Full text of EconSouth : Fourth Quarter 2012, Volume 14, Number 4

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Cloudy with a
Chance of Growth
2 EconSouth Fourth Quarter 2012

Lackluster. Anemic. Sluggish. Whichever adjective you might choose, most
observers agree that the U.S. economy has grown more slowly during this
recovery than in past recoveries. What are economic forecasters telling us to
expect next year?

Economic forecasting is a mercurial and difficult process. Still,
it is clear to most economic forecasters that the current recovery
has been disappointing and the economy has consistently underperformed. Take, for example, the economic forecasts of the
Federal Reserve. The Federal Open Market Committee (FOMC),
the Fed’s main policy-setting body, releases quarterly with its
minutes a Summary of Economic Projections (SEP) for economic
growth, inflation, and unemployment, among other variables.
In November 2011, the rough average of FOMC-member submissions for real GDP growth in 2012 was 2.7 percent (from fourth
quarter to fourth quarter). But growth this year is likely to be
about a full percentage point lower than that projection, at or
slightly below 2 percent. Similarly, the FOMC had projected 2011
growth to be 3.3 percent, but it was 2 percent. And expectations
for growth in 2010 were 3 percent while actual growth was 2.4
percent. The most recent FOMC forecast for 2013, made in December 2012, averages about 2.65 percent.
Many other forecasters have also seen actual growth rates
fall below their projections over the last few years, and their
forecasts for 2013 are relatively weak. As of December 2012, the
Blue Chip Consensus Outlook—the average projections from
a panel of more than 50 professional economic forecasters in
both the public and private sectors—expects 2013 real GDP to
grow at 2.2 percent (fourth quarter to fourth quarter), which is a
slightly more pessimistic outlook than the FOMC’s.
The Congressional Budget Office (CBO), in a recently
released report (What Accounts for the Slow Growth of the
Economy after the Recession?), estimated that growth since
the official end of the recession has been less than half the rate

of past post-World War II recoveries. As analysts look ahead to
2013, they expect gradual improvement, but major economic
challenges remain, including trying to improve the economy’s
underlying potential (see the sidebar on page 4). The most consequential effect of the slow recovery is that unemployment has
remained painfully high.
Labor market improves, but remains in the doldrums
The U.S. Bureau of Labor Statistics survey of establishments
found that the average monthly increase in payroll employment (as reported by businesses, not households) for January
through November 2012 was about 150,000. This rate is well
below the 200,000 to 250,000 net new jobs per month that
many economists estimate must be added not only to keep
pace with population growth but also to make progress in
lowering the unemployment rate.
The Jobs Calculator is a tool on the Atlanta Fed website
(frbatlanta.org/chcs/calculator/) that allows users to specify
a target unemployment rate and the number of months for the
target rate to be achieved. When these numbers are entered,
the calculator returns the average monthly payroll employment
change that would be required, using assumptions about the
labor force participation rate and other variables. For example,
as of November 2012, the national unemployment rate stood at
7.7 percent. For the unemployment rate to decline to 6 percent
within two years, the average monthly payroll increase would
have to be about 210,000 jobs. In the fourth quarter of 2011, the
FOMC had projected that the unemployment rate would average
between 8.5 and 8.7 percent in the fourth quarter of 2012, but it

frbatlanta.org 3

12

68

10

67

Participation rate (right axis)
November 2012 = 63.6%

8

66

Unemployment rate (left axis)
November 2012 = 7.7%
6

65

4

64

2
2000

Percent

The Congressional Budget Office’s (CBO) recent report
(What Accounts for the Slow Growth of the Economy
after the Recession?) estimated that two-thirds of
the difference between this recovery and the average of
past recoveries is attributed to slow growth in potential
gross domestic product (GDP). As the CBO defi nes it,
potential GDP is “an estimate of the amount of real GDP
that corresponds to a high rate of use of labor and capital
resources.” (Economists debate how to estimate and
use potential GDP, but this sidebar does not focus on the
CBO’s methodology.)
According to the CBO, the slow growth in potential GDP over the last three years is mostly a long-term
trend—such as the nation’s changing demographics—
and so is unrelated to the current recession. In fact, the
growth of potential GDP has been trending downward for
the last 50 years. The aging and retirement of the baby
boomer generation has slowed the growth of the potential
labor force, as has the leveling off of the growth in female
labor force participation. The slowing in productivity
growth and a lower amount of investment in the nation’s
capital stock are the other primary factors behind lower
potential GDP.
Most of the economic issues related to potential GDP
are structural in nature. That is, they are related to the
underlying dynamics of the economy rather than to cyclical factors attributed to the ebb and flow of the business
cycle. And a wide range of economic policies affect the
structural economy: tax, international trade, and labor
market policies, as well as demographic trends, retirement, health care, and other issues. So, if lower potential
GDP is two-thirds responsible for the weakness of the
current recovery, according to the CBO, the other third
is attributable to the slowing of real GDP as a ratio of potential GDP—the cyclical component. While the Federal
Reserve analyzes structural economic phenomena during
the process of setting monetary policy, its primary focus
is often on cyclical factors. But lurking in the background
are larger economic policy problems that will need to be
addressed. ❚

Chart 1
Unemployment and Labor Force Participation Rates

Percent

Cyclical versus Structural
Growth Issues

63
2002

2004

2006

2008

2010

2012

Note: Data are seasonally adjusted. Gray bars indicate recessions.
Source: U.S. Bureau of Labor Statistics

was actually 7.9 percent, seemingly rendering the FOMC’s past
forecast overly pessimistic.
Part of the improvement in the headline unemployment rate,
despite only modest employment growth, is the result of a suppressed labor force participation rate. This rate, currently down
nearly two percentage points from when the recession ended
in June 2009, is at its lowest level in nearly 30 years (see chart
1). Demographic trends—in particular, the aging of the baby
boomer generation—explain some of this decline, but the CBO
attributes a significant part of it to the recent recession. So even
though the unemployment rate declined more than expected, the
underlying labor market fundamentals remain weak. For 2013,
the Blue Chip panel projects a modest decline of the unemployment rate, to only 7.6 percent.
Another consequence of slow employment growth is that
long-term joblessness has been remarkably high. The fraction
of the unemployed who have been out of work for 27 weeks or
longer is 39.8 percent as of November 2012. (Until November,
however, the number had been above 40 percent since the end of
2009.) The rate has improved just slightly from its peak of over
45 percent in 2010, but these postrecession levels are higher than
at any time since 1947.
As economists project some improvement in the unemployment rate in 2013, structural labor market challenges are likely
to remain daunting. If labor force participation recovers, the
United States will need substantially faster growth to bring
down the unemployment rate.
Business investment and exports weaken
Two components of growth that have performed relatively well
during the recovery are business investment and exports. However, some factors indicate that these sectors may be weaker in

