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Economic Research
After Rocky 2008, U.S. Consumers Seek
Stable Ground in 2009
An economy besieged on a number of fronts in
2008 staggers into 2009 with rising
unemployment, falling house prices, and strained
financial markets. A recessionary environment
poses formidable challenges for U.S. consumers
in the coming year.

Volume 10, Number 4
Fourth Quarter 2008

FEATURES
After Rocky 2008, U.S.
Consumers Seek Stable
Ground in 2009
The Southeast in 2009:
Region Hopes for Turnaround
Global Economies Anticipate
a Tepid 2009

DEPARTMENTS
Fed @ Issue with Dennis
Lockhart

The Southeast in 2009: Region Hopes for Turnaround
Many components of the Southeastern economy went south in
2008: Food and energy prices rose, the once-hot real estate
market stumbled, and employment fell. A region whose
economy had enjoyed years of robust growth finds itself mired
in recession, and things could get worse in 2009 before they get
better.
Profiles:

Agriculture | Banking | Consumer Spending | Employment |
Energy | Manufacturing | Real Estate | Tourism | Trade
Podcast on The Southeastern Economy in 2009 (MP3 9:27)

Research Notes & News
Southeastern Economic
Indicators
Staff
BackGround
EconSouth Now

Global Economies Anticipate a Tepid 2009
The long global economic expansion hit the wall in 2008 as
financial markets worldwide slumped and many advanced and
developing economies experienced slower growth or recession.
Few expect a recovery to be swift, and 2009 could see slow
growth persist.
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Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470 Tel. (404) 498-8500

Economic Research
After Rocky 2008, U.S. Consumers Seek Stable Ground in
2009

Volume 10, Number 4
Fourth Quarter 2008

FEATURES
After Rocky 2008, U.S.
Consumers Seek Stable
Ground in 2009
The Southeast in 2009:
Region Hopes for Turnaround
Global Economies Anticipate
a Tepid 2009

DEPARTMENTS
Fed @ Issue with Dennis
Lockhart
Research Notes & News
Southeastern Economic
Indicators
Staff
BackGround
EconSouth Now

Heading into a new year,
the U.S. economy faces
many of the challenges
that made 2008 difficult:
tight financial markets,
rising foreclosure rates,
and job losses. By almost
any yardstick, 2009 will
also present formidable
challenges.
In 2008 the problems affecting the
U.S. financial system took a toll on
U.S. consumers were besieged on a
an already weak general economy.
number of economic fronts in 2008. With
High rates of home foreclosures,
house prices continuing their decline and
declines in home prices, and,
unemployment rising, 2009 will see a
continuation of the recession that began
ultimately, the lack of credit
in December 2007.
availability in the economy
translated into sharply lower levels
of economic activity. The outlook is for further weakness through the first half of 2009,
and these conditions will likely continue to dampen consumer price pressures.
Weakening intensified during 2008

EconSouth's outlook at the end of 2007 identified consumer spending and labor
markets as areas of downside risk in 2008. A favorable export environment was
expected to boost economic growth, and forecasters anticipated higher inflation.
As expected, consumer spending slowed in early 2008 amid declines in real estate
values and the run-up in energy prices. A tax rebate stimulus temporarily boosted
spending in the second quarter, but growth in consumer spending remained
restrained.
Slowing economic activity led to weakening labor markets. Nonfarm payroll
employment began to decline in January as firms increasingly held back on hiring,
raising the unemployment rate. Layoffs were widespread, and employment in
residential construction and parts of the manufacturing sector bore the brunt.
Despite the worsening jobs situation, economic activity as measured by real gross
domestic product (GDP) was relatively strong in the first and second quarters, at 0.9
percent and 2.8 percent, respectively. That growth was partially buoyed by robust
exports, which were spurred by strong foreign demand and a decline in the strength
of the U.S. dollar relative to other currencies.

Last half of 2008 saw faster
weakening

Related Links

On the Web:
Economic vital signs in the second
half of the year were much weaker
NBER's procedures on dating the
business cycle
than during the first half. For example,
the national unemployment rate for
Philadelphia Fed's survey of economic
October was 6.5 percent, the highest
forecasters
level in 14 years and up from 4.9
U.S. Census Bureau data on new home
percent in January 2008, according to
sales
the U.S. Bureau of Labor Statistics.
Information regarding recent Federal
Payroll employment declined by
Rreserve actions
650,000 from August to October
Macroblog entry on economic forecasts
compared with losses averaging
113,000 in the first quarter and
218,000 in the second quarter (see chart 1).

Financial stresses intensified dramatically in September, clearly contributing to a
sharp contraction in spending and employment. Labor market conditions deteriorated
further, shifting from businesses' reluctance to hire or replace staff to a marked
increase in mass layoffs. The weakness has spread beyond housing industry woes
and is now broad based: Employment has fallen in auto manufacturing,
transportation and distribution, retail, and financial services.
Real GDP declined an estimated annualized rate of 0.5 percent in the third quarter,
according to the preliminary estimate from the U.S. Bureau of Economic Analysis. At
the same time, consumer spending notably weakened, declining for the first time
since 1991. Data for October 2008 suggest that GDP is likely to drop steeply in the
fourth quarter. For instance, auto sales plummeted in October, and anecdotal
evidence, as well as record low readings from consumer confidence surveys, points
to a bleak holiday season for retailers. Indicators from the manufacturing sector are
similarly downbeat.

Chart 1
Payroll Employment and the Unemployment Rate

Note: The gray bars indicate recessions.
Source: U.S. Bureau of Labor Statistics

Chart 2

Inflation rears
up, then settles
down

Consumer price
inflation
accelerated
through the first
half of 2008,
pushed up by rising
oil prices that
topped $140 per
barrel during the
summer. However,
sharp drops in oil
prices toward the
end of 2008 have
helped ease
inflation pressures.
In September the
headline personal

consumption
expenditure price
index, which
includes volatile
food and energy
costs, eased for the
second consecutive
month and is likely
to continue to
decline as lower
commodity prices
and weak demand
restrain consumer
price pressures.
Over the longer
Note: Dashed line represents real-time actual data.
term, inflation
Source: Blue Chip Economic Indicators
expectations
influence actual
inflation, and the University of Michigan's consumer survey reading for October
indicates moderating inflation expectations for 2009 and beyond.
Evolution of the 2008–09 Blue Chip Consensus
Forecast

These downward pressures on prices will likely reverse the acceleration in inflation
measures seen earlier in 2008. But to the extent that most of the price declines are
concentrated in the goods sector, persistent price inflation in the large service
component of consumption is likely to mitigate concerns about broad-based and
sustained deflation.
Looking ahead to 2009

As 2008 unfolded, the deep problems relating to the housing market, consumer
spending, credit conditions, and eventually wider financial stresses led economists to
produce ever-bleaker forecasts. For example, in January 2008, the Blue Chip
consensus forecasts, which is an average of about 50 forecasts, called for sluggish
growth through the year before improving in 2009. As 2008 progressed, the outlook
was revised significantly downward (see chart 2).
Most economic indicators slipped into recessionary territory during 2008, and
consensus forecasts point to GDP contracting through the first half of 2009 in
response to a fall in household and business spending and weakness in foreign
demand for U.S. exports. The depth and duration of the decline in GDP could be
mitigated by a possible expansion in fiscal stimulus in early 2009. The main risks to
the outlook for the coming year center on the extent and duration of the financial
market strains and problems in housing.
A key assumption in
most forecasts for
2009 is that financial
conditions will
stabilize and soon
begin a gradual
improvement. Signs
of this turnaround
include a narrowing of
credit spreads and an
improvement in the

Chart 3
U. S. Housing Starts

functioning of
markets. While
indicators tentatively
suggest that an
easing of credit
conditions in some
markets may be
under way, concerns
about credit losses
and financial
institutions' solvency
pose a plausible risk
to the outlook.

Note: The gray bars indicate recessions.
Source: U.S. Census Bureau

Housing has fallen
from historical highs to historical lows in the span of less than two years. The pace of
existing home sales in the third quarter of 2008 was relatively stable, but the
inventory of unsold homes remains stubbornly high. As a result, new home
construction is down almost 64 percent from the historical high in January 2006 (see
chart 3). Even though this falloff in home construction has been dramatic, the large
inventory of unsold homes suggests that residential investment is unlikely to
contribute significantly to growth in 2009.
Many forecasters expect that the U.S. economy will recover as 2009 progresses. But
a return to healthy economic growth next year is unlikely. The chances for a
sustained recovery depend largely on the progress of stabilization in the financial
markets, making the ever-evolving outlook more uncertain than usual, with risks
weighted to the downside.
This article was written by Sandra Kollen, a senior analyst in the Atlanta Fed's research
department, and John Robertson, a vice president in the research department.

Financial Markets Seek Thaw in 2009
The financial turmoil of 2008 began as a continuation of the problems that
surfaced in 2007: Falling home prices, rising mortgage defaults, and
accelerating foreclosures led to massive losses at banks and other financial
institutions. (Bloomberg News estimated that U.S. financial firms
experienced $657 billion in write-downs and credit losses through Dec. 9,
2008.) The combination of financial turmoil and other factors (such as high
energy prices earlier this year) slowed the U.S. economy and sharply
reduced expectations for economic performance worldwide.
Deteriorating economic
conditions are further
weakening the residential
mortgage loan market and
reducing the credit quality of
many other types of loans.
Market conditions are causing
potential lenders to tighten
their underwriting standards

Related Links
On the Web:
Recent Federal Reserve actions
Macroblog entry on AMLF and MMMF
Macroblog entry on commercial paper

and demand higher interest
rates, further constrict-ing
financial markets and
reducing expectations of
near-term economic growth.

October 2008 Senior Loan Officer
Opinion Survey
FDIC Web site on bank failures and
troubled banks

The Fed devises unprecedented responses

The Federal Reserve has taken a variety of innovative steps to alleviate
strains in the financial system. A series of cuts in the fed funds rate (totaling
more than 550 basis points) that began in September 2007 brought the rate
down to a range of 0–0.25 percent as of December 2008. Additionally, the
Fed created a variety of new liquidity and lending programs designed to
accommodate the credit needs of businesses and households, bolster
confidence in credit markets, and improve overall market liquidity.
However,
these
programs
may only
alleviate
banks'
concerns
about their
ability to fund
new loans;
the programs
are not
designed to
directly
address the
possibility
that the
Note: Chart shows responses from domestic banks.
weakening
Source: Federal Reserve Senior Loan Officer Opinion Survey
economic
environment will affect borrowers' ability to repay loans. Growing concern
about borrowers' financial condition has led an increasing number of banks
to tighten their lending standards for various loan types, including credit
cards, auto loans, mortgages, and commercial and industrial loans,
according to the Federal Reserve's Senior Loan Officer Opinion Survey (see
chart 1). These tighter lending standards, perhaps combined with
consumers' caution about their own financial condition, led to a 3 percent
reduction in consumer credit outstanding at a seasonally adjusted annual
rate in August—the first decline in more than a decade.
Chart 1
Tightening Standards for Mortgages and Commercial
and Industrial Loans

Some of the strain in the market for short-term debt can be traced to money
market funds. These funds are significant buyers of commercial paper—
short-term promissory notes that large corporations and financial institutions
use to finance their day-to-day operations. Significantly, money market funds
link investors seeking a return with businesses looking to sell their short-term
debt. Many funds suffered significant losses on their commercial paper
holdings after Lehman Brothers failed in September 2008.
One of these funds, Reserve Primary Fund, could no longer maintain its per-

share net asset value at $1, resulting in losses to the fund's shareholders.
These losses were followed by large outflows from money market funds,
whose investments in commercial paper retracted further as many funds
reallocated their portfolio toward safer, more liquid Treasury securities. This
pullback on buying commercial paper was a significant factor behind the
sharp drop in the amount of commercial paper outstanding (see chart 2).
Recovery in money market funds and commercial paper is likely to be key in
restoring normalcy to credit markets and should have broader positive
effects.
To help
stabilize the
commercial
paper market
and money
market funds,
the Federal
Reserve has
created three
new facilities.
The AssetBacked
Commercial
Paper Money
Market
Mutual Fund
Source: Federal Reserve Board
Liquidity
Facility provides funding to U.S. depository institutions and bank holding
companies to finance their purchases of high-quality asset-backed
commercial paper from money market mutual funds. The Commercial Paper
Funding Facility provides liquidity to U.S. issuers of commercial paper. The
Money Market Investor Funding Facility supports a private-sector initiative to
provide liquidity to investors in U.S. money markets.
Chart 2
Commercial Paper Outstanding, Weekly

Changes proposed to the regulatory structure

Historically, changes in the U.S. regulatory structure are almost always
precipitated by significant financial upheaval. Many observers expect the
current crisis to propel efforts toward a new round of restructuring. In the
past, restructuring often took the form of adding new financial regulatory
agencies to implement additional regulation. But some analysts believe that
the confusing structure of overlapping regulatory agencies has exacerbated
the current turmoil. So most of the discussion thus far about a future
restructuring has focused on reducing the number of regulatory agencies,
with any new powers likely being divided among the remaining agencies.
Banks respond to turmoil by consolidating

If regulatory changes come, they won't be the only changes. The financial
market's composition is also evolving. Consolidation in banking and finance
has increased as a number of relatively stronger financial firms have taken
over weaker counterparts, and the trend is likely to continue. Nationally, 25
banks failed in 2008, and the Federal Deposit Insurance Corp. said 171
more were on its list of troubled banks as of the third quarter—before the
most recent acceleration in financial market turbulence. Additionally, under

the Emergency Economic Stimulus Act that President Bush signed into law
in October, the U.S. Treasury has been injecting capital into banks by
purchasing preferred equity. Some industry watchers believe banks may
eventually use some of this capital to acquire weaker financial institutions.

