spending as they strive to pare back expenses. This cautious consumption is likely to continue for some time, especially in light of the weak employment outlook. Sales tax revenue for the Southeastern states declined, on a year-over-year basis, for seven consecutive quarters through June 2009, with second-quarter revenue more than 5 percent below year-earlier levels. Households are expected to increase their savings and limit spending as long as the economic environment remains uncertain.

Tourism-related spending, an important and typically buoyant component of retail activity in several parts of the Southeast, is also suffering. For example, the Florida Department of Revenue estimated that sales tax revenue for tourism and recreation activities was down more than 10 percent in June 2009 from a year earlier. In addition, estimates from Visit Florida, the state's official tourism marketing corporation, show a 9.4 percent drop in the total number of travelers to the state in the second quarter compared with the same period in 2008. Information from hospitality industry contacts supports these data. Some areas noted a significant decline in business-related travel and convention attendance.

One area that has seen modest improvement is single-family residential sales and construction. Permits for new single-family residential construction remain well below year-earlier levels in all Southeastern states, but all six states have posted monthly gains since January 2009. Existing home sales also are improving. Data from the Florida Association of Realtors show a 28 percent year-over-year increase in single-family sales in June. The outlook among builders and Realtors, which had improved in the spring, moderated over the summer. The condo market remains in distress. Vacancy rates remain high, and since many condo sales are second or vacation homes, the outlook for future sales continues to be bleak.

Initial Claims for Unemployment Insurance in the Six Southeastern States
Chart of Initial Claims for Unemployment Insurance in the Six Southeastern States
Source: Source: U.S. Department of Labor, Federal Reserve Bank of Atlanta

Another construction-related sector that remains under stress is commercial development. Office and industrial vacancy rates have been trending upward, with some areas reporting greater availability of sublease space. Developers continued to report fewer backlogs, and more projects were delayed. Recent data support the view that commercial construction activity will continue to soften.

Regional factory activity continued to climb from very low levels over the summer. Overall production continues to contract, albeit at a much slower pace than earlier in the year. Kennesaw State University's Southeast Purchasing Managers Index (see this issue's "Data Corner") rose to 50 in July, indicating that manufacturing activity was neither expanding nor contacting. The report also showed that new orders were rising, a sign that future production will likely tick up.

Business hiring plans remain very conservative, according to most of the Atlanta Fed's business contacts. Although layoffs continue, businesses are implementing layoffs at a more modest pace than earlier in the year. The chart shows that initial claims for unemployment insurance for the combined states of the Southeast, although still elevated, have declined steadily since April. While the worst may be over regarding job losses, the unemployment rate appears set to remain high as hiring plans continue to be cautious.

Data Corner

Southeast Purchasing Managers Index

Southeast Purchasing Managers Index
Chart of Southeast Purchasing Managers Index
Source: Kennesaw State University Econometric Center

The Econometric Center at Kennesaw State University's Coles College of Business prepares a monthly Purchasing Managers Index (PMI) Report. This report provides an analysis of the most current market conditions for the manufacturing sector in Alabama, Florida, Georgia, Louisiana, Mississippi, and Tennessee.

The report, which is based on a survey of major manufacturing companies in those states, analyzes trends and activities for new orders, production, employment, deliveries, purchased materials, finished goods, and commodity prices.

An index reading above 50 indicates that more participants are reporting a higher level of activity than the prior month. The higher the index is above 50, the stronger the indication of wider-spread growth. The lower the reading is below 50, the more activity is contracting.

The Southeast PMI rose to 50 in July from 47.2 in June. A reading of 50 suggests that the manufacturing sector's performance is neither increasing nor decreasing, but stable. The chart shows that the path of the Southeast PMI has been trending upward since December 2008, when it hit 25.8, its lowest point since the series began.

The increase in July's Southeast PMI was based on increases in advances in new orders, production, and employment. The new orders component rose for the third consecutive month, increasing 11.2 points during that period and 4.5 points in July alone. Production rose 13.4 points in July to 62.2. Employment's 4.8 point increase was related to the strong movement for new orders and production. Supplier delivery time fell 4.1 points, suggesting that orders are increasing faster than suppliers can deliver. The commodity price measure rose 5 points to 55.1 points, its highest reading since September 2008. A 4.7 point decline in finished inventory components was likely tied to the three-month pickup in new orders.