4 EconSouth Fourth Quarter 2012

Chart 2
Housing: Sales and Prices
220

7,000

CoreLogic home
price index (left axis)

6,000

180

Existing single-family
home sales (right axis)
5,000

In thousands

January 2000=100

2013. Consider business investment, for example. Spending on
equipment and software (E&S) rose sharply in the early part of
the recovery after a steep decline during the recession. Since its
low point in the second quarter of 2009, inflation-adjusted E&S
spending has been up 30 percent. In fact, the CBO estimated that
business investment had been relatively stronger in this recovery than in other postwar recoveries. But in 2012, E&S spending
leveled off from its double-digit 2011 growth. This investment
slowdown is mostly a response to a weakening sales outlook.
Other drags include slowing global growth and uncertainty
about the fi scal cliff. For 2013, the Blue Chip panel projects 5.2
percent (year-over-year) growth in nonresidential fi xed investment, which, in addition to E&S investment, includes businesses’ nonresidential structures investment. This projection
is almost three percentage points below the growth the panel
expected for 2012.
One of the reasons total business investment has slowed in
recent quarters is the weakened outlook for exports resulting
from the slowing global economy. The U.S. recovery has certainly been disappointing, but European growth has been anemic on
net—and a number of European countries are back in recession.
At the same time, a number of the emerging economies that
powered through the Great Recession—notably, China—are
now slowing.
The International Monetary Fund’s (IMF) World Economic
Outlook estimated that world output growth (year over year)

140
4,000

3,000

100
2000

2002

2004

2006

2008

2010

2012

Note: Data are monthly and are through October 2012.
Source: CoreLogic; National Association of Realtors

would slow from 5.1 percent in 2010 to below 4 percent in 2011
and 2012. It projected only 3.6 percent growth for 2013. China,
which averaged double-digit output growth over much of the
past few decades, slowed to 7.8 percent in 2012, and the IMF
forecasts 8.2 percent growth for 2013. Euro zone economies
contracted 0.4 percent in 2012, according to the IMF, and are
expected to grow negligibly in 2013.
Against this backdrop, U.S. net exports held up well
through 2012. Indeed, net exports were most often a positive
contributor to real GDP growth in 2011 and early 2012 and were
relatively stronger, along with business investment, than in past
recoveries. However, for only the second time since the recovery
began, real exports fell below 2 percent growth in the third quarter
of 2012. In addition, the trade-weighted U.S. dollar exchange rate
strengthened about 5 percent in 2012 through the third quarter.
If the weakening of global growth prospects and the relative
strengthening of the dollar continue, net exports could exert
a greater drag on growth than expected. Like business investment, exports powered the early parts of the recovery but have a
weaker outlook for 2013.
Housing market revives
On a brighter note, the housing market, which led the economy
into recession and showed no growth for much of the recovery,
began to show signs of life in 2012. Because of the overbuilding of
homes during the housing boom, residential investment, which
usually leads a recovery, was a cyclical drag on growth, according to the CBO. But in 2012, construction, home sales, and house
prices all trended up. Sales of newly built single-family homes
were 17 percent higher in October 2012 than they were a year before. And existing single-family home sales rose nearly 10 percent.

frbatlanta.org 5

Consumer spending declines
Consumer spending, the largest component of growth, has an
uncertain outlook for 2013. During the recession (from the third
quarter of 2007 to the second quarter of 2009), household wealth
fell by $15 trillion, or 22 percent. Since then, household wealth
has risen 24 percent, but it is still about $2.5 trillion short of
its previous peak. Tied to the change in household wealth is a
reduction in household liabilities, or debt. During this recovery,
consumers have spent less, saved more, and paid down (or discharged) debt, all while confronting a sluggish labor market and
high rates of joblessness.
This process of “deleveraging,” in which we see a mass
movement by households to lower their ratio of debt to income, is a painful process. Initially, these suppressed spending
habits lowered aggregate demand. Since the recession ended in
June 2009, quarterly real personal consumption expenditures
(PCE) growth has averaged 2.1 percent, compared with a 2.9
percent average over the three years of recovery following the
2001 recession. In the near term, analysts expect deleveraging
to continue but at a slower rate, and consumption growth to
expand only modestly. According to the Blue Chip panel, real
PCE should grow 2 percent in 2013 (fourth quarter over fourth
quarter) and 2.3 percent in 2014 and 2015.
Government expenditures also underperform
Declining government spending has been the largest single
cause of the weak recovery, according to the CBO (see chart
3). Although automatic stabilizers—such as greater safety net
expenditures, along with the stimulus bills—probably alleviated
the recession in 2009, the subsequent recovery has been slowed
by massive retrenchment by state and local (S&L) governments.
The relatively weaker levels of state and local government
purchases have lowered cyclical growth by a full percentage
point over the course of the recovery, according to the CBO.
Reductions in S&L government employees, the majority of them

6 EconSouth Fourth Quarter 2012

Chart 3
Government Expenditures: Contribution to Real GDP Growth
Federal government
State and local government
1

Percentage points

This growth is of course relative to a very depressed level, but
the trend is encouraging.
As of October 2012, the “months of unsold inventory” for
new and existing homes—as measured by the Census Bureau
and the National Association of Realtors, respectively—hit its
lowest levels since 2005. Reflecting this tightness in the market,
the widely watched CoreLogic home price index rose 4.6 percent
between the third quarters of 2011 and 2012. Like the larger residential market, business investment in nonresidential structures
(mostly commercial and industrial buildings) was declining
when the recovery began, and bottomed out in the fi rst quarter
of 2011. It has since risen 20 percent. Given the dearth of new
construction during the recession and the initial recovery, most
private-sector forecasters expect housing to be a bright spot for
the U.S. economy in 2013 (see chart 2 on page 5).