Chart 3
Corporate Yield Spreads Over 10-Year Treasury Bills

Funding
problems
threaten
business
investment

Companies
routinely look
to the
corporate
bond market
for financing.
But the flow
of funding
has slowed to
a trickle as
investors
Source: Federal Reserve Board, Merrill Lynch
have become
increasingly
concerned about the economic outlook, leading many firms to defer the
issuance of new bonds. According to the Securities Industry and Financial
Markets Association, investment-grade bond issuance totaled $26.5 billion in
August 2008, down from the average monthly issuance of about $83 billion
in 2007. Further, issuance of $400 million in high-yield bonds in August 2008
was a small fraction of the monthly issuance of $11 billion in 2007.
As a measure of investors' perception of credit risk, high-yield corporate debt
spreads over Treasury bonds have risen sharply and surpassed 15 percent
toward the end of October (see chart 3). The current spreads have sharply
surpassed the levels seen during the past two credit cycles (after the
1990–91 and 2001 recessions) and have risen much faster. The high cost of
corporate bonds is an additional source of risk to the overall economy. If
rates remain high, businesses may look elsewhere for financing, postpone
investment plans, or even liquidate assets to maintain their operations.
This article was written by Mike Hammill, an analyst, and Larry Wall, a research
economist, both in the research department of the Atlanta Fed.

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Economic Research
The Southeastern Economy in 2009

Region Hopes for Turnaround

Volume 10, Number 4
Fourth Quarter 2008

FEATURES
After Rocky 2008, U.S.
Consumers Seek Stable
Ground in 2009
The Southeast in 2009:
Region Hopes for Turnaround
Global Economies Anticipate
a Tepid 2009

DEPARTMENTS
Fed @ Issue with Dennis
Lockhart

As 2008 dawned, the U.S. economy was already in
the throes of a now-declared recession, and as the
year wore on the nation was plagued by financial
market turmoil, housing market and credit crises,
rising food and energy costs, and job losses.
The Southeastern economy struggled with many of
the same problems. Economic factors that had
buoyed the region's economy in previous years
began to crumble. Employment levels in 2008 in
the region fell for the first time in five years, and by
the third quarter the unemployment rate was at its
highest level since the 1991 recession. Likewise, consumer spending slumped as consumers felt the
pinch of soaring energy and food prices, the credit crunch, and uncertainty about the economy.
New construction and sales of residential and commercial real estate in the Southeast weakened in
2008. Existing home sales did stabilize in parts of the region, but in some markets foreclosed homes
became a larger share of the inventory, driving down home prices. Many manufacturers were hit hard
by the declines in construction, home sales, auto sales, and tighter credit conditions. Agricultural
industries also struggled with continuing drought, risings costs for fuel and related inputs, and
reduced product demand as the domestic and global economies weakened.

Research Notes & News
Southeastern Economic
Indicators
Staff
BackGround
EconSouth Now

Profiles
Agriculture
Banking
Consumer Spending
Employment
Energy
Manufacturing
Real Estate
Tourism
Trade

Not all the region's economic news in 2008 was bad, though.
Tourism industries, especially cruise lines, had a relatively sunny
year as a weaker dollar kept domestic travelers vacationing closer
to home and brought international travelers flocking to the region.
The weak dollar also helped some manufacturing industries that
produced goods for export. Manufacturers tied to the energy
sector and commodities also fared comparatively well.
The economic outlook for the Southeast in 2009 is in many ways
for more of the same. Employment levels in the region may in fact
get worse before they get better. Consumer spending and
personal income will likely continue to be restrained until
employment picks up. Energy markets remain uncertain; prices,
which fell as sharply in the latter half of 2008 as they rose in the
first half, could go up again if global economic conditions improve
and spur business and consumer demand.

Housing activity has shown some recent signs of stabilizing, but recovery is unlikely to occur quickly.
Tourism and exports, two relatively bright spots in the past year, may fare less well if the
strengthening of the dollar and the global economic slowdown that began late in 2008 continue. On
the upside, plans for expansion in auto and aerospace manufacturing should help bolster the region's
economy in 2009.
In the following articles, EconSouth examines how the Southeastern economy coped with 2008's
problems and what challenges and signs of encouragement might be in store in 2009.

The Southeast in 2009 at a Glance

Alabama

Related Links
Despite declining auto sales nationwide, Alabama
should hold its own in auto-mobile manufacturing
On the site:
when Honda shifts assembly of two existing models to
The Southeastern Economy in 2009
its Lincoln plant in 2009. The aerospace industry also
(MP3 9:27)
propped up manufacturing in the state in 2008 and
should remain strong in 2009. Home prices have not
EconSouth Now
declined as much in Alabama as elsewhere in the
region, suggesting that the state's relatively lower
rates of mortgage delinquencies will continue to be a plus in 2009. But Alabama's poultry industry will
feel the pinch in 2009 as a global economic slowdown reduces demand from China and Russia,
major importers of the state's chickens.
Florida

Plummeting home prices, soaring foreclosures, tight credit, and rising unemployment added up to a
fairly miserable economic experience in Florida in 2008. The state's agriculture sector also suffered
from continued drought, declines in demand for landscaping materials, and diseases attacking the
citrus crops. The only relatively bright spot for Florida's economy in 2008 was tourism, especially the
cruise industry. In 2009, expansion in the aerospace industry should provide a boost. One tentatively
encouraging sign for the state's economy is that the decline in home sales has moderated.
Georgia

The rate of home foreclosures was high in Georgia during 2008, particularly in the Atlanta area. Real
estate loan problems also led to the failure of five of the state's banks during the year. The slow
housing market nationally also brought further job losses to the state's textile manufacturers. Another
manufacturing setback was the closing of GM's 61-year-old plant in Doraville in September. But a
positive sign is the new Kia plant in West Point, which began training workers in March 2008 and will
begin production in late 2009.
Louisiana

Louisiana was once again hit by costly hurricanes—two in 2008. On the bright side, however, the
state boasted the lowest unemployment rate among the Southeastern states through September.
Louisiana has reaped the benefits from high oil prices over the past several years, reflected in
continued, although slowing, employment growth through 2008. The current economic uncertainty
and decline in energy prices could spell trouble for the state in 2009.
Mississippi

At the beginning of 2008, Mississippi was the only state in the region with a declining unemployment
rate. But between May and September the state saw the most dramatic rise in the unemployment
rate among the Southeastern states and now has the region's highest unemployment rate. Further
bad news came in December when Toyota indefinitely delayed the opening, scheduled for 2010, of its
assembly plant in Blue Springs. The state also faces uncertainty in 2009 as the potential for declining
energy prices throws the future of many oil exploration projects into question.
Tennessee

A dismal housing market in 2008 continued to be bad news for Tennessee's furniture and fabricated
metals manufacturing sectors. Rising commodity prices through most of the year, however, provided
a relative boost to the state's primary metals industry. Construction of the Volkswagen assembly plant
in Chattanooga will continue through 2009 for an anticipated 2010 opening. If gasoline prices remain
at the relatively modest levels they hit toward the end of 2008, drive-to tourist destinations in

Tennessee should benefit in 2009.

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Economic Research
The Southeastern Economy in 2009

Agriculture Hits a Rough Patch

Volume 10, Number 4
Fourth Quarter 2008

FEATURES
After Rocky 2008, U.S.
Consumers Seek Stable
Ground in 2009
The Southeast in 2009:
Region Hopes for Turnaround
Global Economies Anticipate
a Tepid 2009

DEPARTMENTS
Fed @ Issue with Dennis
Lockhart
Research Notes & News
Southeastern Economic
Indicators
Staff

Drought, rising costs, and a weaker economy
troubled the Southeast's farm sector in 2008. In
2009, most leading agricultural industries face
similar problems as well as the risks of a global
recession.
Poultry industry expects weaker global
demand

Poultry is the region's top cash-producing
agricultural product, with more than $9 billion in
revenues in 2007 (see the chart). Broiler
production in 2008 has been driven by rapidly
changing demand and higher input costs. Recent
domestic demand has weakened as a result of
cutbacks in consumption, exacerbated by a decline in the number of people eating in
restaurants. Export growth has remained steady to China and Mexico, but demand
from Russia, the top U.S. export market for poultry, was soft for most of 2008 for a
variety of reasons, including nontariff import restrictions.
Profiles
Agriculture
Banking
Consumer Spending
Employment
Energy

BackGround
EconSouth Now

Manufacturing
Real Estate
Tourism
Trade

The near-term outlook will depend on how the
global financial crisis affects key trading partners.
Continued market uncertainties could push some
regional producers, already troubled by higher
input costs and weak financial performance, to cut
or consolidate jobs.
Nursery growers hope for rain and a
housing recovery

Greenhouse nursery crops are an integral part of
the region's agriculture sector, with about $3
billion in cash receipts in 2007. Florida is the
nation's second-largest nursery crop producer
after California, accounting for about two-thirds of
the Southeast's income from the greenhouse
industry.

In 2008 the housing slump and ongoing drought conditions adversely affected many
Southeastern producers. The outlook for 2009 is highly uncertain given still relatively
high costs for fuel, fertilizers, and other inputs that are unlikely to be offset by revenue
growth.
Livestock and cattle producers count on Asian appetites

Livestock and cattle operations, with $2.2 billion in revenues in 2007, are present in

all Southeastern states. During 2008, drought and higher feed and fuel costs
negatively affected regional production and profitability.
Like poultry producers, livestock and
Related Links
cattle producers face uncertainties in
the near term as beef consumption
On the Web:
here and abroad softens as a result of
U.S. Department of Agriculture's
the global financial crisis. But on the
Economic Research Service
bright side, healthy demand from
Asian markets, which continued
through 2008, could offset some of the negatives. For example, the U.S.-Korea Free
Trade Agreement, if eventually ratified, could brighten the outlook for large livestockand cattle-producing states such as Tennessee and Alabama.
King Cotton is in a decline

The region's cotton industry is contracting, with revenues declining 13 percent, to
$1.8 billion, from 2006 to 2007. In addition, cotton acreage dropped nearly 40 percent
from 2006 to 9.4 million acres—a 25-year low—planted in 2008. This contraction was
primarily related to some growers switching to alternative crops like corn and
soybeans, which have had much higher returns than cotton.

Leading Sources of Farm Income in the Southeast in
2007

Source: U.S. Department of Agriculture

Demand for cotton in
key global markets
softened in 2008,
partly contributing to
the drop in market
prices seen later in
the year.
Approximately 75
percent of U.S. cotton
production is
exported. The nearterm outlook is
uncertain given that
year-end 2009 futures
prices are still not
high enough to offset
higher fertilizer and
fuel costs.

Citrus battles disease

Florida is the nation's largest citrus-crop producer, netting about $1.5 billion in
revenues in 2007. However, Florida's orange crop was estimated in October 2008 at
166 million boxes, 2 percent lower than a year earlier. For 2009, industry analysts
expect that large orange juice inventories and lower consumer demand will not
change weak price trends. In addition, greening and canker disease will continue to
threaten the citrus industry outlook.

