EconSouth (Fourth Quarter 1999)
U.S. and Southeastern
Economies to Remain on
Solid Ground in 2000
THE SOUTHEASTERN ECONOMY, ALONG WITH THE NATION, SHOULD DECELERATE SOMEWHAT DURING 2000, BUT OVERALL THE REGIONAL AND NATIONAL ECONOMIES WILL CONTINUE TO EXPAND AT A HEALTHY RATE.
oth the nation and the Southeastern United States should continue to enjoy a strong economy in the coming year. Barring any significant economic shock, the current national expansion will officially become the longest in the post–World War II period in 2000, and the Southeast will have performed at or above national growth rates during most of the expansion. In 2000, the Southeast should grow at about the same rate as the nation, but both the regional and national economies should decelerate some from the pace of the last few years.
Whatever deceleration in growth that has occurred during the last few years happened against the backdrop of tight labor markets, which have been a serious constraint in several Southeastern states, extraordinary growth in productivity and a personal savings rate that has been low by historical standards. National economic growth in the coming year should slow from the 3.5 percent to 4 percent range of 1999 but remain healthy.
There is likely to be some acceleration in inflation during 2000, however. Part of this acceleration is simply the reversal of some favorable price shocks that began in 1998. For instance, prices for health care and basic commodities like energy have risen since the late spring of 1999, but these increases do not necessarily imply the start of a systematic increase in inflation rates. The Fed's monetary policy moves in 1999 were aimed at avoiding an acceleration in inflation; but since monetary policy has only a lagged affect on inflation, some increase in measured inflation is likely to occur next year.
Turning from these broad measures of economic performance to look more specifically at the individual sectors that make up the economy is probably best done by shifting focus to the regional level. Since the Southeast is now more than one-seventh of the nation's economy, there are few pronounced differences between an individual sector's Southeastern and national outlook.
Services growth to slow but remain strong
The largest and fastest-growing segment in the economy is the miscellaneous service sector — an all-inclusive designation for businesses, such as accounting, legal work and consulting, that do not produce a physical product and are not involved with the ultimate distribution of goods or finance.
The strong pace of growth in the Southeast's large service sector slackened somewhat in 1999 and is expected to continue to moderate in 2000 as the regional economy moves toward national averages. With over 30 percent of the region's total employment, however, the service sector continued to add more people to employment rolls in 1999 than any other sector. Service sector employment grew 4.1 percent from the third quarter of 1998 through the third quarter of 1999, following 5.5 percent growth in 1998 and 5.1 percent growth in 1997.
Business services continued to pace the service sector expansion with double-digit gains in Florida and continued strong growth in all other Southeastern states. Business services related to computers were in particularly high demand as companies prepared for Y2K, and personnel firms came under pressure to provide workers in the Southeast's tight labor markets. Representing nearly a quarter of service sector employment, the health services industry posted moderate growth in 1999, following restructuring and consolidations in the region.
The tourism and hospitality industry will continue to boost economic growth in the Southeast's service sector in 2000. Occupancies and tourist traffic for hotels and amusement and gaming industries were at historically high levels in parts of the region in 1999. The opening of new and expanded attractions in central Florida and the addition of casinos and lodgings along the Mississippi Gulf Coast brought in record-breaking receipts. Cabin utilization rates on cruise ships out of Florida were at high levels even though capacity rates were up by double-digits over 1998 for some cruise lines.
A falloff in Latin American visitors to south Florida because of poor economic conditions in those countries held back tourism somewhat in the state, but a large number of domestic and European visitors helped take up the slack. Convention activity was especially strong in the region in 1999.
The outlook is mostly positive for the tourism and hospitality industry in 2000. The ongoing expansions of central Florida theme parks should attract more visitors to the state even while raising some concerns about overbuilding. Recovering Latin American economies should also boost tourism to south Florida in 2000.
Overall, the outlook for the service sector is for positive but moderating growth. As the national economy slows and the Y2K problem becomes a memory, there will be less demand for business services, and the boom in recreational and amusement services will slow as consumer spending growth flattens. Demand for health services, however, should expand, stabilizing service sector employment in the coming year.
Manufacturing to slow
Manufacturing activity is likely to slow in 2000 to growth that is in line with national trends. Although manufacturers employ only about 13 percent of the region's workers, the relatively high wages paid by some manufacturers add to this sector's importance.