0

–1
Mar. June
2009 2009

Sep. Dec. Mar. June
2009 2009 2010 2010

Sep. Dec.
2010 2010

Mar. June Sep. Dec.
2011 2011 2011 2011

Mar. June
2012 2012

Note: Data are quarterly and are through third-quarter 2012.
Source: U.S. Bureau of Economic Analysis

teachers, and lower government purchases and construction
have combined to be the largest drag on the recovery. In addition, federal expenditures—defense purchases, in particular—
declined later in the recovery, reducing growth by an additional
three-fourths of a percentage point.
It is important to note that this conclusion by the CBO—the
notion that lower government purchases mean less support for

Chart 4
Consumer Price Index
6

Headline inflation

Year-over-year percent change

5
4
3
2
1

FOMC objective

Core inflation

0
–1
–2
–3
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Note: Data are through October 2012.
Source: U.S. Bureau of Labor Statistics

the economic recovery—is controversial among some economists. If the economy is operating at potential (which means,
basically, full employment), economists generally think that
additional government purchases just crowd out private-sector
activity. However, when the economy is operating below potential, this is not the case (see the sidebar on page 4). Thus, during
the weak recovery, the CBO estimates that relatively lower
government spending, across all levels, lowered cyclical growth

As analysts look ahead to 2013, they expect
gradual improvement, but major economic
challenges remain.

more than did weak residential investment and slower consumer
spending combined. And with the fi scal cliff negotiations being
arguably the most important unknown variable for the outlook
in 2013, this issue is not going away.
Inflation outlook and future threats to the economy
Despite unprecedented interventions by the Federal Reserve, inflation has remained remarkably subdued. Year-over-year changes
in the consumer price index (CPI) declined from 3 percent at
the start of 2012 to 2 percent, or possibly just below. Energy
prices and global commodities are generally large drivers of the
fluctuations in the headline CPI index. Because they are more
volatile than other components, they are not as representative of
underlying inflation inertia. When we look just at core inflation
measures—that is, everything but food and energy—prices have

been much more stable, fluctuating between 2 and 2.3 percent in
2012 (see chart 4).
Arguably more important than these inflation measures are
inflation expectations. Current market-based measures show
medium-term inflation expectations of around 2.75 percent per
year. Forecasters projecting headline CPI in 2013 and beyond
generally put inflation below 2.5 percent.
As mentioned at the start of this article, economic forecasting is a mercurial exercise. Not only are the underlying
components difficult to forecast, but unexpected shocks to
the economy can wreck earlier projections. Throughout this
recovery, a series of negative economic shocks—including the
rapid rise in commodity prices last year, euro zone troubles, and
brinksmanship over raising the U.S. government’s debt ceiling—
have negatively affected sentiment and growth. And looking
ahead, the ongoing economic and political fragility in the euro
zone continues to be a concern. Confl ict in the Middle East could
spike energy prices. But the most immediate threat to the U.S.
economy is the fiscal cliff.
What is the fi scal cliff? In short, it is about $600 billion in
legislatively mandated tax increases and spending cuts scheduled to begin in January. The CBO, the Federal Reserve Board,
and most other policymaking bodies project that full implementation of these tax increases and spending cuts would push the
U.S. economy off the cliff into another recession. The CBO, for
instance, projects that U.S. real GDP would decline by 3 percent
in the fi rst half of 2013 in a scenario of no congressional action.
In addition to the direct negative shock to output that is
likely to occur if the U.S. economy goes off the cliff in 2013,
this potential event has indirectly restrained investment activity in 2012 because of heightened uncertainty over tax rates
and the near-term economic outlook. In the current political
environment, it is impossible to project the course of negotiations to come.
In conclusion, it is fair to say that most analysts project that
the U.S. economy will continue growing in 2013, though not spectacularly—barring a shock such as the fi scal cliff. Growth will
be modest; progress against unemployment will be gradual; and
inflation will remain in check. ❚
This article was written by Andrew Flowers, a senior economic research
analyst in the Atlanta Fed’s research department.

frbatlanta.org 7

A promising start to 2012 eventually yielded to the slower activity that dogged
the region in much of 2011. With some signs pointing to a faster pace of
economic activity, will 2013 lead the way to a broad-based recovery?

8 EconSouth Fourth Quarter 2012

The regional economy’s recovery path largely mirrored broader,
national trends in 2012. Stronger economic activity early in
the year gave way to a slower track by the summer months. By
autumn, it became clear that any real momentum in the southeastern economy had been lost. While the region’s economic
activity continued to expand, the pace had clearly slowed. By
the end of October, economic data and reports from the Atlanta
Fed’s business and community contacts throughout the region
indicated that businesses and workers had resigned themselves
to an environment where growth is likely to remain modest.
Will that sense of resignation continue in 2013? Several
factors point to an improving economy, but uncertainty may
prevent a more robust level of activity.
A fall stall
Recent economic data and information gathered from the business community in the third quarter showed that the expansion

of economic activity was positive but had slowed in the fall.
The halting nature of activity continued through late October.
Most of the business leaders the Atlanta Fed talked with expect
little change in the near term, and they cite weak demand and
uncertainty as reasons for the slow pace of expansion. Firms
remain uncertain about the durability of the recovery (expected
demand) and future health care, tax, and regulatory costs.
While weak demand was the most frequently cited reason
for soft growth expectations, the theme of “bigger is not better” persisted. Many contacts stated that business expansion is
simply not worth the risk in the current environment, and the
focus was cost control and maintenance of profit margins. A
number of companies contacted by the Atlanta Fed said they
were running at capacity for a slow-growth environment and
experiencing growth in sales but were opting not to take on the
risk of investing for expansion. Others reported that they were
postponing planned investments until 2013. The health care

frbatlanta.org 9

Expectations partly sunny, turned cloudy during the year
Before every meeting of the Federal Open Market Committee
(FOMC), the boards of directors of the Atlanta Fed and its five
branches (44 directors in total) respond to a poll regarding the
outlook for their businesses. Our directors’ expectations didn’t
change much in October compared with September. Although
the majority of directors said that they expect growth in their
business to be unchanged from current levels, the percent
who expected slower growth increased. A quarter of them see
improvement. These responses reflect a softening of sentiment
in the second half of the year (see chart 1). In June, more than
half of the Atlanta Fed’s directors anticipated some degree of
improvement in the short term.
Farther out, Atlanta Fed directors expect growth to accelerate. The driving force behind this anticipated improvement is
fairly straightforward; most believe current uncertainties will
fade and demand will pick up. That said, one in three directors
do not see much improvement from current levels of activity.