Economic Research
The Southeastern Economy in 2009

Southeastern Banking Seeks a Balance

Volume 10, Number 4
Fourth Quarter 2008

FEATURES
After Rocky 2008, U.S.
Consumers Seek Stable
Ground in 2009
The Southeast in 2009:
Region Hopes for Turnaround
Global Economies Anticipate
a Tepid 2009

The past year was volatile for the banking sector in the Southeast.
Banks headquartered in the region were not immune to the upheaval
and turmoil in financial sectors worldwide, and some parts of the
region bled from exposure to the real estate correction. Ballooning
mortgage payments, falling home and land prices, tightening lending
standards, and increasing loan default rates took their toll on
consumers and banking institutions alike.
At the beginning of 2008, many consumers were already having
difficulty making ends meet in the face of soaring food and gas prices
and rising mortgage payments. As the housing market slowed further
and lenders tightened their belts, foreclosure rates soared in the
region. In Florida, the percentage of seriously delinquent subprime mortgage loans (those 90 days past due or in
foreclosure) increased to 35.1 percent in September, significantly higher than the U.S. average of 22.8 percent. Georgia,
at 23.3 percent, was just above the national average while Alabama (19.1 percent), Louisiana (20.3 percent),
Mississippi (22.7 percent), and Tennessee (22.5 percent) were just below it (see the table).

DEPARTMENTS
Fed @ Issue with Dennis
Lockhart
Research Notes & News

Competing for profits

Profiles
Agriculture
Banking

Southeastern Economic
Indicators

Consumer Spending

Staff

Energy

BackGround

Employment

Manufacturing
Real Estate

EconSouth Now

As credit quality conditions worsened, earnings and profits at most of the region's
banks were lower because of falling net interest income and substantially higher
loan-loss reserve provisions. More than half of the banks in Florida reported a net
loss for the third quarter. Competition for deposits intensified across the Southeast
as wholesale funds became more limited. In addition, some banks chose to hold
onto any excess liquidity rather than resell it in the interbank market, further reducing
the availability of money for even low-risk borrowers. Small businesses were
particularly affected by the limited availability of loans, stringent conditions attached
to the loans that were available, and high borrowing costs.

The banking landscape saw some
changes in 2008. As the financial
Tourism
crisis deepened, small banks that
Trade
mushroomed during the real estate
boom were now seeing their
portfolios strained as the percentage of bad loans increased. Some
banks closed their doors and reopened under different banners. By midDecember, seven banks in the Sixth Federal Reserve District had failed
and were shut down by regulators.

Related Links
On the Web:
Dynamic maps of U.S. nonprime
mortgage conditions
Office of Federal Housing Enterprise
Oversight Web site
Senior Loan Officer Opinion Survey on
bank lending practices

In the third quarter of 2008, loans and leases in the Southeast rose 6.6
Federal Housing Administration Web site
percent relative to a year earlier. But these increases were not uniform
across all loan types. Commercial lending saw the largest increase, 17.6
percent, and home equity lines of credit grew 14.8 percent. Construction lending, which accounts for approximately onefifth of all lending in the region, fell 5 percent.
Looking ahead to 2009

Conditions in the banking and finance industry in the Southeast are likely to remain difficult in 2009 as tighter mortgage
markets make existing and new homes difficult to sell and deteriorating credit conditions make banks less willing to
assume risk. Some states may see more bank closures as smaller banks with portfolio concentrations in real estate
loans become weighed down by higher default rates. As credit quality problems and intense competition for deposits
continue, further banking industry consolidation is likely.
The outlook for the banking industry is cautious as banks gravitate toward a new equilibrium after swinging from more
liberal lending policies prior to 2007 to a very cautious stance in 2008.

Seriously Delinquent Mortgages as a Percentage of All Mortgages

All
Sept. 2007 Sept. 2008 Sept. 2007 Sept. 2008
Sept. 2007 Sept. 2008
United States

1.48 2.85 1.98 3.56
12.46 22.76

6th Federal Reserve District

2.05 4.87 2.75 6.02
13.82 28.86

Alabama

1.94 2.63 2.58 3.42
11.97 19.14

Florida

1.99 6.62 2.72 8.08
14.06 35.13

Georgia

2.25 3.31 2.85 4.05
14.48 23.29

Louisiana

2.70 3.17 3.60 4.23
14.40 20.28

Mississippi

3.27 4.05 4.62 5.50
16.25 22.68

Tennessee

2.01 2.78 2.88 3.80
14.94 22.45

Note: Seriously delinquent mortgages are those 90 days past due or in foreclosure.
Source: Lender Processing Services Inc. Applied Analytics

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Prime

Subprime

Economic Research
The Southeastern Economy in 2009

Income and Consumer Spending Showing Signs of Strain

Volume 10, Number 4
Fourth Quarter 2008

FEATURES
After Rocky 2008, U.S.
Consumers Seek Stable
Ground in 2009
The Southeast in 2009:
Region Hopes for Turnaround
Global Economies Anticipate
a Tepid 2009

DEPARTMENTS
Fed @ Issue with Dennis
Lockhart
Research Notes & News
Southeastern Economic
Indicators
Staff
BackGround
EconSouth Now

Buffeted by falling home values, rising food and energy prices, financial market
turmoil, and general economic uncertainty, consumers pulled back on their
spending in 2008.
Tax rebates bump up personal income

Total personal income, which includes earnings, dividends, interest, rent, and
transfer payments, remained at healthy levels in the Southeast through the
second quarter of 2008. But some of the growth in personal income through the
first half of the year is related to the federal rebates taxpayers received under the
provisions of the Economic Stimulus Act of 2008.

Consumer Spending

Nationwide, the stimulus payments had the
most significant impact in Mississippi, where
they contributed 2.8 percentage points to second quarter personal income growth. The rebates
also gave Alabama and Louisiana significant boosts. Minus the rebates (and other transfer
payments, such as unemployment insurance), however, growth in personal income continued a
decline that began as early as 2006 in some states (see chart 1).

Employment

Sales taxes swoon

Energy

Southeast sales tax revenues through the third quarter of 2008 mirrored the weak national retail
sales trend. Both sets of data show a slowdown in consumer spending. In the third quarter,
consumer spending nationwide posted its first quarterly decline since 1991.

Profiles
Agriculture
Banking

Manufacturing
Real Estate

Although significantly lower than their peaks in 2006, sales tax revenues in Mississippi,
Alabama, and Louisiana were higher in the third quarter of 2008 than during the same quarter in
Trade
2007 (see chart 2). In contrast, sales tax revenues in Florida, Georgia, and Tennessee were
lower in the first three quarters of 2008 than during the same period a year earlier. Georgia
experienced the biggest decline, with sales tax revenue down 4.3 percent from the first quarter through the third quarter. In Florida,
sales tax revenue has declined steadily since its 2005 peak and has remained negative since the beginning of 2007.
Tourism

Auto sales slump continues

The auto sales slowdown that began in 2007 continued into 2008. Several factors
have contributed to sluggish sales: decreased consumer demand for gas-guzzling
trucks and SUVs, greater difficulty obtaining financing as lending standards tighten,
and several manufacturers eliminating lease programs.
Vehicle sales in the Southeast, as measured by new vehicle registrations, declined
dramatically from January through August, dropping by 12.7 percent from a year
earlier. U.S. vehicle registrations over the same period were down 9 percent.

Related Links
On the Web:
U.S. Census Bureau's economic
indicators
U.S. Census Bureau’s income data

Looking ahead to 2009

The problems that plagued consumers in 2008 will continue into 2009. Declining home values and tighter lending practices will be
the biggest constraint on consumer spending, especially for auto sales and big-ticket items. Auto industry analysts expect vehicle
sales to remain soft in 2009. Given that the largest component of personal income is wages, an expected weak labor market in
2009 should translate into sluggish personal income growth and a continued slowdown in consumer spending.

Chart 1
Personal Income Growth

Chart 2
Retail Sales Tax Revenue

Note: Income does not include transfer payments. Dashed lines
imply interpolation of data.
Source: U.S. Bureau of Economic Analysis

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Source: State Departments of Revenue (for Alabama, Florida,
Georgia, Louisiana, and Tennessee) and Mississippi State Tax
Commission

Economic Research
The Southeastern Economy in 2009

Employment Takes a Tumble

Volume 10, Number 4
Fourth Quarter 2008

FEATURES
After Rocky 2008, U.S.
Consumers Seek Stable
Ground in 2009
The Southeast in 2009:
Region Hopes for Turnaround
Global Economies Anticipate
a Tepid 2009

In 2008, on the heels of two years of weak growth, employment in the Southeast declined for the first
time in five years as a result of troubled financial markets and a weak economy. Collectively, the
Southeastern states lost more than 235,000 net jobs in 2008 through the third quarter, according to
data from the U.S. Department of Labor. The rate of job loss is currently the same as that experienced
during the 2001 recession.
Employment in the Southeast represents about 15 percent of U.S. employment and is characteristic of
national employment trends. So a recovery of jobs in the region is critical to both the region's and
nation's economic outlook.
Not just Florida anymore

As the construction sector slumped, Florida was the largest contributor to the region's job losses in
2007 and 2008. By the fall of 2008, employment in Florida's construction sector hit its lowest level since
1991. Through the third quarter of 2008, Florida lost more than 130,000 jobs, a sharp contrast to the
277,000 jobs the state gained in 2005 before employment growth began to decline. Even more
troubling, job losses became pronounced throughout the Southeast in 2008, with most states in the
region losing jobs (see chart 1).

DEPARTMENTS
Fed @ Issue with Dennis
Lockhart

Profiles

Research Notes & News

Banking

Southeastern Economic
Indicators

Consumer Spending

Staff

Energy

BackGround

Agriculture

Employment

Manufacturing
Real Estate

EconSouth Now

Tourism
Trade

Georgia, like Florida, had enjoyed notable job growth for several years, especially in the
construction and services sectors. Only six other states, including Florida, added more jobs than
Georgia between 2003 and 2006. In 2008, however, Georgia experienced the fourth-largest job
losses in the nation, after Florida, California, and Michigan. Georgia's job losses have been
broad based, occurring in almost every sector, most notably in manufacturing, construction, and
financial activities. During the third quarter of 2008, job losses in the service and government
sectors accelerated significantly. The decline in service jobs is on par with 2001 recessionary
levels.
Although moderate, employment growth in Mississippi and Alabama held up for most of 2008.
After the third quarter, though, Alabama and Mississippi saw payrolls begin to decline. In
Louisiana, employment remained positive in 2008, but the rate of growth was much lower than
during the period of recovery from Hurricane Katrina. In Tennessee, the rate of job creation
turned negative in the spring of 2008 as most sectors lost jobs.

The unemployment rate in the Southeast began to rise in the spring of 2007. A spike occurred in
the second quarter of 2008, around the time job losses accelerated. The unemployment rate in the region as a whole, as well as in
Florida, Georgia, and Tennessee, is now at the highest level since the 1991 recession. The region's unemployment rate remained
at or above the national average for most of 2008.
Employment takes multiple hits in 2008

After a year and a half of weak employment growth, 2008 ushered in many factors—
the financial crisis, inflationary pressures, and dampened spending—that
exacerbated job losses. The subprime mortgage crisis that surfaced in 2007
morphed into significant financial instability in 2008. Louisiana, Alabama, and Florida
reported record numbers of mass layoffs in the third quarter of 2008. Across the
Southeast, some businesses also laid off workers and shortened work weeks as
they adjusted to high input costs.

Related Links
On the Web:
U.S. Bureau of Labor Statistics
U.S. Department of Labor
U.S. Department of Labor’s Employment
and Training Administration

Government sectors in the Southeast, and elsewhere in the nation, began shedding
jobs because declining consumer spending was squeezing tax revenue collections. Consumer spending averaged a 2.7 percent
monthly decline in 2008 through the third quarter in part because of the rapid rise in commodity prices, such as food and energy.
Employment in the services sector suffered in 2008 and is no longer offsetting losses in goods-producing industries. For most
states in the region, annual growth in services employment is at or below 2001 recession levels.
Louisiana suffered additionally from the 2008 hurricane season. Approximately 20,000 job losses can be linked to Hurricane
Gustav, which hit the U.S. Gulf Coast on Sept. 1, 2008. In September, Louisiana reported its largest number of monthly job losses
since 2005, after Hurricane Katrina, but regained some of these jobs in October.
Job losses in the Southeast accelerated throughout 2008. Losses in payroll employment more than quadrupled in the first two
quarters of 2008 and jumped another 23 percent in the third quarter. In October initial unemployment claims in the region as a
whole were up more than 60 percent relative to the same month a year earlier. Even more troubling, continuing unemployment
claims also trended upward, indicating that individuals are having difficulty finding work. The labor force shrank considerably in
Georgia, Alabama, and Mississippi, suggesting that some people have become discouraged about seeking work (see chart 2).