The Southeast PMI is calculated using the same methodology as the Institute for Supply Management's (ISM) national survey, making comparisons of national and regional trends possible. The ISM index for July was 48.9, which suggests that manufacturing activity in the Southeast is rebounding a bit faster than it is nationally.

University Studies

Universities Delve Into Regional Economies

To gauge where the economy is and to see where it may head, researchers examine data that measure consumer sentiment. Two widely used sources of such data are the Conference Board's Consumer Confidence Index and the Reuters/University of Michigan Index of Consumer Sentiment. While these two indexes can provide insight into consumers' opinions on a national level, gauging how consumers feel at a more local level is also useful. Fortunately, some members of the Atlanta Fed's Local Economic Analysis and Research Network (LEARN) have constructed their own versions of these indexes.

Businesses' outlook improving in Alabama
The Alabama Business Confidence Index (ABCI) is a quarterly gauge of the state's business sentiment conducted by the Center for Business and Economic Research at the University of Alabama. The ABCI equally weights six survey variables—expectations for the national and Alabama economies and four key industry indicators: sales, profits, hiring, and capital expenditures.

During the third quarter, the ABCI climbed 14 points, posting the largest quarterly gain in the survey's almost eight-year history. Still, the economy is not expected to turn the corner in the third quarter, as indicated by an ABCI reading of 46. (An index reading above 50 indicates expansion; less than 50 indicates contraction.) Sales, with a reading of 50.3, was the only component higher than 50. However, all six components of the index rose by double digits, led by a 20.4 point improvement in the national economy variable.

Wariness in the Sunshine State
The University of Florida publishes a monthly Florida Consumer Confidence Index. The index is constructed using current perceptions and expectations of personal finance and national economic conditions and perceptions about buying big-ticket items.

In July, Floridians' consumer confidence declined 2 points, to 67, from a revised June index of 69. (An index reading above 100 indicates strong growth.) The only component that rose is whether now is a good time to buy big-ticket consumer items. "This decline comes as a bit of a surprise," Chris McCarty, the survey director, said. "Most of the decline can be attributed to a big drop in consumers' perceptions of long-term economic conditions and, second, to perceptions of personal finances. Given that the stock market is now up for the year and housing is showing strong signs of stabilizing, I would attribute much of this decline to the news about employment. Moving forward we predict consumer confidence may gain a little in the next month or two given this big a drop."

Mississippi businesses optimistic
The Gulf Coast Business Council Research Foundation releases a quarterly report based on local chief executive officers' and business owners' perceptions of the economy compared with six months prior and their outlook for the next six months.

For the second quarter of 2009, Mississippi Gulf Coast business owners and CEOs reported significant improvements in perceptions of the current economy compared with the previous six months and in their six-month projections. Their overall measure of business confidence for the Mississippi Gulf Coast improved by 13 points from the previous quarter, to 57. More than 55 percent of respondents predict that the performance within their own industries will improve in six months, compared with 46 percent in March. The number of respondents who believe the economy would worsen in six months declined to 19 percent from 26 percent the previous quarter.

Econ 101

Personal Consumption Expenditure

Personal consumption expenditure (PCE) is the consumer spending component of gross domestic product (GDP). PCE measures the value of goods and services purchased by U.S. households. It is the largest portion of GDP, accounting for more than 70 percent of the measure.
Image of a graduation cap

As a result, significant changes in PCE—what we might also refer to as consumer spending habits—will affect the economy. Marked drops in consumer spending can lead to a recession. Conversely, an increase in PCE during a recession generally indicates that a recovery is at hand.

PCE and personal savings are inversely related; as consumers save more, they spend less, a phenomenon also linked to consumer attitudes and expectations. For instance, if consumers are uncertain about their current and future finances, they will rein in spending and save more. As of July 2009, the savings rate (savings as a percentage of GDP), sits at 4.2 percent, well above the 10-year average of 2.8 percent. However, the savings rate has noticeably decreased recently, which may mean that people are feeling a bit more confident and thus spending more.

The goods component of PCE accounts for almost one-third of total consumer spending. The goods component is very broad and is broken down into two subcategories: durable and nondurable goods.