Chart 1
Atlanta Fed Directors’ Business Sentiment
80

June
July
September
October

72%
63%
57%

60

52%
Percent

industry is an exception to this trend, as it continues to prepare
for the implementation of the Affordable Care Act.

40

37%
33%
24% 23%

20

14%

13%
8%
4%

0
Better

Same

Worse

Note: Percentages indicate Atlanta Fed directors’ responses to the question “Do you expect the growth in your business
over the next three months to be better, about the same, or worse than it was over the previous three months?”
Source: Atlanta Fed poll

Southeast Banking Conditions Moderate in 2012
anking conditions in the Southeast improved somewhat
during 2012 as the economy slowly began turning around.
Nationwide, 2012 saw slightly more than half the bank
failures that 2011 experienced. The Southeast continued to have
more than its share of banks fail, with more than two of five U.S.
failures in 2012 occurring in southeastern states. Since 2008,
Georgia has been home to more failed banks than any other state
in the nation, and nearly one in fi ve failures in 2012 occurred in
Georgia. De novo bank expansion was nonexistent again in 2012.

B

Lending remained tight in 2012
Loan qualification remained a problem for many potential borrowers whose credit scores were marred by missed payments
and loan defaults, often as a result of job loss. Fixed-rate mortgages were at or near all-time lows, and although property values stabilized in some areas, other areas continued to struggle.
Regulatory compliance hindered many community bankers’
ability to originate loans, and the time and scrutiny required
to qualify for a loan led many consumers to simply walk away
before completing the process.

10 EconSouth Fourth Quarter 2012

Business lending makes halting progress
Small business loan demand increased slightly, but many businesses remained hesitant to borrow, citing uncertainty in the
economy as a drawback. Banks had money to lend, but qualified
borrowers were scarce. Some banks reportedly loosened credit
standards to attract new loans. For high-quality loans, competition remained fierce. Banks experienced some residential loan
growth, most often as a result of refi nanced loans instead of
entirely new demand. Some southeastern bankers reported an
increase in demand for construction loans and slightly increased
lending levels from last year.
While banks are no longer tightening credit, many are keeping underwriting standards high, and competition for high-quality
loans is intense. The outlook for the banking industry remains
cautious, as regulators anticipate the number of problem banks
and failures will remain elevated and credit will remain fairly
tight as banks continue to shore up their balance sheets. ❚
By Pam Frisbee, an analyst in the Atlanta Fed’s research department

Chart 2
Purchasing Managers Index

65

55

45

National PMI
35

Southeast PMI
25
2007

2008

2009

2010

2011

2012

Note: A reading above 50 represents an expansion in the manufacturing sector, and a reading below 50 indicates a contraction.
Source: Institute for Supply Management, Kennesaw State University Econometric Center

Retail is another sector that sent mixed signals. Although
reports on current and expected activity remain rather subdued,
retail trade shows have been well-attended and are reporting
improved orders for goods. That said, transportation and retail
contacts expect the holiday season to be similar to last year’s and
will continue to limit inventory build-ups. Tourism reported solid
activity in the early fall, but those in the sector are concerned that
higher fuel costs and weaker global growth, especially in Europe,
will weaken bookings from international visitors.

Chart 3
Southeastern Payroll Employment
60

Alabama Florida Georgia Louisiana Mississippi Tennessee
40

Thousand of payrolls

As the timid economic expansion continued, the one bright
spot to emerge was the housing sector. Of course, housing is
coming off historically low levels of activity, but improving sales
and an increase in building activity are welcome developments
(more on this sector later).
Mixed signals emanated from the manufacturing sector
as the year progressed. After posting healthy gains early in
the year, activity softened over the summer before rebounding in September. However, production levels and new orders
decelerated again in October, according to the Southeast Purchasing Managers Index (PMI) produced by Kennesaw State
University (see chart 2). The overall Southeast PMI was just
below the level of 50, and the national PMI was a few points
above 50. A reading above 50 represents expansion in the
manufacturing sector.
Auto production was a positive factor for the region in 2012.
Automobile fabrication and production of parts and other related
auto supplies should remain a bright spot. Energy-related activity,
from manufacturing and refi ning to exploration and extraction,
also continues to do well and is experiencing significant capital
investment from extraction through refi nement.

20

0

–20

–40
Jan.
2011

April
2011

July
2011

Oct.
2011

Jan.
2012

April
2012

July
2012

Oct
2012

Note: Data are from January 2011 through October 2012 and compare month-over-month net changes in total employment.
Source: U.S. Bureau of Labor Statistics