Chart 1
Southeastern Employment Growth

Notes: Data are through September 2008. The gray bars indicate
recessions.
Source: U.S. Bureau of Labor Statistics and the Federal Reserve
Bank of Atlanta

Chart 2
Southeastern Initial and Continuing Unemployment
Claims

Notes: Data are through Oct. 11, 2008, and represent a four-week
moving average. The gray bars indicate recessions.
Source: U.S. Bureau of Labor Statistics and the Federal Reserve
Bank of Atlanta

Looking ahead to 2009

Declining energy prices in the fall of 2008 offered workers and employers some relief in the form of lower travel and input costs. But
the drop in energy demand and prices could hurt employment in Louisiana because some lawmakers and businesses there have
already factored high energy prices into their investments and outlook. Thus, energy-related employment, which typically provides
good support for the state, could soften further in 2009.
Because of the uncertain economic outlook, many businesses are hesitant to hire or make new investments. Seasonal hiring
should be soft this winter. The surge in initial and continuing unemployment claims late in 2008 is a portent that the jobless will
continue to have difficulty finding work in 2009.
Although the labor markets felt a pinch from this year's financial crisis, the full impact on employment is likely yet to come. Moody's
Economy.com forecasts that employment in Southeastern states will continue to decline through part of 2009. Recovery in the labor
market will be key to the region's economic outlook in 2009. Even as credit markets ease and confidence is restored, jobs must be
restored for consumer spending and economic growth to improve.

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Economic Research
The Southeastern Economy in 2009

Energy Industry Seesaws With Supply and Demand

Volume 10, Number 4
Fourth Quarter 2008

FEATURES
After Rocky 2008, U.S.
Consumers Seek Stable
Ground in 2009
The Southeast in 2009:
Region Hopes for Turnaround
Global Economies Anticipate
a Tepid 2009

DEPARTMENTS
Fed @ Issue with Dennis
Lockhart
Research Notes & News
Southeastern Economic
Indicators
Staff
BackGround
EconSouth Now

The year 2008 is likely to be long remembered as one of the most volatile periods
ever for global energy markets. In the first half of the year, energy prices rose to
unprecedented heights as supply-side constraints, paired with surging demand,
strained market fundamentals. This trend quickly reversed, however, amid a global
credit contraction and fears that slowing economic growth would dampen demand for
energy products. Energy markets remained relatively bullish throughout the second
half of the year, brushing off two hurricanes that pummeled the U.S. Gulf Coast, the
hub of the nation's energy industry, in early September.
A fueling frenzy

Three Southeastern states—Louisiana, Mississippi, and Alabama—combined with
federal offshore areas in the Gulf of Mexico, are home to more than a third of the
country's oil production and nearly half of total U.S. refining capacity, according to
the Energy Information Administration (EIA), an agency of the U.S. Department of
Energy. The Southeast is also home to the Henry Hub, in Louisiana, the largest
centralized point for natural gas trading in the country, as well as the Louisiana
Offshore Oil Port, the only U.S. port that can accommodate the largest oil tankers. So when significant movements occur in national
or global energy markets, Southeastern businesses and consumers especially feel the effect, as they did through the end of 2007
and into mid-2008 when energy prices rose persistently to new highs.
Profiles
Agriculture
Banking
Consumer Spending
Employment

Energy costs peaked during the summer of 2008 as the price for a barrel of light sweet oil
topped $145 per barrel. The average U.S. price for regular-grade gasoline in the nation
surpassed $4.11 per gallon in July, a record high, even in real (inflation-adjusted) terms, and
nearly 40 percent higher than prices during the summer of 2007. Other refined products such as
diesel and residual fuel oil also climbed to record levels, and Henry Hub natural gas was selling
at more than $13 per mmbtu (millions of British thermal units) amid expectations for strained
global supply. Energy and energy-servicing companies were raking in record profits while
consumers were feeling the pinch on their wallets.

Energy
Manufacturing
Real Estate
Tourism
Trade

High gasoline prices sparked a national debate over offshore drilling. On July 14, President
Bush lifted the presidential moratorium on offshore oil and gas drilling that had been in place
since 1990 in hopes that increased leasing in the Outer Continental Shelf would ease supply
pressures and allow prices to moderate. For a short while, skyrocketing energy prices sparked
an almost frenzied reaction as industry members considered higher-cost drilling options and
talked of hastening investment plans, and consumers were struggling to find ways to conserve
fuel.

But this situation reversed itself almost as soon as it began. In mid-July indications that global economic growth was beginning to
slow triggered a rapid sell-off of futures contracts for oil and other commodities in international markets. This sell-off marked the
beginning of several months in which prices eased significantly, dropping to levels well below half their peak trading level.
Some uncertainty continues to cloud the forecast for the oil and gas industry as
many market participants are taking a wait-and-see approach, hoping for credit
markets to stabilize and economic growth to pick back up. In the final months of
2008, several companies announced plans to cancel or postpone investment and
expansion plans in the region as prices continued to be weak and financing became
more difficult to obtain.

Related Links
On the Web:
U.S. Energy Information Administration
Oil and Gas Journal

The two storms

Despite all the activity in energy markets in 2008, one of the most significant events of the year for Southeastern states was two
consecutive hurricanes that pounded the Louisiana and Texas coasts and left much of the region's energy infrastructure temporarily
offline.
On Sept. 1, the center of Hurricane Gustav made landfall along the Louisiana coast as a strong category 2 hurricane. Gustav
caused extensive flooding and power outages along the Gulf Coast and widespread shutdown of the region's energy production
and refining infrastructure. Less than two weeks later, on Sept. 13, Hurricane Ike struck the coast, wreaking further havoc.
The combined impact of the two hurricanes will prove to be the second-costliest on record, behind 2005's Hurricane Katrina,
according to estimates published by Action Economics. The group calculates that total damage caused by Ike could amount to $27
billion, while Gustav will cost around $15 billion. Despite reports that the hurricanes caused little major long-term damage to the
Gulf Coast's energy infrastructure, their impact on oil production and refining has been, by some accounts, just as devastating, if
not more so, than that of Hurricanes Rita and Katrina in 2005.

The impact of Gustav and Ike on the Southeast's refineries had substantial short-term implications for the rest of the nation. The
many refineries that shut down in advance of Hurricane Gustav remained closed until Ike passed 12 days later. Even without
damage, shut-down refineries can take several weeks to restart operations, and electrical outages in storm-ravaged areas further
delayed return to operations. The country's refinery utilization rate dropped to 66.7 percent, the lowest rate on record, pushing the
amount of crude processed by U.S. refineries to record lows as well (see chart 1). Fuel distributors were forced to draw down the
country's gasoline stocks to the lowest level in 41 years to maintain supplies at the pump (see chart 2).
About 5.2 million barrels of emergency exchange oil were released from the nation's Strategic Petroleum Reserve in the weeks
following the two storms because some refineries were stranded without enough oil to process while pipelines in storm-damaged
areas had not yet come back online. Despite efforts to bring as much supply to the market as possible, some areas of the
Southeast, including Atlanta and Nashville, faced fuel shortages through early October.

Chart 1
Total U.S. Estimated Crude Oil Production

Note: Data are through Oct. 10, 2008, and represent a four-week
moving average.
Source: Oil and Gas Journal

Chart 2
Gulf Coast Motor Gasoline Inventories

Note: Data are through Oct. 17, 2008.
Source: Oil and Gas Journal

The EIA estimates that about 14.5 million barrels of crude oil production (or about three days' worth of total U.S. output) were lost
as a result of hurricane-related outages in 2008. But despite the significant disruption to energy supply caused by Gustav and Ike,
the resulting price effect was relatively muted largely because the worsening financial situation that was surfacing around the globe
curtailed demand.
Looking ahead to 2009

For most of the past two years, the outlook for energy markets has been uncertain. Early in 2008, some analysts forecast that oil
would reach $200 per barrel. With prices trending around a quarter of that level 10 months later, forecasters disagree about where
the markets will go next.
Falling oil prices indicate that market supply exceeds current demand by businesses and consumers. Thus, given the recent
slowdown in the global economy, unless oil output is reduced considerably in the near term, prices are likely to remain low in the
coming months. In the longer term, however, as global growth recovers, demand will resume its upward pressure on prices.
One question facing the industry right now is the extent to which exploration and production projects currently under way will be
canceled or postponed as a result of the recent price decline and the financial turbulence affecting investments. Cancellations and
delays become increasingly likely as prices fall below levels necessary to make the more capital-intensive projects profitable. A
slowdown in new oil production projects could mean that future global production capacity will be reduced, resulting in additional
price pressures when demand growth resumes down the road.

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Economic Research
The Southeastern Economy in 2009

Mixed Messages for Manufacturing

Volume 10, Number 4
Fourth Quarter 2008

FEATURES
After Rocky 2008, U.S.
Consumers Seek Stable
Ground in 2009
The Southeast in 2009:
Region Hopes for Turnaround
Global Economies Anticipate
a Tepid 2009

DEPARTMENTS
Fed @ Issue with Dennis
Lockhart
Research Notes & News

The region's manufacturing sector
experienced a weak performance
in 2008 amid a slowdown in the
broader economy. In particular,
many manufacturers were
hampered by a worsening housing
market, declining automobile sales,
and credit strains related to
financial market turmoil. But
manufacturers tied to the energy sector or that make goods for export fared better
than others because of the surge in commodity prices and the weak dollar.
Weakness reflected in data

One indicator of the status of manufacturing in the region is Kennesaw State
University's Southeast Purchasing Managers Index (PMI), which is a monthly report
on a manufacturing survey similar to the national PMI produced by the Institute for
Supply Management. A PMI reading above 50 indicates expanding manufacturing
activity, below 50, contracting activity. Through October 2008, the Southeast's PMI
declined to 32.4, down from 41.8 in September and 44.7 in August and 17.8 points
below the October 2007 level (see chart 1).
Profiles

Southeastern Economic
Indicators

Agriculture

Staff

Consumer Spending

BackGround

Employment

EconSouth Now

Banking

For 2007, the Southeast PMI reading averaged
53.1, while nationally the average was 51.1. Since
January 2008, however, the Southeast and
national PMIs have declined to average readings
of 46.1 and 46.8, respectively. So while
manufacturing across the country experienced
contracting activity in 2008, the Southeast fell
further than the national average.

Energy

The Federal Reserve Bank of Atlanta conducts its
own regional manufacturing survey, which also
Real Estate
showed sluggishness in the region throughout
2008. Survey contacts reported weakness in
Tourism
production, shipments, and new orders compared
Trade
with a year earlier, and most continued to report
cutbacks in employment and/or work hours. Price
pressures on raw materials rose considerably in the first half of the year but then
eased significantly beginning in August. Southeastern manufacturers also noted
higher export orders relative to a year earlier although the number of such orders
decelerated in the second half of the year as the dollar gained value and demand
overseas weakened.
Manufacturing

Aside from data on business activity, another crucial metric in analyzing
manufacturing is employment. Manufacturing employment in the six Southeastern
states was down 4.2 percent through September on a seasonally adjusted basis from
a year earlier, according to data from the U.S. Bureau of Labor Statistics (BLS), and
down 4 percent on a non-seasonally adjusted basis. (Unless otherwise noted,
employment data are from the BLS and are not seasonally adjusted.) Within
manufacturing, employment in durable goods industries declined 3.8 percent, while
nondurable goods employment declined 4.2 percent (see chart 2).
Dragged down by weak housing
and auto sales

As the housing market has weakened,
so has the construction industry.
Through September, construction
employment in the Southeast slumped
more than 7 percent from a year
earlier on a seasonally adjusted basis.
Important manufacturing industries
that previously supplied the boom in
real estate and construction suffered
as well in 2008.