Durable goods make up about 11 percent of PCE and are defined as items that last for more than three years (such as cars, refrigerators, and televisions) and are generally more expensive than nondurable goods. Because the timing of many durable goods purchases is discretionary, they are a key indicator for economists.

Nondurable goods are generally less expensive than durables. Nondurables, which account for about 22 percent of PCE, usually display less volatility than durables because many nondurables are necessities, such as food and clothing, that people must buy even when times are tough.

Services account for more than two-thirds of PCE. Today the United States is a service-based economy. Services, like nondurable goods, tend to have more stable spending patterns during volatile economic times because some services, such as going to the doctor and getting haircuts, are hard to cut back on.

Because of the role that personal spending plays in the economy, PCE is a key indicator that yields important insight into the economy's direction. During times of economic uncertainty, such as today, economists track PCE closely.

By Courtney Nosal, an economic analyst at the Atlanta Fed

On the Ground

An Interview With Julius Weyman, Regional Executive at the Atlanta Fed’s Birmingham Branch

Photo of Lee JonesWhen you became regional executive at the Birmingham Branch, you didn't have many contacts to help gauge the Alabama economy. What steps have you taken to gather economic information effectively? I have found the public is pretty excited to engage when they learn that the Federal Reserve is not only interested in what they have to say but is also eager to maintain a flow of information and consider it in the context of informing, guiding, and ultimately constructing monetary policy. The best insights into Alabama came from the people around me. When I landed in this assignment, the office staff had already outlined places to go and people to meet. Careful thought had been given to connections that would likely be helpful, and the groundwork had been laid. Not only were the right people selected for me to meet, but they were expecting me to learn from them, and they were energized about the Atlanta Fed's focus and the REIN (Regional Economic Information Network) initiative. To a person, they were prepared to suggest ideas, provide information, and contribute. I'd say they were hungry to be involved and quite excited about the Atlanta Fed's increasing its attention to this area beyond what the bank had done previously.

What relationships have you formed that will help you gather solid regional intelligence? Once we got the right contacts helping us, our relationships have been easy to build. Manufacturing and agriculture, education, health, the financial sector, construction, real estate, and the rest—there is nothing Alabama doesn't do, and there is someone we know or can talk to as necessary.

Have your information-gathering efforts reached outside the Birmingham area? Through the formation of advisory councils—the Atlanta Fed has several now—we have selected key players in targeted areas for seats on the councils. We search the entire region to choose folks, and the regional executives in our five branches share our best people with one another depending on who needs what and who knows whom. For example, Birmingham's advisory council is agriculture, and I have citrus representatives from Florida based on references I received from our Jacksonville and Miami regional executives. Our Nashville regional executive helped identify a sugar industry representative. We have crawfish and rice farming representatives from Louisiana, and I went to Georgia to find a biofuels contact. Of course, Alabama is well represented with row-crop farming and cattle ranching advisers.

D6 Factor

The D6 Factor fell to a record low of –6.3 in April from a revised –6.0 at the end of the first quarter. From its April low, the index rose slightly to –6.2 in May, reflecting a slight improvement in Southeastern economic activity. The index has been in negative territory since October 2006 and, until the May upturn, had been setting new historical monthly lows since the start of the current recession. (A negative value indicates that economic conditions are weak.)

Note to readers: This issue's D6 Factor summary and chart are updated only through May because we are in the process of updating the methodology and construction of the D6 Factor index.

The D6 Factor
D6 Factor chart
Note: The growth rate is normalized to zero.
Source: Federal Reserve Bank of Atlanta
About the D6 Factor
The D6 Factor is an estimate of the trend common to 25 distinct monthly series of economic data for the six states of the Sixth Federal Reserve District. It provides a broad measure of Southeastern economic conditions that is available more frequently than estimates of gross domestic product (GDP) for the six states. Also, unlike an average of state-level GDPs or other factors, the D6 Factor can filter out idiosyncratic shocks that disproportionately affect individual states. For detailed information on the D6 Factor's construction, see "When More Is Better: Assessing the Southeastern Economy with Lots of Data," by Pedro Silos and Diego Vilán (Economic Review, Third Quarter 2007).