Are the labor market’s dark clouds receding?
Good, and frankly somewhat surprising, news came from
regional labor markets. The U.S. Bureau of Labor Statistics
reported on November 20 that southeastern states added nearly
60,000 jobs in October—the strongest monthly increase since
October 2010—and the region’s unemployment rate fell to
8.3 percent, the lowest reading since December 2008. Perhaps
more importantly, October’s positive numbers represent a
marked improvement over the soft labor market readings of the
spring and summer months.
October’s gains were broad-based in geographic terms,
as all states of the region added jobs (see chart 3). The largest
increase was in Georgia, with 16,100 new jobs. Florida was next,
at 14,700 jobs, followed by Louisiana with 12,200. Louisiana’s
increase was the largest in percentage change terms (up 0.6
percent). The Bayou State also had the largest regional decline
in the unemployment rate, down 0.4 percentage point (see chart 4).
Regional employment gains were shared across industries
as well, with all sectors adding jobs in October. Trade and
transportation employment rose by 13,500 for the region, while
private education and health care increased another 12,600
(this sector continued to add jobs throughout the recession).
Construction, by far the hardest hit during the recession,
ECONSOUTH NOW PODCAST added 2,300 jobs in the region.
This news is certainly good
Chris Cunningham of the Atlanta
and welcome, but economic
Fed’s research department discusses
observers should keep the
the national and regional economy.
champagne on ice for a numOn frbatlanta.org, select “Podcasts.”
ber of reasons. First, one
month’s data do not make
a trend. Along those lines, a

frbatlanta.org 11

look at the three-month moving average of regional job growth
shows that the Southeast has experienced similar increases in
job growth in the years since the recession officially ended. The
jump in 2010 was boosted by temporary census-related hiring,
but in the fi rst few months of 2011 and again in late 2011 into
early 2012, encouraging increases in employment occurred, only

to be followed by periods of disappointing results. Simply said,
although increases in employment and declines in the headline
unemployment rate are good news, these increases need to be
sustainable, and no one is yet making that call.
Second, Atlanta Fed President Dennis Lockhart noted in his
November 1 speech in Chattanooga, Tennessee, that he is look-

Mortgage Rates Decline, Boosting Applications in 2012
he Mortgage Bankers Association’s weekly applications
survey (WAS) reported this fall that the volume of mortgage loan applications—approximately 83 percent of which
are applications for refi nancing—has exceeded prerecession
levels. This volume is thanks, in part, to historically low and still
declining rates.

T

Mortgage Rates and Applications for Refinancing

30-year fixed rate
(right-hand axis)

6

8,000

4

6,000

Refinance applications
(left-hand axis)

Percent

Refinance applications

10,000

4,000
2
2,000

0
2000

Southeastern Mortgage Rates
Average Mortgage Rates (Percent)
15-Year Fixed

30-Year Fixed

National average

2.72

3.41

Atlanta-Sandy Springs-Marietta, GA

2.83

3.49

Birmingham-Hoover, AL

2.92

3.53

Jacksonville, FL

2.85

3.51

Miami-Fort Lauderdale-Pompano
Beach, FL

2.91

3.59

Nashville-Davidson-MurfreesboroFranklin, TN

2.83

3.49

New Orleans-Metairie-Kenner, LA

3.15

3.92

Tampa-St. Petersburg-Clearwater, FL

2.90

3.53

Note: Data are current through October 30, 2012.
Source: Freddie Mac’s Primary Mortgage Market Survey

0
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Note: Data are through November 22, 2012, indexed so March 1990 = 100, and seasonally adjusted.
Source: Mortgage Bankers Association and Freddie Mac’s Primary Mortgage Market Survey

According to Freddie Mac’s Primary Mortgage Market
Survey (PMMS), average rates for 30- and 15-year fi xed rate
mortgages have fallen approximately 0.69 basis points (bps) and
0.66 bps over the last year, respectively (see the chart). As of
October 25, they hover around 3.4 percent for a 30-year and 2.7
percent for a 15-year fi xed-rate mortgage. To put these rates into
perspective, the series’ average 30-year fi xed-rate mortgage rate
(since the PMMS began in April 1971) was approximately 8.69
percent, and the 15-year rate (since 1991, when the 15-year series
began) was approximately 6.13 percent.
Refis rise as rates fall
As rates continue their decline, the level of mortgage loan applications trends upward. Data from the WAS show that the volume

12 EconSouth Fourth Quarter 2012

of mortgage loan applications for refi nancing has increased
34 percent over the year ending October 18, 2012. How has the
region fared in this low-rate environment? Data show that average rates in southeastern metro areas are slightly above but very
near the national average (see the table).
How long will low rates last and will they decline further?
The Federal Reserve’s open-ended purchase of $40 billion of
mortgage debt each month should continue to put downward
pressure on rates, offsetting some of the increases that might
have resulted from increased demand for fi nancing. Given that,
in the words of Federal Reserve Chairman Ben Bernanke, the
Federal Open Market Committee is seeking “ongoing, sustained
improvement in the labor market” before it ends these purchases,
only time and economic conditions will tell how long these low
mortgage rates will last. ❚
By Nicholas Parker, an analyst in the Atlanta Fed’s research department

Chart 4
Unemployment Rates for Southeastern States
12

Florida

10

Percent

Mississippi

Alabama

Georgia

Tennessee

8

Louisiana

6
Jan.
2011

April
2011

July
2011

Oct.
2011

Jan.
2012

April
2012

July
2012

Oct.
2012

Note: Data are from January 2011 through October 2012.
Source: U.S. Bureau of Labor Statistics

So, in addition to the need for sustainable trends in job
growth and ongoing declines in unemployment rates, quite a few
other indicators need parsing.
The Atlanta Fed’s network of business contacts throughout
the Southeast saw no shift in sentiment that would portend a
recovery in labor markets. Firms remain cautious regarding hiring, especially in light of the short-term fiscal challenges facing
the country. (For more on this subject, see President Lockhart’s
November 16 speech on our website.)
October’s employment reports were a pleasant surprise, to
be sure, and perhaps a sustainable, positive trend is building in
the labor market. Several more months of positive reports and
more progress on a number of labor market indicators—not just
the headline grabbers like the unemployment rate—are needed
before we would consider saying that “substantial improvement”
in labor markets was under way.

ing for “substantial improvement” in the labor market that one
month’s worth of data do not alone accomplish. In his words:
The starting point certainly should be the headline unemployment rate and the payroll jobs number.
The interpretation of movements in these two statistics would be enriched and reinforced by a review of
additional data elements.
Here are examples of what I would look for:
First, I would look for lower unemployment rates
that are driven by increased flows of job seekers
into employment. I would not interpret discouraged
workers dropping out of the labor force as a sign of
improvement, even if the unemployment rate falls as
a consequence.
Conversely, I’d like to see growing public confidence in the labor market as measured by increased
movement of people from out-of-the-labor-force status
into the labor force—that is, growing labor force participation. I would interpret a reduction in the number of
marginally attached workers as a sign of improvement,
even if the unemployment rate goes temporarily higher.
Third, I’d look for employment gains that are
associated with reductions in underemployment. I
would interpret a pickup in job growth less positively
if it is associated with increases in part-time jobs for
people who seek full-time work.
Finally, I’d like to see signs that improvements in
all these indicators are gaining momentum and are
sustainable. A framework for assessing labor market
conditions needs to include forward indicators of
labor market health, such as falling claims for unemployment insurance.

