EconSouth (Fourth Quarter 2000)
Nation and Southeast Set For Slower but Solid Growth in 2001
Growth in both the nation and the region in 2001 is likely to be slower than the rapid pace experienced during the last several years, but no serious economic setbacks are anticipated in the coming year.
he year 2000 marked the tenth year of the current economic expansion — the longest in the post–World War II period — but growth moderated somewhat during the year in comparison to the hectic pace in 1999. In the face of declining rates of return in the stock market, higher real oil prices and the shift of interest rates to historical norms, economic growth in the latter part of 2000 was more subdued than earlier in the year. Economic growth in 2001 for the Southeast and the nation as a whole should match the rate of solid but more moderate growth seen over the latter part of 2000.
As anticipated (see cover story, EconSouth Fourth Quarter 1999), there was some acceleration in the overall rate of consumer price inflation in 2000. In large part, this increase represented a reversal of the favorable shocks the U.S. economy experienced in 1998. Prices for health care and oil-related products and services, in particular, rose considerably through 1999 and 2000. But these price increases have so far remained largely self-contained, and measures of price inflation that exclude these costs have risen only slightly.
By reducing liquidity and reinforcing the public’s expectation that monetary policy is committed to maintaining a low inflation rate, the Fed’s monetary policy initiatives in 1999 and 2000 were aimed at avoiding a sustained acceleration in inflation. Going forward into 2001, the Fed will continue to guard against the threat of inflation.
The outlook for the states of the Southeast reflects the considerable diversity in the array of economic activities across the region. For example, Florida’s economy is service-oriented, while Alabama’s is relatively more dependent on manufacturing. When the variety of economic activities is aggregated across the Southeast, however, the region’s industry is broadly similar to the nation’s as a whole. This similarity is not surprising since the Southeast accounts for about 15 percent of the nation’s economy. Thus, there are few pronounced differences between the overall outlook for the nation and the Southeast in the individual economic sectors, but certain differences do emerge in the outlook for individual states.
Services to continue broad strength
The service sector, comprising activities such as hotels, recreation, health care and business services, accounts for more than 30 percent of total nonagricultural payroll employment in the Southeastern and national economies. During the last 30 years, the share of employment in this sector in comparison to the economy as a whole has almost doubled. Also, between 1992 and 1998 the inflation-adjusted gross state product for Southeastern states increased at an annual average rate of over 4 percent, with nearly a fifth of that growth directly attributable to the output of the services sector.
The region’s service sector employment growth held steady at just under 5 percent in 2000, outpacing the nation’s growth in this sector by over a percentage point. In fact, slightly more than half of the nonfarm jobs created in the region during the year occurred in the service sector. The Southeast’s business services category posted especially strong growth. Business services, which include personnel supply services and computer-related services, among others, increased total payroll by 9.8 percent in 2000. Florida’s business services sector was particularly strong, adding jobs at a double-digit rate for the third consecutive year.
Continued tight labor markets stimulated strong demand for temporary labor agencies and computer services as companies sought ways to become more efficient and competitive. Another driving force behind the surge in overall business services employment in the Southeast has been the rapidly expanding number of call centers, such as customer or client support service centers, which tend to be very labor intensive.
Employment in health care services registered slightly over 2 percent growth during 2000. While still low, this figure was up notably from the modest 0.5 percent growth rate experienced in 1999, when a number of consolidations and reorganizations took place.
Amusement and recreation services added many jobs in 2000 as a result of newly completed amusement parks and park expansions in the region. Although estimates are preliminary, the visitor count to Florida should reach a record high in 2000 following a record year in 1999. New theme park attractions, good weather and liberal consumer spending helped to keep Florida theme parks, cruise ships, beaches and resorts full of tourists throughout the year. Additional hotel rooms, increased marketing and more visitors helped produce record-breaking casino revenue figures in Mississippi for the first part of 2000. In addition, new attractions stimulated tourism activity in the New Orleans area. Overall, though, the rate of growth in the region’s hotel and motel services employment dropped off slightly in 2000 compared with 1999, largely as a result of slower growth in Mississippi’s gaming industry relative to the dramatic growth seen in 1999.
The outlook for the region’s service sector in 2001 is for solid but slower growth than during the last two or three years. If the U.S. economy expands more slowly and labor markets loosen somewhat, there may be less demand for the services of firms supplying personnel as well as business services such as accounting and management consulting. Also, a decline in consumer spending growth, coupled with high fuel prices, may discourage some travel and tourism activities. Absent further consolidation in the health care industry, the expansion of the region’s aging population should continue to provide for moderate growth in the health services industry.
Manufacturing will continue to retool
Southeastern manufacturing employment declined for the second consecutive year in 2000. The number of factory jobs fell by 0.2 percent following a 1 percent job loss in 1999. Although the region is becoming less dependent on manufacturing as a source of jobs — with manufacturing’s percentage of total employment in the region falling from nearly 14.5 percent to 12.5 percent during the past four years — the area’s changing mix of factory employment is an important factor. While durable goods producers have been adding slightly to employment rolls over the past three years, employment in the manufacture of nondurable goods has continued to shrink.