Related Links
On the Web:
U.S. Census Bureau data on
manufacturing, mining, and construction
Federal Reserve data on industrial
production and capacity utilization
National Association of Manufacturers
Web site
Institute for Supply Management Web
site
Purchasing Managers Index data

As of September, wood product
manufacturers in the Southeast saw
their employment rolls decline by 4.8 percent from a year earlier. Alabama and
Georgia, the two regional states with the largest share of wood manufacturing, saw
employment in the industry fall 3.9 percent each.
Furniture manufacturers' payrolls were down 9.3 percent in the Southeast, hitting
Mississippi and Tennessee (where the industry is primarily located) particularly hard
with 7.4 and 10.9 percent declines, respectively.
Similarly, textile-related employment was down more than 7 percent through
September in the region. In Georgia, with the region's largest share of textile firms,
payrolls at textile mills and textile product manufacturers declined 8.7 and 6.1
percent, respectively. On a brighter note, however, in June Zagis USA broke ground
on the first of two textile mills to be built in Louisiana's Jefferson Davis Parish. The
two mills, to be completed in early 2009, should bring 160 additional jobs to that area.

Chart 1
National and Southeast Purchasing Managers
Indexes

Along with the
declining housing
market, the first half of
2008 saw a surge in
the price of gasoline,
slower consumer
spending, and
financing constraints
for businesses. All of
these factors
dampened automobile
sales and forced car
makers to cut back on
production,

investment, and
employment (see the
sidebar).
Auto parts
manufacturers
suffered along with
automakers. For
every auto
manufacturing job
there are three jobs in
related auto suppliers.
In September
employment in the
Note: An index reading over 50 indicates expanding manufacturing
region's fabricated
activity, below 50, contracting activity.
Source: Institute for Supply Management (national PMI); Kennesaw
metal and
State University (Southeast PMI)
transportation
equipment industries
was 3.0 and 2.1 percent lower, respectively, than a year earlier. Tennessee and
Florida were hit particularly hard; during the same period, Tennessee lost 2.4 percent
of fabricated metal jobs and 2.0 percent of transportation equipment jobs, and
Florida's transportation equipment payrolls declined by 3.2 percent.
The story was more upbeat in Alabama, which was the only state in the region to
boast employment growth in transportation equipment manufacturing in October
compared with a year earlier, driven by a 4.5 percent expansion in aerospace
manufacturing. Alabama's auto producers also saw a 1.0 percent job increase during
the same period, primarily supported by Mercedes production in Vance.
Strong commodities and a weak dollar boost some manufacturers

During the first half of 2008 commodities prices soared, supporting business for
manufacturers in petroleum, metals, food, and other goods. Manufacturing related to
energy and commodities, while weaker than in 2007, thus performed relatively well in
2008 compared with other manufacturing industries. Louisiana's petroleum and coal
products industries saw employment declines of less than 1 percent through
October—less than half the rate for manufacturers across the state as a whole. One
example of spillover growth from the commodity price surge is PSL North America's
hiring of more than 300 people at its plant in Perlington, Miss., to produce steel pipe
for the gas and oil industry.
After consistently growing for much of 2007, employment in food product
manufacturing in Florida held steady in September 2008, with payrolls unchanged
from a year earlier.
Employment in the region's primary metals industry (mostly centered in Tennessee)
rose about 1 percent in September Wrelative to a year earlier, in contrast to the
payroll declines seen in other manufacturing industries.
Until mid-2008, the
consistent
depreciation of the
U.S. dollar made U.S.
exports relatively
cheaper for foreign

Chart 2
Manufacturing Employment in Southeastern States

consumers and thus
brought a surge of
export orders for
many manufactured
goods in 2007 and
early 2008. The new
export orders
component of the
national PMI
averaged 54.8 from
January 2007 to
November 2008, well
above the average of
49.3 for all new
orders. But as
Note: Data are through September 2008 and are not seasonally
adjusted (except for construction).
financial turmoil
Source: U.S. Bureau of Labor Statistics
spread globally, the
dollar started to
appreciate, and new export orders began to fall in the summer of 2008, diminishing
hopes for an export-led recovery in manufacturing.
Looking ahead to 2009

As the economy remains weak in 2009, business investment and consumer spending
will be subdued and provide little stimulus for the region's manufacturers. In
particular, the credit crunch will continue to restrain growth in manufacturing
industries, which rely more heavily than many other industries on freely flowing credit
to finance big-ticket expansion projects.
In spite of challenging credit conditions, some of the Southeast's manufacturing
industries face a more promising future. Along with some positive developments in
the auto industry (see the sidebar), another bright spot is the region's strong
aerospace industry, which is set to expand even more in the coming years. Embraer,
the world's third-largest aircraft manufacturer, based in Brazil, broke ground in
December on its first U.S. factory, located at Melbourne International Airport in
Florida. The $51 million facility is expected to create approximately 200 additional
jobs by 2011. Florida also welcomed the announcement in May that Piper Aircraft will
keep its headquarters in Vero Beach and expand its payroll by nearly 50 percent.
In November, Leading Edge Aviation, in Greenville, Miss., was awarded the contract
to repaint Northwest Airline planes, which will be given a makeover as a result of
Northwest's merger with Delta Air Lines. The contract will require a tripling of the
company's workforce.
The strong auto and aerospace industries thus seem likely to provide significant
ongoing support to economic activity in the region.

Auto Production Stalls as Economy Sputters
Auto production in the Southeast may be in line for an overhaul. During
2008, the region's five assembly plants and their parts suppliers were
affected by a dramatic fall in vehicle sales, the worst in decades. About fourfifths of the models assembled in the region are trucks or SUVs—vehicles
most affected by rising fuel prices and shifting consumer demand. The chart
illustrates the decline in production from 2007 to 2008 across the region's

automobile manufacturers.

Related Links
Auto assembly plants in the
region employed 29,000 in
On the Web:
early 2008, but with closing
Automotive News
factories and production
adjusting to lower vehicle
Automotive Digest
sales and the recent financial
crisis, that number could drop
below 25,000 by year-end. In addition, regional suppliers and parts
manufacturing companies employed 70,000 workers at the beginning of
2008, down from about 78,000 a year earlier.
The near-term outlook for auto producers is not promising. Pressured to
reduce excess production capacity and losses of $1,200 per vehicle by the
third quarter, in 2008 General Motors (GM) closed nine plants in North
America, including a 61-year-old plant in Doraville, Ga. GM's two remaining
factories in the Southeast, in Louisiana and Tennessee, face an uncertain
outlook. Recently, GM asked the U.S. government for financial assistance to
avoid bankruptcy.
At the
Shreveport,
La., GM
plant, which
assembles
the Hummer
H3 and
Colorado and
Canyon
trucks,
production
through the
first three
quarters of
2008 was 40
percent
below levels
for the
comparable
period in
2007. The
Note: Data compare January–October 2007 with January–October
2008.
plant recently
Source: Automotive News
laid off about
800 workers
to adjust to lower demand. The company is reportedly trying to sell the
Hummer brand to foreign automakers. GM's Spring Hill, Tenn., plant, after
being idle for almost a year, has recently started production of the Chevrolet
Traverse CUV, with a much-reduced workforce and production levels far
below last year's output of two Saturn models.
Southeastern Auto Production

Weak vehicle demand and higher vehicle inventories were not limited to
domestic automakers. In fact, most import brands or "transplants" have been
working at about half their production capacity during 2008. Toyota
announced in mid-December that it is indefinitely suspending the opening,
originally scheduled for 2010, of its plant in Blue Springs, Miss. But the
company assures that the plant, which is 90 percent complete with nearly
$300 million spent so far, will be finished.
Longer term, though, some news is positive. For example, Volkswagen (VW)
has selected Chattanooga, Tenn., as the site for its $1 billion auto factory.
The plant will assemble 150,000 midsize sedans per year, with production
starting in late 2010. VW anticipates that more than 80 percent of its vehicle
components will come from North America, and the company is promoting

an industrial park nearby to ensure just-in-time supplies to its new assembly
plant.
Kia Motors will begin new vehicle assembly production in 2009 in West
Point, Ga. And Honda recently announced that it will move production of the
Accord from Ohio and of its Ridgeline truck from Canada to its Lincoln, Ala.,
plant.

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Economic Research
The Southeastern Economy in 2009

Construction and Real Estate Languish as Economy
Swoons
Volume 10, Number 4
Fourth Quarter 2008

FEATURES
After Rocky 2008, U.S.
Consumers Seek Stable
Ground in 2009

The Southeast's residential
housing market continued to suffer
from weak demand during 2008.
New home construction and sales
deteriorated further while existing
home sales levels stabilized in
many parts of the region.

Global Economies Anticipate
a Tepid 2009

Inventories of homes available for
sale shrank, but foreclosed homes
owned by financial institutions
became a larger share of the
available inventory and depressed
both new and existing home prices.

DEPARTMENTS

Florida and Georgia hit
hardest

The Southeast in 2009:
Region Hopes for Turnaround

Fed @ Issue with Dennis
Lockhart
Research Notes & News
Southeastern Economic
Indicators
Staff

Florida homebuilders opened 2008 with a heightened motivation to offer substantial
price incentives to move inventory. Existing homeowners also began to come to
terms with price cuts, although grudgingly. As a result, home prices continued to
slide, ending the first quarter nearly 16 percent lower than a year earlier.
Profiles
Agriculture
Banking

BackGround
EconSouth Now

Consumer Spending
Employment
Energy
Manufacturing
Real Estate

But in the second quarter, single-family home
sales declined more moderately, decreasing only
6.5 percent on a year-over-year basis, according
to the Florida Association of Realtors. During that
quarter, the wave of foreclosures that hit Florida
homeowners in 2007 began to show up on
financial institutions' books (referred to as realestate owned, or REO, inventory). Greater
discounts were offered on these properties, and in
the second half of 2008 the pace of REO
inventory accumulation accelerated across most
of the state.

Tourism

In the third quarter, sales of existing single-family
homes across Florida rose 5.4 percent above
weak year-earlier levels as home prices fell 20
percent. Contacts in some markets noted that REO sales accounted for as much as
half of sales and contributed to the substantial decline in the median home price.
Trade

In Georgia housing markets, existing home sales also destabilized somewhat during

2008 while a glut of foreclosed properties, particularly in the Atlanta market,
weakened home prices. According to the National Association of Realtors, existing
home sales during the second quarter fell 21.4 percent statewide compared with a
year earlier. During the same period, Georgia home prices declined 3.6 percent,
according to the Federal Housing Finance Agency purchase-only house price index
(see chart 1).
Many Atlanta homebuilders faced troubles during 2008. On the heels of weak price
growth in 2007, they were forced to cut prices in 2008 to move inventory. Over the
past decade, the Atlanta market led the nation in single-family building permits,
reflecting the market's attractiveness to homebuilders. But since their peak in 2005,
permits have declined nearly 75 percent through the third quarter of 2008. This
dramatic slowdown pushed many homebuilders into bankruptcy or closure. In
September, the Greater Atlanta Homebuilders Association reported that its
membership had declined 22 percent in the past two years.
Other Southeastern states also
feel the pressure

The remainder of the Southeast was
not hit as hard as Florida and Georgia
by the wave of foreclosures and the
run-up in REO inventory. However,
downward pressure on home prices
and reduced access to financing were
themes in these markets as well.
Home sales continued to soften (see
chart 2), but home price declines were
more muted than in the Atlanta and
Florida markets.

Related Links
On the Web:
U.S. Census Bureau's economic
indicators
National Association of Realtors data on
existing home sales
Florida Association of Realtors data on
existing home sales
FHFA home price index
S&P;/Case-Shiller Index

Alabama's year-over-year existing home sales growth continued to soften during the
third quarter. The slide in existing home prices continued as well, with prices ending
the third quarter at levels just below those a year earlier. Single-family building
permits continued to weaken across the state, and builders reported that new sales
declined significantly in the third quarter from year-earlier levels.
New Orleans and Baton Rouge existing home markets remained weak during 2008,
experiencing disruptions from hurricane activity during the third quarter. Declines in
single-family permit growth recovered somewhat (but remained negative year over
year) during the first half of the year but then weakened further in the third quarter.
South Louisiana homebuilders reported that third-quarter sales declined moderately
compared with a year earlier. Several large condominium projects were put on hold
during the second half of the year as financing dried up.
Home sales and construction in Mississippi remained below year-earlier levels during
2008 as activity continued to decelerate from the post–Hurricane Katrina surge.
Homebuilders in south Mississippi reported that sales declined significantly in the
third quarter compared with a year earlier.