frbatlanta.org 13

Chart 5
Southeastern Residential Housing Starts

120,000

Housing units

Despite the recent increase in employment, reports of skills
mismatches persist. Several manufacturers reported challenges
fi nding entry-level workers for the line, despite offering what
they see as highly competitive starting salaries. Several fi rms
reported some increase in wages, driven by the need to attract
already-employed workers away from their current jobs. However,
many companies across several sectors have not significantly
raised entry-level salaries to attract employees. Some companies
have engaged in an advanced screening process to help identify
qualified workers and minimize turnover. Mortgage lenders said
they were reluctant to train new workers to meet the large but
transitory wave of refi nances, limiting home lending activity,
according to several banking industry contacts.

80,000

40,000

0

A broader view: Why has the recovery turned chilly?
Fundamentally, the regional economy relies a great deal on inmigration and the associated economic development and job creation it brings. Last year’s economic outlook issue of EconSouth
said, “The driving force behind the region’s economic growth
over the years has been robust population growth, which ignited
development and spurred job creation. The slowdown in population growth to the levels experienced by the rest of the country
explains a big part of the regional economic contraction, and
lagging in-migration appeared to continue in 2011.”

2000

2002

2004

2006

2008

2010

2012

Note: Data indicate new, privately owned housing units.
Source: U.S. Census Bureau, Atlanta Fed calculations

Early estimates suggest that in-migration and population
growth have improved, but have not returned to the heady
levels seen before the 2007–09 recession. The breakdown of the
region’s economic engine during the recession was, of course,
tied directly to the real estate bust that helped make both the
national and southeastern downturns so deep. Several housing
indicators showed sustained improvement in 2012, indicating
that the regional housing sector has continued to heal.
Housing becomes a potential ray of sunlight
Regional housing starts, sales, and prices stabilized in many
areas throughout 2012. Florida led the way. After suffering some
of the nation’s largest declines, data show that a rebound in this
state is clearly under way. However, Florida is in many ways
unique. Significant investor activity has boosted the housing
sector in the Sunshine State, as have the number of international
sales in the Florida market. Many of these transactions have
been in cash, so the tight underwriting standards that persist in
the mortgage markets have not posed as high a barrier to recovery that other areas of the region face. That said, trends outside
Florida are also turning positive in terms of both sales and new
residential construction.
Both the sale prices of nondistressed homes and the cost of
owning versus renting a home stabilized in many areas in 2012.
However, the large number of distressed properties will likely
work against any broad home-price appreciation. Home price
indices, which have recently exhibited year-over-year increases,
may continue to experience sluggish, uneven growth despite high
levels of affordability and stability in housing starts and sales.
The new-home market has made significant progress toward recovery (see chart 5). Housing starts have begun to trend

14 EconSouth Fourth Quarter 2012

Chart 6
Southeastern Home Prices

Southeastern Agriculture
Weathers Challenges in 2012

1

Brokers

0

–.5

Builders
–1
2006

2007

2008

he drought that gripped much of the country was the
big news in U.S. and Southeast agriculture for 2012.
Many farmers in drought-stricken midwestern areas
saw their corn and soybean crops severely affected, but
southeastern farmers with more favorable soil conditions were able to increase crop production and enjoy the
higher 2012 prices these crops demanded.
An overall rise in feed prices put pressure on livestock producers, with many deciding to liquidate herds.
However, some cattle producers are now increasing herd
size in anticipation of higher prices. Poultry producers
saw somewhat better prices in 2012; their margins were
also squeezed because of high feed costs.
The Florida citrus crop was quite robust, and export
demand held up well. Cotton prices in 2012 remained
relatively weak compared with 2011 prices, as lower demand and greater international stocks constrained price
increases.
Labor costs are stable, with the soft economy placing no significant upward wage pressure. However, labor
availability—particularly immigrant labor—affected
some southeastern farmers. Alabama and Georgia recently
passed stringent immigration laws, and many workers in
those states left for Florida, a more hospitable environment for guest workers. Some agricultiural producers are
reportedly switching to less labor-intensive crops because
of labor availability issues. ❚

T

.5

2009

2010

2011

2012

Note: Data represent an index of southeastern housing prices and are through October 2012.
Source: Atlanta Fed business contact poll

upward, though they remain near historically low levels. Many
builders who survived the recession have positioned themselves
within desirable submarkets (for example, those in betterperforming school districts, close to employment centers, or
with limited competition from distressed properties).
The majority of regional builders polled by the Atlanta Fed
reported that home construction during the third quarter of 2012
exceeded the year-ago level. Most said construction is up slightly
compared with a year earlier. Year to date, single-family permits
in the Southeast were up 18 percent, driven by activity in Florida
(up 24 percent) and Georgia (up 23 percent). The outlook among
the region’s homebuilders for construction activity over the next
several months remains positive. Most anticipate construction
activity will be flat to slightly up compared with a year earlier.
Rising demand for new homes and limited supply have
enabled many builders to increase prices or reduce incentives.
Vacant developed lot inventory is shrinking in the most desirable
submarkets, and home prices in many areas have not risen to
levels that make it profitable for builders to build on lots located
in less desirable locations or to develop new lots. Therefore,
home inventories may continue to drop and remain low for some
time. In some markets, residential developers warn of a looming
crisis in the availability of lots. The location of many existing
vacant developed lots make them functionally obsolete while
more desirable areas may restart new lot development. Still, the
market share for new homes remains constrained because of
appraisal issues, difficulty in fi nancing new construction and
development, and competition from the existing home market.
Most Atlanta Fed contacts in the real estate sector continued to report modest home price gains through the third quarter
(see chart 6). Importantly, modest increases in overall home
prices mask important differences in markets and submarkets.

