EconSouth (Fourth Quarter 2004)

Steady Growth on Horizon at Home and Abroad

The Southeast, like the nation, is poised for continued economic growth, and conditions are set for international expansion as well.

   
Promising Picture
for U.S. Economy
  In the Southeast,
Storm Clouds Recede
  International Outlook
Remains Positive

Promising Picture for U.S. Economy

The outlook for the U.S. economy in 2005 is promising. Low overall inflation and continued improvement in the job market will provide the base for solid economic growth next year.

Following a year of gains in broad economic measures such as per capita income and employment (see chart 1) as well as strong real gross domestic product (GDP) growth, it would be tempting to describe the 2005 national forecast as bright and sunny with few headwinds. But that description wouldn’t provide a complete picture because some of the uncertainty and risks that clouded prior years’ outlooks, such as geopolitical concerns in the Middle East and higher oil and energy prices, remain challenges for the economy in 2005.

That the nation’s economy has continued to grow despite the presence of these risks indicates its resilience. Additional progress in addressing these challenges—especially those the United States can influence directly, such as fiscal imbalances—will be important to sustaining the expansion.

2005 forecast
In 2004, performance as measured by real GDP mostly matched analysts’ expectations. In 2005, overall GDP growth is anticipated to be similar to that experienced in 2004.

Strengthening labor markets and solid improvements in income should continue to support real personal consumption growth in 2005. Moderating energy prices would also boost consumer spending next year. But growth in consumer spending may be restrained somewhat as the effects of past fiscal and monetary policy actions run their course. On the other hand, reduced monetary policy accommodation will help contain core inflationary pressures in 2005.

The resurgence of business investment spending that began in mid-2003 has brought capital spending back to prerecessionary levels. This year, tax incentives supported business investment, but these incentives are due to expire at the end of 2004, potentially causing a moderation in investment spending in the first part of 2005. Corporate balance sheets appear to be in good shape as strong profit growth during 2004 provided business with ample funds to support capital spending.

Residential investment spending continued to surge ahead in 2004, bolstered by low interest rates and strong income growth. Modest increases in mortgage interest rates in 2005 could dampen growth in residential investment spending. But even so, overall housing activity is expected to remain at high levels, supported by robust income and employment growth.

Chart 1
U.S. Employment and Per Capita Income
Note: Shaded areas indicate recessions.
Source: Per capita income data from the Bureau of Economic Analysis; employment data from the Bureau of Labor Statistics. Data provided by Haver Analytics. Data for 2004 are through the third quarter.

The large U.S. current account deficit has placed downward pressure on the dollar’s exchange rate during 2004. When combined with continued economic growth in the rest of the world, the dollar’s lower value should help support U.S. export growth in 2005, a welcome relief for U.S. exporters.

Employment on the rise
The unusually slow recovery in employment during 2002 and 2003 is partially explained by painful structural adjustments within particular industries. But the signs are that the adjustment process appears to be nearing completion, as evidenced by 2004’s decline in the size and frequency of mass layoffs as well as the small gains in manufacturing employment during the year.

Nonetheless, the overall improvement in the employment situation in 2004 was relatively modest, suggesting that businesses continued to weigh hiring decisions carefully. Higher energy costs likely played some role in restraining employment this year. By some estimates, higher energy prices reduced real GDP growth by about 0.7 percentage points in 2004. If energy prices ease in 2005, some of the restraint in hiring should also lift.

Fiscal policy deliberations cloud outlook
The approach of Congress and the administration to fiscal policy issues will undoubtedly affect the pace of growth in 2005. The nation’s fiscal deficits are unlikely to be erased without adjusting taxes or spending. Recognizing this condition, legislators in Washington have placed tax reform on the agenda in 2005. Regardless of how the legislative negotiations play out, the process itself introduces some uncertainty to the economic outlook.

Even with this uncertainty, however, the U.S. economy appears to be on track for a year of solid growth.

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In the Southeast, Storm Clouds Recede

The Southeast’s economy in 2005 will be led primarily by developments in the national economy but with some distinct regional variations. For instance, Florida’s unique service-based economy leads the Southeast, although the state will continue to feel the effects of the four hurricanes that hit there in the late summer.

Despite the resilience of Florida’s economy during 2004, employment numbers for the Southeast were soft overall. At the same time, other indicators of economic performance, such as real per capita income, showed more strength during 2004 than did the region’s tepid employment picture.

A regional difference
When one looks at the effects of the 2001 recession in the Southeast versus the United States overall, it is notable that per capita income in the Southeast was slower to decline than in the rest of the country whereas employment recovered more quickly (see chart 2). Increases in transfer payments to individuals (especially Medicare and Medicaid) and the concentration of job losses in lower-wage manufacturing industries influenced regional income trends in recent years. The relatively better employment situation is largely explained by the underlying strength in Florida’s service-producing industries.