The same pattern applies to factory output. Between 1992 and 1998, manufacturing’s dollar value share of total output in the Southeast fell from 16.5 percent to 14 percent. In 1992, about 45 cents of every dollar of manufacturing output was related to durable goods production, with the remaining 55 cents attributable to nondurables. But by 1998 the durable and nondurable sector shares of output value were evenly split. In part, this shift reflects the expansion of the transportation and equipment industry, which includes auto, truck and ship production, and the continued contraction of the apparel industry.
Apparel employment in the region fell by nearly 40 percent, or 73,000 workers, over the past four years, while the transportation equipment industry added 22,000 workers during that time. Other manufacturing industries linked to residential construction slowed in 2000, with lumber and wood producers as well as furniture and fixture manufacturers posting employment payroll declines.
The manufacturing outlook features some slowing, broadly in line with the national economy but with certain industries outperforming others. Lower demand for housing, increased lumber processing capacity in the United States and weak exports brought about by greater competition from northern European producers will continue to depress lumber prices. Slowing consumer spending may also affect industries, like carpet and furniture manufacturing, that are linked to residential building. Further layoffs are expected in the beleaguered apparel industry as companies continue the trend of shuttering inefficient operations or moving operations offshore to remain competitive.
On a more positive note, the outlook remains strong for the Southeast’s vehicle production industry. Mercedes-Benz, Honda, Saturn and Nissan plan to invest a total of over $2 billion and hire about 5,500 workers over the next few years at auto plants in Alabama, Mississippi and Tennessee. Information technology companies are poised to continue to expand and locate in the region, predominantly in Florida and Georgia. New military and cruise line contracts will boost shipyard activity. The likelihood of continued high energy prices, even if prices remain somewhat below their peak in 2000, will boost production of oil field equipment.
Retail trade to slow in line with consumption
Retail trade accounts for around 19 percent of employment in the Southeast. During 2000, regional employment in the retail sector grew at a faster clip than nationally. The main source of overall growth in the industry came from discount retail outlets. Nationally, consumer expenditure growth eased slightly during 2000, with expenditures on durable goods, in particular, slowing from the double-digit growth seen in 1999. This pattern is also reflected in the national and regional retail sales data.
After record-breaking end-of-year retail sales figures in 1999 in the Southeast, growth in both same-store sales and total sales was slower after the first quarter of 2000. Apparel sales were mixed in 2000, and home-related product sales weakened from their strong levels over the past several years. Consolidations in the retail industry continued in 2000, with several chain stores filing for bankruptcy and others scaling back operations or exiting markets because of strong competition. Maintaining same-store sales growth in 2001 will continue to be difficult for retailers, but the situation may be aided in some markets by further consolidations. Total sales growth will likely be more subdued in the coming year than in 2000 as retailers scale back on the number of new stores entering the market.
Construction slower but at a high level
After peaking during the first quarter of 1999, the region’s single-family home construction activity slowed through 2000. Permit issuance for new construction fell below year-ago levels in the first quarter and continued to decline through the remainder of the year. During the third quarter of 2000, permits in the Southeast were almost 9 percent below the year-ago level compared to a national decline of close to 8 percent. But the slowdown has not been evenly distributed across the Southeast. Building activity remained strong in Florida, which accounts for nearly half of the region’s single-family residential construction, but declined significantly in Louisiana, Mississippi and Tennessee.
Existing and new home sales also slowed somewhat during 2000. Price concessions began to be more widespread during the second half of the year, and inventory levels rose in some markets. In the coming year the pace of construction and home sales will remain slower than in the first half of 2000 in most parts of the Southeast. The new home market through the third quarter of 2000 was generally balanced. Going into 2001, builders seem committed to hold supply in check as they move ahead at a more cautious pace.
Significant signs of overbuilding in the commercial real estate market have not emerged in 2000, and markets around the region have experienced lower levels of nonresidential construction during 2000 than in previous years. Vacancy rates have not increased substantially in most markets, and there continues to be little risk of a serious downturn in commercial real estate markets over the next year. But most industry experts anticipate that construction levels will continue to soften during 2001.
Financial sector to hold its own
Buoyed by growth in fee income, efficiencies generated by recent acquisitions and consolidations, and modest expansion in loan activity, Southeastern financial institutions should continue to perform relatively well in 2001. Net returns on assets, however, will likely fall below current average levels as loan-deposit interest rate spreads remain narrow. The current high levels of consumer and commercial loan activity should generally decline in the coming months, while mortgage demand and refinancing activity will continue to be subdued. Overall credit quality is anticipated to remain healthy even though the levels of nonperforming loans will possibly increase slightly in 2001.
Drought stunts growth in agriculture
The drought of 2000 took a significant toll on agricultural production throughout most of the Southeast. Many parts of the region were declared federal agricultural disaster areas, making many of the region’s farmers eligible for low-interest government loans.
Although the impacts of the drought varied according to location and type of agricultural commodity, the total cost in lost production and income has been tremendous. In addition to lost production, farmers in the Southeast have been forced to contend with increased irrigation and fuel costs. Strengthening international economic growth, especially in Asia and Latin America, should lead to a modest increase in national and regional agricultural exports during 2001, while food prices are expected to post small increases.
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 John Robertson, David Avery, Whitney Mancuso, Edgar Parker and Gustavo Uceda of the Atlanta Fed research department’s regional research group.