Full text of EconSouth : Fourth Quarter 2008, Volume 10, Number 4
The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
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. Español | Português Disclaimer & Terms of Use : Privacy Policy : Contact Us : Site Map : Home 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. Disclaimer & Terms of Use : Privacy Policy : Contact Us : Site Map : Home Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470 Tel. (404) 498-8500 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. Disclaimer & Terms of Use : Privacy Policy : Contact Us : Site Map : Home Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470 Tel. (404) 498-8500 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 Disclaimer & Terms of Use : Privacy Policy : Contact Us : Site Map : Home Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470 Tel. (404) 498-8500 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 Disclaimer & Terms of Use : Privacy Policy : Contact Us : Site Map : Home Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470 Tel. (404) 498-8500 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. Disclaimer & Terms of Use : Privacy Policy : Contact Us : Site Map : Home Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470 Tel. (404) 498-8500 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. Disclaimer & Terms of Use : Privacy Policy : Contact Us : Site Map : Home Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470 Tel. (404) 498-8500 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. Disclaimer & Terms of Use : Privacy Policy : Contact Us : Site Map : Home Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470 Tel. (404) 498-8500 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. Disclaimer & Terms of Use : Privacy Policy : Contact Us : Site Map : Home 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. Disclaimer & Terms of Use : Privacy Policy : Contact Us : Site Map : Home Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470 Tel. (404) 498-8500 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. Disclaimer & Terms of Use : Privacy Policy : Contact Us : Site Map : Home Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470 Tel. (404) 498-8500 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. Disclaimer & Terms of Use : Privacy Policy : Contact Us : Site Map : Home Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470 Tel. (404) 498-8500 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 Disclaimer & Terms of Use : Privacy Policy : Contact Us : Site Map : Home Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470 Tel. (404) 498-8500 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 Use the WebScriber service to request free subscriptions and additional copies or for change of address notices. The views expressed in EconSouth are not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Reprinting or abstracting material from this publication is permitted provided that EconSouth is credited and a copy of the publication containing the reprinted material is sent to the Public Affairs Department. Public Affairs Department Federal Reserve Bank of Atlanta 1000 Peachtree Street, N.E. 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. Disclaimer & Terms of Use : Privacy Policy : Contact Us : Site Map : Home Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470 Tel. (404) 498-8500 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 Disclaimer & Terms of Use : Privacy Policy : Contact Us : Site Map : Home