When looking forward to 2005, it’s important to note that many of the recent years’ job losses in the Southeast were structural rather than cyclical in nature as numerous traditional manufacturing industries permanently cut back their operations in the region. As a consequence, job growth in 2005 will be less likely to rely on rehiring by downsized manufacturers than previous recoveries did. Instead, new hiring will have to be generated mostly by growth in other industries—such as health care, education, residential construction, defense, and tourism—that have displayed strength over time as well as by the establishment of new, primarily business service–based firms. Nonetheless, manufacturing will remain important in much of the Southeast, especially as the region’s newer industries, such as automobile manufacturing, increase their presence.

Chart 2
Southeastern Employment and
Per Capita Income
Note: Shaded areas indicate recessions.
Source: Per capita income data from the Bureau of Economic Analysis; employment data from the Bureau of Labor Statistics. Data provided by Haver Analytics. Data for 2004 are through the third quarter.

An examination of some of the Southeast’s major economic sectors depicts the gathering strength in 2004 that points to an optimistic outlook for 2005.

Retail rebounds
Retailers across the Southeast generally noted modest improvement in retail sales in 2004 following a lackluster performance during most of 2003. In particular, high-end retailers and department stores, especially those associated with tourist destinations, noted improved markets. Discounters, meanwhile, reported softening overall market conditions in 2004 after four years of very rapid growth. Many regional retailers, like their national counterparts, noted that rising fuel costs were negatively affecting retail sales during the second half of the year as higher fuel prices became an unexpected additional expense for consumers.

The four Southeastern hurricanes in the late summer of 2004 redirected consumer spending in the affected areas. For instance, purchases of emergency items such as plywood, generators, batteries, tarpaulins, and groceries were especially strong. Outside the affected locales, many stores benefited from the surge in traffic as evacuees stocked up on supplies before heading back home.

Because consumer spending is tied closely to job and income growth, the retail outlook for 2005 will ultimately depend on continued improvement in the overall economy, including solid job growth. Fuel prices will remain a key factor affecting the pace of consumer spending in 2005. Against this backdrop, the outlook is positive.

Residential strength persists
Low mortgage rates and strong demand in Florida continued to drive the Southeast’s housing market in 2004. New home construction and sales were both especially strong during the first half of the year, with sales records set in several parts of the Southeast. Activity moderated in the second half of 2004 but remained robust and stronger than in the nation as a whole. Existing home sales also rose strongly through the first half of the year although real estate agents indicated some sales moderation since the summer.

Multifamily construction in the Southeast continued to outpace the nation, improving from weak levels in 2003. Condominium development maintained its strength, and the struggling apartment segment improved modestly.

In the coming year, industry experts suggest that home sales and construction may moderate from this year’s pace. The expectation is that the demand for single-family housing will ease relative to the demand for multifamily housing. Residential construction will receive an additional boost over the coming year as Florida and parts of the Gulf Coast recover from hurricane destruction.

New hiring will have to be generated mostly by growth in other industries—such as health care, education, residential construction, defense, and tourism—that have displayed strength over time

Nonresidential near par
Nonresidential real estate markets in the Southeast experienced small improvements during 2004. Vacancy rates in most markets peaked early in the year, and net absorption of space was generally positive as more sublease space was occupied. However, the level of new nonresidential construction in the Southeast, as in the United States overall, remained at low levels in 2004. The majority of new construction was in the retail sector, particularly in neighborhood centers catering to residential development.

Damage to infrastructure in areas affected by the hurricanes will result in some new federal and state government construction, but the outlook for commercial real estate remains relatively subdued for 2005.

Services show improvement
Reflecting trends in the U.S. economy, conditions in many of the Southeast’s service-producing industries improved in 2004. For instance, employment in the business services segment increased over the year as demand for workers in advertising, consulting, architecture, engineering services, and computer system design displayed some renewed strength. Extending the positive trend from previous years, the Southeast continued to add workers in the health care industry, especially at nursing and residential care facilities.

Temporary staffing firms prospered in the Southeast during 2004 as more businesses chose to use temporary or contract workers rather than permanently add to their payrolls. Demand was strongest for workers in light manufacturing, health care, and accounting. Demand for general office assistance staff remained weak. Rising health care costs were frequently cited as a deterrent to hiring, especially for small businesses.

The outlook for the region’s service sector is for gradual improvement in 2005. As the region’s economy gains more traction, the demand for business and professional services will expand. The region’s aging population will continue to stimulate growth in the health care industry.