Factory employment growth declined moderately in the region from the third quarter of 1998 through the third quarter of 1999, following little growth during the previous two years. Most of the job losses were concentrated in nondurable industries, which lost 27,000 jobs over the year. The apparel industry accounted for more than 21,000 of these job losses — the most of any factory industry — as relavely high domestic costs took their toll. The paper industry also weakened because of excess world supplies.
While durables manufacturing jobs grew during the same period, growth was slower than in each of the previous two years. Durables industries in the region benefited from robust housing and commercial building markets. Lumber and wood employment posted strong growth during 1999. Employment in industries producing building materials such as stone, clay and glass also grew. Strong consumer spending stimulated the transportation equipment sector, helping regional car, light truck and auto parts producers. Employment rolls grew in electrical and electronic equipment industries as the region's high-tech industries expanded. The metals industry, however, retrenched, losing employment because of competition from cheap foreign imports.
Total Nonfarm Employment in the Southeast and the United States
Source: Calculated by the Federal Reserve Bank of Atlanta using monthly data (not seasonally adjusted)
The year 2000 is not expected to offer much growth for the manufacturing sector. Weakening housing markets will adversely affect the durable goods manufacturers that did well in 1999. Although the contraction of the apparel industry will slow as the weeding out of the weaker companies slows, producers will continue to move facilities offshore to take advantage of lower wages. If consumer spending slows, the region's auto, light truck and auto parts market will be disproportionately affected in an adverse way. More positively, improvement in foreign economies will help regional exporters, and new laws protecting domestic steel makers should help ensure their survival. Large contracts currently being signed will continue to boost the region's shipbuilding industry.
Retail competition remains strong
For the most part, retailers said that sales matched expectations and that inventories were balanced during most of 1999. Women's and children's apparel sales were strong through the third quarter of 1999, while men's apparel sales were weaker. Home-related product sales were mixed across the region. The year 2000 should feature more of the same, with growth in retail sales remaining modest in line with personal income growth.
Construction to moderate in 2000
The single-family home market continued to operate at historically high levels in 1999. Through the first three quarters, however, existing home sales remained steady and strong but below 1998's rate of growth. In the coming year, single-family permits and home sales will likely continue to slow along with overall growth but remain at historically high levels.
Through the third quarter of 1999, the pace of multifamily construction in the region was up modestly from the previous year and well above the national growth rate. Permit growth remained strong in Florida, which accounts for almost two-thirds of the region's activity. Louisiana also posted strong permit growth in 1999, but growth was down in Alabama, Georgia, Mississippi and Tennessee compared to 1998. In 2000, growth will continue to moderate somewhat overall in the region's multifamily housing construction market in line with overall economic performance.
Commercial construction also remained at relatively high levels in 1999, but growth in terms of square footage through the third quarter of 1999 was less than 1998's increase. Through the third quarter of 1999 the region's performance was slightly better than the nation's. Several key markets in the region have experienced rising office and industrial vacancy rates in 1999. The Atlanta and Tampa markets had high vacancy rates in both office and industrial space while Nashville and Orlando had high office vacancy rates. With some rising vacancy rates, commercial construction should decrease in the coming year but will remain at a relatively high level.
Financial services continue transformation
The ongoing transformation of the Southeast's financial services sector will continue. Legislative changes, technological advances, and intense regional, national and international competition have fueled this structural change. These trends will continue to drive consolidation and innovation in the financial services sector well into the next century.
The present consolidation movement has not come without raising questions about some potential difficulties, however. In addition to temporary employment dislocations, customers and businesses have complained of problems such as diminished services and higher fees. As consolidation continues, intense competition and innovations should ameliorate these problems.
Agricultural exports to increase
The drought of 1999 had a mixed impact on the national and regional agricultural sector. While 1999's yields and aggregate production in most of the region's agricultural products increased over 1998 levels, per acre yields in some key crops and prices of many more agricultural commodities fell to low levels. As a result, many of the region's farmers find themselves in a financial bind.
The drought is currently forecast to last at least through the spring of 2000, causing a great deal of concern throughout the agricultural sector and adding to the usual uncertainties of domestic and international supply-and-demand issues and input costs. Stronger international economic growth, especially in Asia, should lead to a modest increase in national and regional agricultural exports in 2000, food prices should increase only modestly in the coming year.
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 article was written by Tom Cunningham, David Avery, Whitney Mancuso, Edgar Parker and Gustavo Uceda of the Atlanta Fed research department's regional research group.