By Teri Gafford, director of the Regional Economic Information
Network at the Birmingham Branch of the Atlanta Fed

While some markets in the region continue to have a large number of vacant homes, boosted by the ongoing inflow of foreclosed
properties, other markets have a low level of inventory, multiple
offers on houses for sale, and reduced time on market. Typically,
markets with a higher share of distressed property sales tend to
experience greater downward pressure on prices while markets
with fewer distressed properties are more likely to experience
price stabilization.
Seriously delinquent mortgages remain elevated, and thus
an ongoing flow of foreclosed properties may continue to hold
down home price appreciation. A rebound in home prices is

frbatlanta.org 15

important, given that many homeowners who would like to sell
cannot because their current mortgage exceeds the sales price.
Until home prices improve, negative equity will likely create a
logjam, preventing those who may be “move-up” home buyers
from reentering the market.
Heading into 2013: Cost control and conservative hiring
and investment
Controlling costs remains a central theme for businesses in the
Southeast. Higher energy and crop-related input prices, along
with the ongoing challenge of rising health care costs, represent a large part of this challenge. That said, the Atlanta Fed’s
feedback from fi rms throughout the region is that the pressure
from input prices overall has eased over the last several months.
While energy and agricultural goods prices are important because they have an impact on most fi rms, widespread input cost
pressures are not presently a factor.
Although fi rms in the region are facing cost pressures
from energy-related prices, the decline in natural gas prices has
helped utilities and manufacturers manage these challenges.
Transportation fi rms face a more difficult situation because of
the high cost of gasoline, but in many cases these costs have
been passed along to customers.
Higher crop prices pose a serious challenge for many
companies in the region, especially for food service fi rms and
restaurants. They are also having an impact on companies that
use agricultural goods as inputs in production processes. Still
Atlanta Fed survey respondents, as noted earlier, did not detect
any widespread concerns regarding input costs.
No fi rm in the region is free from the challenges posed by
higher health care costs. Many are passing these increases along
to employees as higher deductibles or reduced benefits. Some
fi rms have adopted a strategy of shifting more of their workforce
to part-time status to reduce the number of employees eligible
for company-provided health care coverage. However, most
fi rms continue to wait for the full requirements of the Affordable
Care Act to be spelled out before making formal changes to their
health care plans.
The Atlanta Fed’s results from the most recent business inflation expectations survey illustrate this broader view nicely. The
survey includes responses from roughly 300 businesses across
a broad range of industries in the Atlanta Fed’s region. Firms
reported that their unit costs were up just 1.4 percent on average
compared with this time last year. That number falls below their
October 2011 year-ahead expectation of 1.9 percent. Looking forward, on average, businesses expect unit costs to rise 1.8 percent
over the next 12 months. That number is up slightly from 1.7 percent in September but still somewhat below recent year-ahead
inflation forecasts of private economists.
According to the businesses surveyed, fi rms
continue to operate in an environment of below-

16 EconSouth Fourth Quarter 2012

normal sales levels and profit margins. Firms continue to anticipate little or moderate upward pressure coming from input
costs over the next 12 months. Respondents also anticipate
that margin adjustments and sales levels are likely to have a
small upward influence on the prices they charge in the coming year. Clearly, fi rms’ ability to fully pass along higher input
prices is constrained by competitive forces in the marketplace
and generally subdued demand in most areas of the economy.
Positive but slow job gains
The overriding theme from the Atlanta Fed’s business inflation
expectations survey and from recent discussions with business
contacts is that fi rms remain very conservative and are hiring
full-time staff only to meet current needs. Some acceleration
in hiring earlier in the year—based on the need to staff up to
necessary levels—was observed, but it tapered off in the spring.
The October increase in employment is a positive development,
but several more months of strong gains are needed
to determine if a sustained rebound
in hiring is under way.
Hiring seems to focus on
accommodating growth
from new customers,
which mainly reflects
market share gains,
rather than increased sales to
existing clients.
This evidence is
consistent with
limited growth
in demand.

Weak sales expectations and a lack of clarity about the nearterm outlook were cited most often when businesses were asked
why their hiring intentions remained subdued. When firms see
clear evidence of increasing sales, they will still add positions.
However, when improvement is marginal or volatile or uncertain,
firms choose to keep workforce levels unchanged. These uncertainties focus on the durability of the recovery (expected demand)
and future health care, tax, and regulatory costs.
On the other hand, energy exploration and extraction
fi rms are increasing or planning to increase their workforces.
Auto manufacturers and suppliers are running at capacity, and
increased demand will result in additional hours or staff. Some
auto-related manufacturing contacts are hiring and are looking at changing their scheduling practices to allow more upside
production flexibility. Another area where some hiring momentum appears to be building is the housing sector, where some
builders and building products manufacturers report beefi ng up
staff to meet increases in broader demand.
Many companies report that they are shifting existing employees’ responsibilities from less productive divisions to more
productive areas as they struggle to adapt to current conditions.
In addition, the underlying, ongoing theme of technology replacing labor in certain occupations—most notably, those that can
be described as performing routine tasks—continues. Overall,
businesses have become more selective in their hiring over the
past few years. These practices are tied to fi rms’ conservative
approach to adding to their workforces.
And the ongoing theme of the difficulty in fi nding qualified workers for some specialized positions was reinforced in
our most recent conversations with regional business leaders.
Trucking and energy fi rms were the most vocal about this
problem, but across the board fi rms were searching for hardto-fi nd qualified IT-related workers, engineers, and fi nance
and accounting experts. Some fi rms are increasing wages to
attract and retain workers, but that practice is not
widespread.
Our bottom line is that demand—or the lack thereof—
appears to be the driving force behind hiring decisions. Uncertainty is having an impact on hiring decisions at the margin.
The ongoing drive for efficiency through the application of
technology and automation is also playing a role in limiting
overall increases in workforces.
Investment postponed until sunnier days
Atlanta Fed staff polled their business contacts in July with
regard to capital spending plans. Fifty-five percent of the respondents noted that they planned to increase spending on capital
equipment over the next six to 12 months, relative to what they
spent over the last six to 12 months. About one in three said they
planned to leave capital expenditures unchanged, and only 14
percent said they anticipated decreasing spending.