Photo by Brad Newton

Ongoing problems for the region’s airline carriers, particularly Delta Air Lines, will affect some local economies. But expansions of infrastructure, such as the construction of a fifth runway at Atlanta’s Hartsfield-Jackson International Airport and expansion at the region’s ports, should ensure that the Southeast continues to be an important center for transportation and distribution services in 2005.

Tourism and hospitality on the go
The Southeast’s tourism and hospitality industry continued its rebound during 2004. The convention and business travel segment grew stronger during the year, with hotel occupancies and convention bookings notably improved from 2003.

Resorts, attractions, and theme parks throughout Florida and other parts of the Southeast posted strong occupancy and attendance numbers through much of the summer. However, four hurricanes dented Florida’s short-term outlook somewhat. Several beachfront resorts and hotels announced temporary closures because of storm damage. Along parts of the Gulf Coast, repairs will take several months.

The storms also disrupted business travel plans, and industry analysts are concerned about bookings to Florida during next year’s hurricane season. Fortunately, some of Florida’s major tourist destinations, such as Miami and Orlando, were only temporarily affected by the storms. Strengthening European and South American tourist numbers should continue to boost Florida’s tourist markets in 2005.

Manufacturing making a tentative comeback
Employment in the Southeast’s manufacturing sector was essentially flat during 2004, ending a string of four years of large declines. In industries such as apparel, textiles, and paper, employment continued to decline in the face of stiff foreign competition. Expansions in other industries such as automobiles and shipbuilding helped to offset these job losses. In addition, continuing strength in residential building throughout the region helped boost suppliers of lumber, building supplies, carpets, and furnishings. All these industries have a significant presence in the Southeast.

Overall, the outlook for the region’s factory sector in 2005 is positive. The vehicle production and parts supply industries are likely to continue their regional expansion. Auto plants in the Southeast tend to be among the most efficient in the country, and the vehicles produced in the region are generally in strong demand. U.S. Department of Defense contracts for ships, fighter planes, and defense-related technology equipment continue to provide new job opportunities. With business investment spending back in full swing in the United States, manufacturers of capital goods will also likely see good growth in 2005.

However, the outlook for the apparel and furniture manufacturing industries in the Southeast is bleak as foreign competition remains intense, and domestic operations continue to move offshore.

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International Outlook Remains Positive

The 2005 economic outlook for the United States’ trading partners is generally positive. Analysts’ estimates suggest that foreign economic growth in the coming year should average between 3 percent and 3.5 percent, down slightly from the 4 percent estimated for 2004.

Oil price rise moderates outlook
The rising price of crude oil in 2004 has not derailed the optimistic global economic outlook, but it has resulted in a slight revision downward in the forecast. The average price of a barrel of West Texas Intermediate, a global benchmark price, has risen more than 70 percent in the last year. However, the negative effect on economic activity has been mitigated by most industrialized countries’ increased energy efficiency. Economists expect oil prices to decline in 2005 as demand growth stabilizes and supply worries subside.

Central banks act to preempt rise in inflation
Several foreign central banks, including those in Canada, Brazil, and the United Kingdom, increased interest rates and tightened credit conditions in 2004 to keep potential inflationary pressures in check. Rate increases have been modest, and expectations of further tightening have been incorporated into the overall global growth outlook. Slow and steady rate increases instituted before inflation accelerates mean that central banks are less likely to take abrupt actions that could threaten the positive outlook.

Regional outlook and U.S. exports
Export outlooks vary regionally, but most forecasts anticipate that all major U.S. trading partners will post economic growth in 2005. Expanding demand abroad should help increase U.S. exports (see chart 3), but differences in the rates of growth in some countries and differing patterns of dollar depreciation may limit the extent of the anticipated export improvement in 2005.

Healthy economic growth among U.S. trading partners should help fuel demand for U.S. products in 2005. In addition, a weaker dollar makes U.S. exports cheaper abroad and should help make U.S. goods more attractive to foreign purchasers. According to the Atlanta Fed’s trade-weighted dollar index, the value of the U.S. currency has declined roughly 10 percent since January 2003 through November 2004 (see chart 4).

Chart 3
U.S. Export Destinations
Source: Federal Reserve Bank of Atlanta calculations based on U.S. Department of Commerce data
 
Chart 4
The Dollar Since January 2003
Source: Federal Reserve Board of Governors; Federal Reserve Bank of Atlanta
Dollar Index

However, as the chart shows, much of the dollar’s recent depreciation has come against the euro (down 8 percent through November) and the yen (down 6 percent through November). Most forecasters expect real GDP in the euro area to expand by only 2 percent, which is near the estimated rate of growth for 2004. In Japan, real GDP should also grow around 2 percent—half of Japan’s estimated 2004 growth rate. Therefore, the positive effect of a weaker dollar on exports to Europe and Japan may be muted by soft demand from these slow-growing economies.

