EconSouth (Second Quarter 2000)


CURRENT ISSUE


Fed’s Regional Structure Provides
Unique Insight into the Economy

One of the by-products of the unique structure of the Federal Reserve System is the role the 12 regional banks play in gathering grassroots economic information from their respective regions. The most familiar evidence of this effort is found in the Fed’s Beige Book, a set of summaries of current economic conditions from each region that, collectively, span the nation’s economy.

The view from the Southeast
The contributions to the formulation of monetary policy that can be made by the regional sections of the Atlanta Fed’s research department extend beyond a simple recitation of current developments and expectations. The Atlanta Fed’s Southeast region, for example, represents a significant piece of the U.S. economy. As such, not only does regional performance, by itself, carry considerable weight in national performance, but there are theoretical reasons why regional trends can provide insights into the performance of the rest of the economy.

Theoretically, it is useful to think of the Atlanta Fed’s region as an open economy that trades with the rest of the world, mostly the rest of the United States. Economists have a rich set of models and results that apply to small, open economies, but in the real world few countries can match up to the theoretically pure case. The Southeast comes close, however, because it really is an integrated part of the larger economy, and goods, capital and labor flow freely in and out of the region.

Tom Cunningham

Regional trends have national implications
One example of how this way of thinking about the Southeast can inform national judgments is in single-family housing. The Southeast has a disproportionate share of its manufacturing concentrated in production of items for single-family homes — building products, carpets, textiles, furniture and major appliances. Thus any assessment of national housing has disproportionate implications for the Southeast, and vice versa.

The surge in new housing construction that occurred at the beginning of this economic expansion boosted employment and income disproportionately in the Southeast because of this concentration. Similarly, capital investment in Southeastern plants eased materials shortages that hampered national construction in the mid-1990s. Whatever is going on in the relevant portions of district manufacturing serves as a check on the larger view of the national housing market. Another example is tourism, where national income growth and confidence in future income growth play a disproportionate role in the Southeast’s hospitality sector.

Since the Southeast region is quite large, the Atlanta Fed has branches across the region, in Miami, Jacksonville, Nashville, Birmingham and New Orleans. Each branch has its own board of directors, whose members provide economic reports that are used by the Atlanta Fed’s research department. Often, the anecdotal data gathered from directors and their business contacts precede national developments, where data are available only with a lag. For example, reports from our Jacksonville branch of tightening credit standards preceded the national “credit crunch” associated with the downturn in the early 1990s by more than a year.

Implications for monetary policy
Clearly, the unique regional structure of the Federal Reserve can be an important tool in forming monetary policy. To be sure, policy cannot be targeted at a particular sector or geographic region, but regional information is still important to an evaluation of national conditions. Thus, an understanding of how the regional and national economies interact is a central feature in the formulation of sound monetary policy.

By Thomas Cunningham, vice president of regional research for the
Federal Reserve Bank of Atlanta

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