Chart 1
Existing Home Prices

In Tennessee, both
the Nashville and
Knoxville housing
markets experienced
a pickup in home

sales during the third
quarter after sales slid
earlier in the year. But
single-family permit
growth in the third
quarter remained
below year-earlier
levels while
homebuilders
reported that sales
were flat or slightly
down.
Commercial real
estate weakens

Source: Federal Housing Finance Agency

further

Like housing markets, the region's nonresidential real estate markets experienced
shakier conditions during 2008. Early in the year, commercial contractors reported
declining backlogs, particularly in Florida. Contractors also noted that the field of
bidders on projects became more crowded as bidders chased fewer projects and as
some residential contractors and subcontractors turned to nonresidential projects to
take up the slack in their residential work. Subsequently, across the Southeast some
projects came in well below expected cost at bid time.
In addition, retail projects were postponed or canceled because of softening
consumer spending. By midyear, more nonresidential construction projects were put
on hold across the Southeast as access to financing continued to shrink.
Infrastructure rebuilding along the Gulf Coast remained a bright spot, but state and
municipal spending was under pressure by year-end across much of the Southeast
as budgets for road and highway projects shrank.
Demand for office and industrial space also weakened in the Southeast during 2008
(see chart 3). Lackluster retail sales led retailers to slow expansion plans and shutter
underperforming stores. Businesses also began to shed jobs and curtail growth,
resulting in rising vacancies across much of the Southeast.
Office and industrial
vacancy rates in the
region trended
upward during 2008.
According to real
estate service firm CB
Richard Ellis, office
vacancy rates had
already begun to rise
in Florida in 2007, and
that trend carried over
into 2008. The most
dramatic rise in office
availability was in the
West Palm Beach–
Boca Raton and
Jacksonville markets.
Elsewhere in the

Chart 2
Existing Home Sales

Source: National Association of Realtors

region, the office vacancy rate rose modestly in Nashville despite several large
corporate relocations to the area. In Atlanta, vacancy rates rose slightly from yearend 2007, and sublease availability grew during the third quarter.
Industrial vacancy rates were uneven across the Southeast, according to CB Richard
Ellis, but weaker conditions were apparent in several areas. A surge in completions
during the third quarter, coupled with weak economic activity, caused a jump in
vacancies in Tampa. Similarly, in Jacksonville expansion at the port during 2008
brought a wave of completions that the market was not able to fully absorb. In
Atlanta, the industrial vacancy rate declined somewhat from the year-end 2007 level,
but during the third quarter of 2008 absorption turned negative for the first time in five
years. Vacancy rates in south Florida and Nashville markets in 2008 were little
changed from year-end 2007.
In New Orleans and Baton Rouge, commercial real estate markets were mostly
steady during 2008, according to Latter & Blum Realtors. Office occupancy rates
remained strong in both markets through the third quarter while industrial markets
were mixed. Baton Rouge continued to benefit from port growth and petrochemical
plant expansions while the New Orleans market experienced weaker demand.
In Mobile, Ala., construction of the ThyssenKrupp Steel facility continues to be a boon
for industrial activity.

Chart 3
Metropolitan Office Vacancy Rates

Looking ahead to
2009

In the coming year,
housing activity
should remain weak.
Home prices should
continue to slide as
home sales will likely
exceed weak 2008
levels in many parts
of the Southeast.
Recovery in the
region's housing
markets will depend
on the availability of
credit for homebuyers
Source: CB Richard Ellis
and on the level of
REO inventories,
which will continue to push home prices down in the Southeast, particularly in Florida.
How long that downward pressure persists depends on how fast those inventories
are worked down and whether foreclosures stabilize or decline. The third-quarter
boost in sales shows that buyers can be lured by deeply discounted homes. Buyers'
access to credit is a current hurdle, so any easing on that front would benefit housing.
The commercial real estate market is also likely to weaken somewhat in 2009. Most
notably, more retail store closures are expected, and rents will decline year-over-year
in the Southeast, similar to national trends. Office vacancy rates will continue to rise
modestly across the Southeast as employment levels decline and rents remain
depressed. Demand will also slacken in industrial markets, particularly along the East
Coast as import/export business is curtailed. Current backlog levels point to a further
slowdown in commercial development.

Economic Research
The Southeastern Economy in 2009

Tourism Cruises Through Tough Times

Volume 10, Number 4
Fourth Quarter 2008

FEATURES
After Rocky 2008, U.S.
Consumers Seek Stable
Ground in 2009
The Southeast in 2009:
Region Hopes for Turnaround
Global Economies Anticipate
a Tepid 2009

DEPARTMENTS
Fed @ Issue with Dennis
Lockhart
Research Notes & News
Southeastern Economic
Indicators
Staff
BackGround
EconSouth Now

Even in the midst of 2008's economic turmoil,
tourism in the Southeast enjoyed a fairly good
year relative to other sectors. Domestic tourists
kept a low profile, but international travelers
more than compensated for their absence,
boosting tourism in the region throughout most
of the year. Some signs of slowing in tourism
activity appeared toward the end of the third
quarter with increased reports of discounting
and lower revenues.
Record-high fuel prices, an economy in
recession, soaring airfares, and inflation had a
significant impact on domestic tourism in the
region. A weaker dollar that discouraged travel
abroad encouraged some residents to vacation
closer to home and attracted international travelers in higher numbers through most
of 2008. Domestic airlines pared seats at some airports in the region, but
international airlines added seats to gear up for the beginning of peak travel season
in December.
International visitors prop up the industry

According to the U.S. Department of Commerce, 5.6 million international visitors
traveled to the United States in August 2008, 6 percent more than a year earlier.
These tourists spent a record $12.7 billion, a 20 percent increase over spending in
August 2007. For the first eight months of 2008, the number of international visitors to
the United States climbed 20 percent compared to the same period in 2007.
Profiles
Agriculture
Banking
Consumer Spending
Employment
Energy
Manufacturing
Real Estate
Tourism

Through August, the number of overseas visitors
to the United States had grown for the past two
years, according to the International Trade
Administration's Office of Travel and Tourism
Industries. Comparing the first eight months of
2008 with the same period a year earlier,
international tourism increased across the board,
led by a 29 percent increase in visitors from
China. During that period the total number of
tourists from Asia (including China) rose only 1
percent, however, dragged down by a 5 percent
drop in visitors from Japan, which accounts for
more than 50 percent of the nation's Asian
visitors.

Trade

In the first eight months of the year, the number of
visitors from Western Europe rose 17.5 percent
relative to the same period a year earlier, with the largest increases from Spain and
Ireland (36 percent), followed by France and Italy (29 percent), the Netherlands (27
percent), and Switzerland (19 percent). For the same period, the number of visitors
from Eastern Europe increased 15 percent.
Although travel to the United States in the final months of the year did not keep up
this pace, bookings and travel from Europe to the United States were expected to
remain strong through the end of 2008, according to two surveys from firms, one
British and one German, that promote or sell travel services to the United States.
Florida is international tourist magnet

Tourism in the Sunshine State was fueled by international visitors in 2008. In MiamiDade County, international visitors accounted for nearly 45 percent of the tourism
market through the first half of the year. Through the summer that inflow remained
strong, but it faltered a bit in September as hurricane-related evacuations and the
financial market slowdown took a toll. International passenger traffic at the Miami
International Airport declined 1.78 percent in September compared to the same
month in 2007 but was up 4.6 percent on a year-to-date basis. At the Orlando
International Airport international passenger traffic soared 18.7 percent in September
compared to a year earlier, but domestic passenger traffic declined 14.7 percent.
Hotels across the state enjoyed strong
Related Links
occupancy rates through August but
also suffered a September swoon.
On the Web:
Miami-Dade County hotels saw their
Travel South USA
first decline in per-room revenues in
two years in September, according to
New Orleans Convention and Visitors
Bureau
Smith Travel Research, but reports
noted a rebound in October. The
City of Atlanta tourism
tourism and recreation component of
Orlando/Orange County Travel and
sales tax collections in Florida also
Visitors Bureau
showed year-over-year growth from
February to July but a decline of 0.4
percent in August, according to the Florida Department of Revenue. In Jacksonville
the annual occupancy rate through July was at 65 percent, 6 percent lower than in
2007. But the Visit Jacksonville sales department reported booking a record 200,000
room nights during the fiscal year that ended in September.
Cruise lines in Florida posted strong results through the third quarter of 2008. The
North American cruise industry is important to Florida's economy, contributing more
than $6 billion in direct spending and supporting more than 126,000 jobs and $5
billion in income in the state in 2007, according to a study commissioned by Cruise
Lines International. The report also noted that Florida led the nation in both the
number of passengers leaving on cruise ships from the state's ports and in the
number of residents taking cruises.
Convention activity in Florida remained strong through most of 2008 as business
travel held up in the face of an economic downturn.
Bugs, games, and pharaohs

It was a good year for New Orleans as visitors returned in large numbers for the city's
traditional big events, including Mardi Gras and the Jazz Festival. Both the 25th

Annual French Quarter Fest in April, with 485,000 attendees, and the monthlong
Essence Musical Festival in July, with 275,000 attendees, broke event attendance
records.
The city also got a
boost from the
opening in June of the
23,000-square-foot
Audubon Insectarium,
built at a cost of $25
million. In its first two
months the attraction
welcomed more than
100,000 visitors,
exceeding
expectations. In its
first year 350,000
visitors are predicted,
and the attraction
Note: Data are through September 2008.
could have an annual
Source: Mississippi State Tax Commission
economic impact of
more than $54 million, according to the Audubon Nature Institute.
Mississippi Gaming Tax Revenue

Convention activity in New Orleans remained relatively strong, but convention sites
noted an increase in bookings of smaller meetings in the absence of larger
conventions.
On the Mississippi Gulf Coast, gross gaming revenues declined 23 percent in
September on a year-over-year basis following a January–August year-over-year
decline of 11 percent. Hurricane-related closings at the coastal casinos in late August
and early September, higher fuel prices, and generally slow economic conditions
shrank casinos' September earnings (see the chart).
Atlanta played host to numerous conventions, and general tourism trends in the city
remained strong in 2008. The city anticipates a significant boost from two exhibitions
that opened in November: "Tutankhamun: The Golden King and the Great Pharaohs"
at the Atlanta Civic Center (through May 2009) and "The First Emperor: China's
Terracotta Army" at the High Museum (through mid-April 2009). Convention
attendance and hotel occupancy held up through August before slowing somewhat,
but the longer-term outlook for the city's convention activity is strong into 2010.
Tennessee also attracted tourists to popular drive-to attractions. The four state parks
closest to Chattanooga reported marginal increases in campsite rentals through
June. The Cherokee National Forest in East Tennessee also saw an increase
through September in visitors and significant upticks in camp usage fees at some
recreation areas. In Nashville, the Convention and Visitors Bureau reported booking
122,780 rooms in the third quarter, exceeding its goal of 93,500 rooms.
Contacts in Alabama reported strong tourism trends in the state through summer,
noting gains in the number of "staycationers"—people who stay home or at local
hotels and "vacation" at local attractions.
Looking ahead to 2009

The strengthening dollar and the global economic slowdown are expected to affect

tourism in the Southeast in 2009. But the tourism industry should chug along, though
international tourism, the engine of growth that propelled the industry through 2008,
will probably rev down a bit.
Increased international marketing could attract more foreign visitors to the region.
The Orlando/Orange County Convention and Visitors Bureau will launch a $1 million
advertising campaign in Brazil and plans to double its spending, to $400,000, on
promotions in Mexico. The visitors bureau and Visit Florida are also collaborating on
a marketing effort in China, hiring a Chinese tourism development agency to attract
Chinese tourists to Florida and Orlando. Promoters in Orlando, including the visitors
bureau, are intensifying market efforts to attract medical tourists—international
travelers seeking health care services.
More passenger seats and nonstop flights at Florida's airports should also bring in
more visitors in 2009. Miami International Airport plans a 2 percent increase in the
number of seats to Miami, and Orlando International Airport is adding nonstop flights
from Brazil and Mexico City.
Cruise lines, a mainstay of the Southeast tourism industry, appear to have weathered
the current financial crisis relatively well, and industry experts expect this segment to
remain steady in the new year, though discounting is likely. In the next 15 months,
five cruise lines will introduce their biggest ships ever at a combined estimated cost
of $4.47 billion.
Increased discounting in hotel rates and cruise packages, which began late in the
third quarter of 2008, will probably continue in 2009. The moderation in fuel prices
toward the end of 2008 could spell a rebound for many of the region's drive-to
attractions.