Economic growth in the developing Asian economies is likely to moderate in 2005 but should continue to outpace the increases of other major economies. Real GDP growth in these economies averaged an estimated 7 percent in 2004, but the outlook for 2005 calls for growth closer to 6 percent. Strong demand for U.S. goods should accompany these healthy rates of growth even though the dollar has depreciated only slightly against these economies’ currencies in 2004. So while demand from Asia should remain solid, any significant increase in U.S. shipments to these dynamic economies may be constrained by the fact that unit prices have not declined very much for these countries.

U.S. neighbors poised to grow
The United States’ two largest individual export markets, Canada and Mexico, should post economic growth rates near 4 percent in 2004. Such a performance would represent a 1 percent increase for Canada but a 0.5 percent decline for Mexico compared to 2004’s growth rate. While the U.S. dollar declined nearly 6 percent against its Canadian counterpart in 2004—a development that bodes well for U.S. exports in 2005—it has appreciated almost 5 percent against the Mexican peso. Nevertheless, U.S. exports to Mexico should continue to gain strength on a broad basis as the two economies deepen their ties through NAFTA (the North American Free Trade Agreement).

Forecasts for growth in the rest of the Americas are mixed. Overall, real GDP in South and Central America and the Caribbean is forecast to be near 4 percent in 2005, down from 2004’s estimated 5.5 percent rate of growth as these countries try to achieve sustainable growth. In 2003, the region’s growth rate was under 2 percent. The jump in output in 2004 represented a recovery from these abnormally low rates of economic growth.

In particular, Brazil—the region’s largest economy—experienced flat growth in 2003 but rebounded in 2004 to post an estimated real GDP growth rate of nearly 5 percent. Brazil’s 3.5 percent growth forecast for 2005 is a major reason why the regional growth average should moderate in the coming year. Venezuela and Argentina, respectively the region’s second- and third-largest economies, should enjoy a similar performance.

Despite healthy levels of growth, U.S. exports to the region may not be helped by the value of the dollar, which in 2004 declined only 2 percent against the major currencies of South America.

Stable growth for 2005
In the past, higher energy prices combined with higher interest rates would have dimmed the prospects for the global outlook. In a time of geopolitical uncertainty in the Middle East, the outlook’s negative aspects would have been magnified because of concern about increasing oil prices. But in 2005, the international economic outlook remains positive despite these conditions. Increased energy efficiency and prudent central bank action to preempt inflationary pressures appear to have stabilized the global outlook for 2005, and broad-based and stable economic growth is the most likely path for much of the global economy for the coming year.

How this positive outlook translates into strength for U.S. exports is not so clear, however. The fact that the dollar’s depreciation is centered against currencies whose economies should post slow growth in 2005 may result in modest rather than booming increases in U.S. exports in the year ahead.

This article was written by Michael Chriszt, Melinda Pitts, John Robertson, and Ellis Tallman of the Atlanta Fed research department. The estimates and forecasts in the international section of the article represent a consensus of private-sector or multilateral outlooks and are not those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.

Southeast Trade: Double-Digit Growth

The Southeast’s international trade performance improved in 2004 as both exports from and imports into Southeastern ports posted double-digit gains. Stronger exports reflect the health of the global economy, rising demand for goods produced in the Southeast, and a decline in the value of the dollar versus the currencies of some key trading partners. The increase in imports to the United States through the region’s ports is a sign of the overall strength of the U.S. and Southeastern economies. Yet, in total value, imports outpaced exports in 2004, mirroring the overall U.S. trade imbalance.

International shipments from Southeastern ports grew 17 percent in 2004. All ports posted improvements in their outbound shipments, led by the ports of Mobile, Ala., and Savannah, Ga. The greatest increases in exports came from cotton, autos, and chemical products. China is rapidly becoming the Southeast’s fastest-growing export market. During 2004, the value of shipments to China from the Southeast grew 23 percent. Exports to Venezuela and Mexico also posted notable gains.

The value of imports entering the Southeast were 19 percent higher in 2004 than a year earlier, with the Mobile, Ala., Tampa, Fla., and Savannah, Ga., customs districts posting double-digit gains. The New Orleans customs district also posted healthy import growth as well, primarily driven by higher shipments of petroleum products. Imports during the year surged from China, Germany, Japan, Mexico, and Venezuela.

Rising auto shipments into Jacksonville, Fla., and Brunswick, Ga., are rapidly elevating these ports to leading gateways for imported autos. In addition, regional production in foreign-owned plants such as Nissan, Honda, Mercedes-Benz, and Hyundai is likely to result in increased imports of auto parts.

 

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