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Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470 Tel. (404) 498-8500

Economic Research
The Southeastern Economy in 2009

Trade Props Up the Economy

Volume 10, Number 4
Fourth Quarter 2008

FEATURES
After Rocky 2008, U.S.
Consumers Seek Stable
Ground in 2009
The Southeast in 2009:
Region Hopes for Turnaround
Global Economies Anticipate
a Tepid 2009

DEPARTMENTS
Fed @ Issue with Dennis
Lockhart
Research Notes & News
Southeastern Economic
Indicators
Staff

For the past two years,
international trade has been a key
driver of U.S. economic growth.
The U.S. economy barely
expanded during 2008, but without
overseas trade, gross domestic
product (GDP) would have declined
during the same period. Demand
for U.S.-made goods from major
trading partners such as Canada
and the European Union primarily
drove the increase. In addition, the weak U.S. dollar, which started depreciating in
2002, made U.S. companies more competitive abroad.
While exports increased at a fast pace, imports slowed. The United States began to
buy fewer imported goods as their prices increased because of the weaker dollar.
Consumers opted for relatively cheaper U.S.-made goods, boosting the domestic
manufacturing industry.
Profiles
Agriculture
Banking
Consumer Spending
Employment
Energy

BackGround
EconSouth Now

Manufacturing
Real Estate
Tourism
Trade

Ports see more traffic in 2008

The value of international shipments passing
through Southeastern ports in 2008 exceeded
2007 levels. The expansion of trade with Asia and
foreign manufacturing investments in the region
led East Coast ports such as those in Savannah,
Ga., and Jacksonville, Fla., to improve their
container facilities. The American Association of
Port Authorities recently ranked the Port of
Savannah as the nation's fastest-growing
container port, and JacksonvilleÑwith Japanese
and Korean shipping companies adding container
terminalsÑcould see tripled container capacity by
2011.

Gulf Coast ports in the region are not far behind
this rate of growth. The Port of Mobile is adding container capacity to accommodate
increased shipments generated by the new $4.2 billion ThyssenKrupp steel
processing plant, which will begin production in Mobile, Ala., in 2010. The port's
container traffic has also benefited in recent years from increased rail-to-barge trade
with ports in the Gulf of Mexico.
Robust global demand propels ports

For the year ending in August, exports rose more than 28 percent regionally, with all
regional ports posting double-digit gains, according to U.S. Department of Commerce
data. Exports from the Southeast benefited from Canada and Mexico's strong
demand, and increased orders from Brazil, the United Kingdom, Germany, and China
also boosted Southeastern exports.
For the same period, the value of
imports into the region rose nearly 18
percent, an increase mostly driven by
higher import prices, especially for
commodities. Although import values
across regional ports rose, import
volumes fell from year-earlier levels.
Looking ahead to 2009

Related Links
On the Web:
U.S. Census Bureau data on foreign
trade
International Trade Administration Web
site
Federal Trade Administration Web site

In the near term, U.S. exports should
grow at a much slower pace primarily
because the dollar strengthened significantly during the third quarter of 2008 against
the currencies of major trading partners, making domestically produced goods more
expensive for overseas markets. Also, as global economic growth has slowed,
foreign demand for U.S.-made goods weakened. Overall, diminishing international
trade could prove a drag on U.S. GDP growth starting in the second half of 2009.
Andrew Flowers, Laurel Graefe, Julie Hotchkiss, Whitney Mancuso, Kate Rees, Navnita
Sarma, Menbere Shiferaw, and Gustavo Uceda of the Atlanta Fed's research department
and Brian Bowling and Carl Hudson of the Atlanta Fed's supervision and regulation
department contributed to this article.

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Economic Research
Global Economies Anticipate a Tepid 2009

Volume 10, Number 4
Fourth Quarter 2008

FEATURES
After Rocky 2008, U.S.
Consumers Seek Stable
Ground in 2009
The Southeast in 2009:
Region Hopes for Turnaround
Global Economies Anticipate
a Tepid 2009

DEPARTMENTS
Fed @ Issue with Dennis
Lockhart

The slowing economic
growth that countries
around the world
encountered in 2008
should persist into 2009.
Hopes for a swift recovery
are dim and hinge on
several fragile
developments.
Worldwide economic growth
slowed significantly in 2008,
buffeted by the deep financial
crisis, sharp run-ups in energy and
food prices, and declines in many developed economies' housing markets. As a
result, the near-term outlook for developed and emerging economies alike
deteriorated rapidly toward the end of 2008. While most major developed economies
are in recession or close to it, economic growth in emerging economies has also
decelerated substantially. The world economy is expected to stagnate for most of
2009, with a slow recovery beginning toward year-end.
A drama with roots in 2007

Research Notes & News
Southeastern Economic
Indicators
Staff
BackGround
EconSouth Now

For four years through the summer of 2007, the global economy expanded rapidly,
and emerging economies supplied three-fourths of this growth. Accommodative
monetary policies supported strong growth, and the world's central banks maintained
these policies for an extended period. Rapid economic expansion, along with low
inflation and interest rates, encouraged investors to take considerable risks. Stock
markets soared, and credit spreads fell to very low levels. Significantly, low mortgage
interest rates led to a housing construction boom in many developed and emerging
economies and a considerable run-up in house prices.
But just as the Federal Reserve began tightening monetary policy in mid-2004, the
housing market in the United States began to weaken. House prices declined,
mortgage defaults began to rise, and the value of mortgage-related assets sank. U.S.
financial conditions began to deteriorate in August 2007, and the turmoil quickly
spread to Western Europe, where banks had invested heavily in U.S. mortgage
securities. At the time, China and other emerging economies remained relatively
insulated from the financial turmoil because their holdings of troubled U.S. assets
were comparatively low.
Inflation creeps onto the global
stage

Emerging economies continued to

Related Links

grow rapidly, and economic growth
remained solid in most developed
economies through the opening
months of 2008. But this sustained
expansion fueled a rapid increase in
commodity prices. Crude oil soared
above $140 per barrel, boosting
energy prices around the globe as well
as the price of some petroleum-based
products. Prices of agricultural
commodities such as wheat, corn, and
soybeans also climbed sharply.

On this site:
Economías mundiales anticipan un tibio
2009
As Economias Globais Preveem um 2009
Morno
On the Web:
International Monetary Fund
World Bank

As energy and food prices rose to record highs, annual inflation shot up, reaching an
estimated 5 percent worldwide—the highest pace since 1991. The resurgence in
inflation was particularly pronounced in emerging economies, where food and energy
account for a larger share of consumer spending. The food price spike led to riots in
some 30 countries in late 2007 and early 2008. Some governments responded by
increasing subsidies, freezing prices, and banning exports of key commodities
—measures that exacerbated price increases in world markets.
As inflation quickly rose above their comfort zones, central banks in many countries
tightened monetary policy. Among developed countries, central banks in Europe were
particularly worried because many European countries index workers' wages to
consumer price inflation. The European Central Bank continued to raise interest rates
until July 2008, and Sweden increased rates through September 2008. In emerging
economies, Latin American countries quickly followed suit by also raising interest
rates, while most Asian countries took longer to adjust.
The crisis spreads

Financial market stress intensified significantly in mid-September 2008 after a series
of developments including the bankruptcy of Lehman Brothers, which caused
considerable losses to creditors. Investors' confidence in their counterparties
evaporated, and interbank credit markets effectively seized up. The crisis quickly
spread around the globe, and five European banks were nationalized or received
public funding in the last week of September. Major central banks injected an
unprecedented amount of liquidity into the banking system. Governments around the
world tried to stem the panic by guaranteeing deposits and loans, recapitalizing
banks, and passing legislation to use public funds to purchase troubled assets from
banks.

Global GDP Growth Estimates

Although the financial
crisis originated in
major developed
economies, emerging
countries were
increasingly swept
into the turbulence.
Investors began to
flee emerging markets
as risk aversion
intensified and many
investors needed to
sell assets to raise

cash to cover debts.
Along with the
financial markets in
developed countries,
stock markets in
emerging economies
plunged, and
currencies
depreciated. Access
to dollar funding
tightened dramatically
around the world. In
response, the Federal
Reserve opened or
Note: Developing Asia excludes China and India.
Sources: International Monetary Fund and the Economic Intelligence
increased currency
Unit
swap lines with major
developed and
emerging economies to provide them with dollars. Often called reciprocal currency
arrangements, these swap lines are designed to help improve liquidity in global
financial markets.
Meanwhile, the economic outlook for developed economies continued to deteriorate
rapidly. Bank lending to businesses and households contracted, and elevated
inflation put the brakes on consumer spending. Major developed economies fell into a
recession, and economic growth in emerging economies decelerated substantially. In
expectation of a global economic slowdown, commodity prices plunged, in many
cases losing half their value in a matter of weeks. The price of copper, for example,
fell 45 percent from September to November.
Economic activity slowed considerably in most of Western Europe. The United
Kingdom has been hit especially hard largely because of a sharp housing market
downturn. In recent years U.K. house prices rose faster than those in the United
States, and British consumers became more indebted, making the U.K. economy
extremely vulnerable to financial shocks.
No country immune to slowdown

Germany, the world's third-largest economy, is in a sounder financial position than
most advanced economies. But the country's growth depends heavily on exports and
has been hit hard by the global slowdown. Weakening foreign demand is also hurting
Japan's export-oriented economy. Thus, despite Japanese banks' lower exposure to
U.S. mortgage-backed assets, Japan has slipped into a recession as international
trade has diminished.
The sharp slowdown in developed countries significantly dampened demand for
emerging economies' exports, restraining their economic growth as well. In addition,
decreased global demand for commodities has negatively affected countries that
depend heavily on commodity exports, many of them in Latin America.
Among major emerging economies, China appears to be best positioned to weather
the global slowdown. Although export growth has weakened substantially, China has
a budget surplus that gives the government considerable flexibility to boost consumer
and business spending. China's financial system has little connection to foreign
banks, and the country's foreign exchange reserves are approaching $2 trillion.

India's banking system is also relatively insulated from the financial turmoil, and the
country's economic growth has generally relied more on domestic demand than on
exports. Although Brazil is a major commodity exporter, its economy is relatively well
diversified and therefore more immune to the global economic and financial woes. Of
the largest emerging economies, Russia appears to be the most vulnerable, with a
heavy dependence on exports of oil and natural gas and on foreign lending.
Looking ahead to 2009

Sustained deleveraging and tight credit availability are likely to continue to weigh
heavily on the world economy in 2009 (see the chart). Economic growth in developed
countries will likely stagnate, but mild recovery could begin by the end of the year.
The pace of growth in emerging economies should also moderate further but is likely
to remain higher than during the 2001–02 recession.
The magnitude of the global slowdown in 2009 will depend to a large degree on the
severity of the financial crisis and the effectiveness of government policy initiatives
around the world. Considerable time could pass before financial institutions' losses
are fully recognized, leverage is reduced, and market confidence recovers. A
decisive commitment to multilateral concerted and coordinated efforts is crucial to a
global recovery. Overall, the global economic situation going into 2009 remains
extremely uncertain and faces significant risks.
This article was written by Galina Alexeenko, a senior economic analyst in the regional
section of the Atlanta Fed's research department. The international estimates and
forecasts 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.

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Economic Research

Volume 10, Number 4
Fourth Quarter 2008

FEATURES

Dennis Lockhart is the
president and chief executive
officer of the Atlanta Fed.

Toward a Durable Recovery

After Rocky 2008, U.S.
Consumers Seek Stable
Ground in 2009

Editor's note: This column is based on an early November speech Dennis Lockhart gave in West Palm
Beach, Fla., regarding financial turbulence. (For a summary of a more recent speech on the U.S.
economy, see Research Notes and News.)

The Southeast in 2009:
Region Hopes for Turnaround

The country is suffering from a severe financial crisis that has accelerated an economic downturn during
the second half of 2008. Policymakers have responded with programs that should remediate the many
pressing economic challenges we face moving into 2009, and some hopeful signs have emerged in
credit markets that a corrective process is under way.

Global Economies Anticipate
a Tepid 2009

DEPARTMENTS
Fed @ Issue with Dennis
Lockhart
Research Notes & News
Southeastern Economic
Indicators
Staff
BackGround
EconSouth Now

As term funding shows sustained improvement and other indicators point to the credit market's gradual
return to health, I expect severe economic weakness in the short term should give way to an eventual
recovery of growth near potential, with inflation returning to an acceptable range.
Let me begin with a summary of the economic situation according to the most recent data. Economic
activity as measured by real gross domestic product (GDP) declined an estimated 0.5 percent at an
annualized rate in the third quarter, according to the preliminary estimate. An even steeper decline in
GDP is likely for the fourth quarter.
Unemployment in November was 6.7 percent—up from 4.9 percent in January 2008 and the highest
rate in 14 years. In the first 11 months of 2008, nearly 1.9 million jobs were lost.
Retrenchment of the housing sector has continued to weigh heavily on the overall economy. A spike in
foreclosures in 2008 added to the supply of homes for sale and accelerated price declines in many
areas.
Beyond the housing sector, forces of contraction also took hold in consumer spending, business
investment, industrial production, and foreign demand for U.S.-made goods. Problems are now broad
based. Activity has fallen in auto manufacturing, transportation and distribution, retail trade, financial
services, and some segments of commercial real estate.
Without question, the dramatic events of September and October in global financial markets have
contributed to an extremely cautious posture on the part of consumers and businesses.
As a result of the widespread weakness in the U.S. economy, inflationary pressures appear to be
declining. In particular, sharply lower energy and other commodity prices have contributed to lower
headline inflation measures, and businesses appear to be more hesitant to pass on cost increases to
their customers.
Near-term outlook

Looking ahead, I foresee substantial economic weakness at least through the first half of 2009. This
weakness will likely exacerbate the employment picture. In the Atlanta Fed's outlook, unemployment will
rise further. Also, I expect headline inflation to decline over the coming months.
As we evaluate the economy my colleagues and I are closely watching credit conditions. About 75

In this environment of faltering confidence, policymakers in the United States and other countries have
employed an array of creative measures to forestall further deterioration.
Policy actions

Since August 2007—when financial turmoil began to emerge—the Federal Open Market Committee has
lowered the federal funds rate target by a total of 425 basis points to its current level of 1 percent.
[Editor's note: On Dec. 16, the Fed set the target rate to a range of 0–0.25 percent.]
In addition, the Fed also has undertaken several moves to enhance liquidity during the past year. These
temporary programs expand the Fed's role as lender of last resort by making credit available to a
broader range of borrowers, by extending the term of lending, and by accepting a broader range of
collateral.
Other agencies are active in the broad-based efforts to stabilize financial markets. To encourage
resumption of interbank and wholesale lending, for instance, the Federal Deposit Insurance Corp. has
temporarily guaranteed most short-term deposits.
Also, the fiscal authority—the U.S. Treasury, with Congress approving—put Fannie Mae and Freddie
Mac into conservatorship. In addition, the Treasury Department is now implementing the Emergency
Economic Stabilization Act, a key feature of which is the injection of capital into the banking system to
preserve solvency. Congress enacted a fiscal stimulus package earlier this year.
In an international effort, the Fed has put in place dollar swap facilities with a number of central banks.
These facilities provide U.S. dollars to the monetary authorities of countries whose commercial banks
require dollar-based liquidity support.
The path to recovery

I expect these cumulative measures will help create the conditions that financial markets need to
stabilize and find an environment in which trend growth can resume. What has to happen to achieve this
favorable outcome?
First, U.S. house prices need to stop falling, and the volume of defaults and foreclosures needs to stop
rising. These factors should help stabilize troubled asset values. Second, deleveraging of the financial
sector must run its course. The deleveraging, or the selling off of assets, that began late in 2008 has
continued—both voluntary and forced. Progress on these fronts should clarify the condition of financial
sector counterparties and lead to a general restoration of confidence, which is essential.
In some respects, the current financial crisis and economic fallout can be seen as a painful adjustment
made necessary by macro imbalances that are global in nature. Symptoms in this country of such
imbalances have included a highly leveraged financial system, a savings shortfall in the household
sector, and growing public sector deficits.
In my view, a mere cyclical recovery that returns to the status quo ante will not be durable. The shaping
of that recovery must come to grips with deep structural imbalances in our economic arrangements if we
are to lower the potential for a recurrence of instability. Ideally, the return of confidence and the better
conditions this will bring should be accompanied by progress or even resolution of these imbalances as
part of a durable recovery for the long term.

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Economic Research
Research Notes and News
Research Notes and News highlights recently published
research as well as other news from the Federal Reserve Bank
of Atlanta.
Volume 10, Number 4
Fourth Quarter 2008

FEATURES
After Rocky 2008, U.S.
Consumers Seek Stable
Ground in 2009
The Southeast in 2009:
Region Hopes for Turnaround
Global Economies Anticipate
a Tepid 2009

DEPARTMENTS
Fed @ Issue with Dennis
Lockhart
Research Notes & News
Southeastern Economic
Indicators
Staff
BackGround
EconSouth Now

Atlanta Fed president says U.S. economy needs rebounds in housing,
confidence
Atlanta Fed President Dennis Lockhart said the country is enduring "a long and
difficult adjustment process" that will result in continued weak economic performance
for much of 2009.
During a Dec. 4 speech to the U.S. Association of Energy Economics Annual Meeting
in New Orleans, Lockhart said the following conditions need to be in place for a
recovery to take hold: housing sector and house price stabilization, along with a
return of consumer confidence and credit confidence.
Though the Federal Reserve has left itself little room to lower the federal funds rate
[set at a range of 0 percent to 0.25 percent as of Dec. 16], the Fed has other ways it
can help the economy through this difficult period, Lockhart said. The Fed can
provide liquidity through programs that have been expanded significantly in recent
months and can continue coordinating policy actions with other central banks.
Spillover from financial turmoil into the broader economy has produced various
effects, notably periodic and acute problems in credit markets, he noted. "The Fed
and other authorities have stepped in as appropriate to help address issues and have
worked to dampen the effects of these problems along the way," he said. "I am fully
confident that we have both the means and the will to continue to do so as events
require."
As for the Southeast's short-term outlook, Lockhart expects employment to weaken
further, house prices and household wealth to probably continue to decrease, and
personal consumption likely to decline, at least for the next few months.
Similar problems are affecting the entire world. Lockhart pointed out that the
International Monetary Fund projects that growth in advanced economies will
contract in 2009 for the first time since World War II. Growth for emerging economies
also is expected to slow. He said that if current forecasts are close to accurate, the
current quarter and the next couple are likely to be the worst.
"Policymakers have policy tools remaining to respond to unwelcome surprises," he
said. "And the intrinsic resilience of the economy at its core, combined with the
regenerative capacity of the financial system, will carry us through."

Economic Research
Southeastern Economic
Indicators

Volume 10, Number 4
Fourth Quarter 2008

Alabama Florida Georgia Louisiana Mississippi Tennessee
Total payroll
employment
(thousands)a

2008Q3

2,013.1 7,916.2

Percent change
from

2008Q2

0.1

Percent change
from

2007Q3

Manufacturing
payroll
employment
(thousands)b

6th
District

U.S.

4,116.8

1,948.1

1,148.8

2,785.3 19,928.3 137,370.7

–0.6

–1.0

0.2

–0.7

0.0

–0.5

–0.2

0.3

–1.3

–0.8

1.0

–0.3

–0.7

–0.7

–0.3

2008Q3

288.2

362.4

409.5

156.6

162.7

369.2

1,748.6

13,495.0

Percent change
from

2008Q2

–0.9

–1.8

–2.0

–0.6

–1.4

–0.7

–1.3

–0.6

Percent change
from

2007Q3

–2.9

–5.8

–4.8

–1.5

–3.6

–2.5

–3.8

–3.0

Civilian
unemployment
ratea

2008Q3

5.1

6.5

6.2

4.6

7.8

6.9

6.3

6.0

Rate as of

2008Q2

4.5

5.4

5.5

4.0

6.6

6.1

5.4

5.3

Rate as of

2007Q3

3.6

4.2

4.4

3.8

6.3

4.7

4.3

4.7

Existing singlefamily home
sales
(thousands of
units)c

2008Q3

84.4

259.6

172.8

56.8

48.8

114.4

736.8

5,037.0

Percent change
from

2008Q2

–6.2

–4.3

–1.4

–12.3

–8.3

–9.8

–5.7

2.6

Percent change
from

2007Q3

–28.5

–0.8

–15.8

–25.3

–19.2

–24.3

–15.5

–7.7

Single-family
building
permits YTD
(units)b

2008Q3

9,503

33,346

21,127

9,478

5,931

13,424

92,809

480,760

Percent change
from

2007Q3

–37.2

–45.2

–53.0

–26.5

–33.7

–43.0

–44.2

–40.4

Personal
income
($ billions)c

2008Q2

158.1

724.2

334.2

160.5

87.9

215.6

1,680.5

12,146.9

Percent change
from

2008Q1

2.7

1.8

2.4

2.4

3.5

2.0

2.2

1.8

Percent change
from

2007Q2

6.1

4.3

5.3

3.8

5.4

5.6

4.8

5.2

Atlanta Birmingham Jacksonville
Total payroll
employment
(thousands)b

2008Q3 2,441.5

532.0

Percent change
from

2007Q3

–0.8

0.1

–0.9

Civilian
unemployment
rateb

2008Q3

6.3

4.8

Rate as of

2007Q3

4.5

Office vacancy
rateb

2008Q3

Rate as of

Miami Nashville

623.4 2,380.6

New Orlando Tampa
Orleans

766.9

526.8

1,093.0 1,270.7

–1.0

0.1

2.3

0.0

–1.5

6.5

6.2

5.9

4.7

6.3

6.9

3.4

4.2

4.2

3.9

3.6

4.1

4.5

19.3

—

17.6

9.9

12.6

—

12.0

15.8

2007Q3

17.9

—

13.7

7.7

9.7

—

9.1

12.9

Median existing
home sale price
(thousands of
$U.S.)b

2008Q3

151.3

156.1

175.6

287.8

—

166.8

213.4

173.4

Median price
as of

2007Q3

175.3

165.9

189.2

346.3

—

160.2

266.8

218.3

a Seasonally adjusted
b Not seasonally adjusted
c Seasonally adjusted annual rate

Sources: Payroll employment and civilian unemployment rate: U.S. Department of Labor, Bureau of Labor Statistics.
Existing home sales and median existing home sale price: National Association of Realtors. Single-family building
permits: U.S. Bureau of the Census, Construction Statistics Division. Personal income: Bureau of Economic Analysis.
Quarterly estimates of all construction data reflect annual benchmark revisions. Office vacancy rate: CB Richard Ellis.
Most data were obtained from Economy.com.
For more extensive information on the data series shown here, see www.frbatlanta.org/publica/econ_south/2008/q4
/dist_data.cfm.

Total Payroll Employment

Manufacturing Payroll Employment

Civilian Unemployment Rate

Single-Family Building Permits YTD

Existing Home Sales

Personal Income

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Economic Research
Staff
Lynne Anservitz
Editorial Director

Volume 10, Number 1
First Quarter 2008

FEATURES
Southern States Ply the Art of
the Deal
The Lower Mississippi River:
The Flow of Trade
Putting Pension Reform Into
Perspective

DEPARTMENTS

Lynn Foley
Tom Heintjes
Managing Editors
Julie Hotchkiss
Contributing Editor
Charles Davidson
Ed English
Staff Writers
Dave Avery
Steve Kay
Melinda Pitts
Contributing Writers

Fed @ Issue

Peter Hamilton
Designer

Grassroots

Editorial Committee

Q&A

Bobbie H. McCrackin
VP and Public Affairs Officer

State of the States
Research Notes & News

Thomas J. Cunningham
VP and Associate Director of Research

Southeastern Economic
Indicators

John C. Robertson
VP, Research Department Regional Section

Staff

Pierce Nelson
AVP and Public Information Officer

BackGround
EconSouth Now

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Public Affairs Department
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Atlanta, Georgia 30309-4470
ISSN 0899-6571
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.

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Economic Research
Back Ground

Volume 10, Number 1
First Quarter 2008

FEATURES
Southern States Ply the Art of
the Deal
The Lower Mississippi River:
The Flow of Trade
Putting Pension Reform Into
Perspective

DEPARTMENTS
Fed @ Issue
Grassroots
Q&A
State of the States
Research Notes & News

Photo courtesy of the State Archives of Florida

Although the financial incentives governments use to attract
corporate citizens are far broader today, groundbreaking
ceremonies remain a constant. Here, those involved in
wooing U.S. Plywood to northwest Florida in 1969 celebrate
their achievement.

Southeastern Economic
Indicators
Staff
BackGround
EconSouth Now

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