Of the businesses that planned to increase spending in the
near term, high expected growth of sales and the need to replace IT
equipment were the two most common factors driving their plans.
Among the businesses that said they do not plan to increase
spending in the near term, fi rms noted increased or high economic or fi nancial uncertainty followed by low expected growth
of sales as the two major factors behind not increasing capital
spending.
In our conversations with businesses since the survey was
completed, we have detected that many fi rms have postponed
capital expenditures. They cited worries over the impact of the
fi scal cliff as a main reason for such postponements, but delays
also appear to be tied to disappointing sales results.
The July survey did not tackle the question of inventories.
However, in discussions with business leaders throughout the
region, most say they are content with their current levels. Very
few were building inventories in anticipation of future demand,
and excess inventories do not appear to be a widespread issue.
Regardless, tight inventory management is one of the cost-reducing
strategies adopted by many fi rms over the last few years, and it’s
not clear that this will change if demand begins to increase.
Looking at the clouded horizon
In his November 1 speech in Chattanooga, Atlanta Fed President
Dennis Lockhart commented on his economic outlook for the
nation. He said, “I think the most plausible forecast is continued modest growth with gradual employment gains. Around
this more-of-the-same forecast are downside risks of economic
shocks as well as chances of somewhat better economic performance if certain risk elements are eliminated or attenuated.”
Focusing on the latter part of his comment, the national,
and for that matter the regional, outlook will clearly be helped
if the short-term uncertainty surrounding U.S. fi scal policy is
removed. Economic activity in the region will likely closely track
national developments. Housing should lend some support, to be
sure, as should auto manufacturing and energy production. But
while desirable, a broader recovery—one that generates more
robust employment gains and lower levels of unemployment as
well as accelerated levels of investment—remains elusive. ❚
This article was written by Michael Chriszt, a vice president in the
Atlanta Fed’s research department. Jessica Dill, Pam Frisbee, Whitney
Mancuso, Shalini Patel, and Ellyn Terry, analysts in the Atlanta Fed’s
research department, also contributed.

frbatlanta.org 17

18 EconSouth Fourth Quarter 2012

Global economic expansion weakened in 2012. Europe’s ongoing debt crisis and
recession hampered growth and heightened uncertainty in the rest of the world.
Even the emerging economies of China, India, and Brazil, which had been growing robustly for some time, weakened. Economic conditions may not improve
quickly as we enter 2013, and the downside risks facing numerous countries are
likely to remain elevated.

Over the course of 2012 through the third quarter, global economic growth decelerated, and economic forecasters continually revised down the outlook for most major economies. In
addition, downside risks to the world’s economic expansion appeared to intensify around midyear. Growth in global manufacturing flagged. World trade barely grew. All-around uncertainties
shook confidence. Most forecasters were expecting only a slight
acceleration in global growth in the fi nal months of the year and
in 2013—if uncertainties dissipate and as the latest round of
global monetary policy easing boosts economic activity.
Overall, low growth and high risks characterized the world
economy in 2012, and economic conditions in most parts of the
world are not likely to improve rapidly as we head into 2013.
Despite austerity measures, European debt problems
persist
The fi nancial crisis brought on by high levels of government
debt has battered Europe since 2009 and proved a formidable
impediment to global growth. Greece has been in the eye of
the storm, with Ireland, Portugal, Spain, and Italy also suffering from the devastating loss of investor confidence. The crisis
abated somewhat in the beginning of 2012, in part as a result of
the European Central Bank’s (ECB) provision of relatively cheap
three-year funding to European banks that allowed them to refinance maturing debt. But a few months later, market sentiment
deteriorated again amid rising concerns about Greece’s potential
abandonment of the euro, Spain’s ability to address its fiscal and
banking sector problems, and continued worsening of the euro
zone’s economic prospects.

As the crisis intensified, European leaders agreed at their
June summit to develop a road map toward strengthening the
European Union’s fi scal, fi nancial, and economic integration.
On the fi nancial side, as a step toward forming an area banking union, the European Union’s fi nance ministers decided in
December to establish a single supervisory mechanism for the
region’s banks under the ECB.
However, the June summit failed to prevent the fi nancial
crisis from deepening. Market sentiment became progressively
worse until late July, when ECB President Mario Draghi said,
“Within our mandate, the ECB is ready to do whatever it takes
to preserve the euro. And believe me, it will be enough.” In early
September, the ECB followed through by announcing that it
would buy short-term bonds of euro zone governments without
limit, but the purchases would be subject to strict conditions.
The central bank would buy the bonds only of those countries
that have applied for help from the region’s rescue funds—the
European Financial Stability Facility and its successor, the
European Stability Mechanism—and accepted the funds’ policy
conditionality, essentially submitting to outside control of the
countries’ fi scal matters. The announcement caused fi nancial
markets to rally in relief, but it will likely be months before the
outlook substantially improves for the broader economy.
The euro zone’s economy, weakened by the loss of confidence and severe austerity measures, has not grown since the
third quarter of 2011. Although Germany and France—the region’s largest economies—have managed to avoid recession thus
far, the economies of fiscally weak countries in southern Europe
have been contracting for a number of quarters, in some cases at

frbatlanta.org 19

Chart 1
Gross Domestic Product, Europe

Germany
Percent change, year over year

4

France

0

Spain

–4

Greece

–8
2007

2008

2009

2010

2011

2012

Note: Data indicate 2005 chained euros.
Source: Haver Analytics

alarming rates (see chart 1). The unemployment rate for the region
as a whole reached a record high of 11.7 percent in October,
with rates of joblessness varying from less than 6 percent in
Germany to more than 25 percent in crisis-stricken Greece
and Spain.
Emerging economies weaken
Through trade and fi nancial interconnections, the euro zone’s
crisis has impeded economic growth and heightened uncertainty
all over the world.
Advanced economies as a group have grown at a lackluster
pace since mid-2011. Actual growth has varied across different
parts of the world—from moderate expansions in Canada and
Australia to pronounced weakness in the United Kingdom and
double-dip recessions in southern Europe. Japan’s economy
grew strongly in the beginning of the year as the country rebuilt
after the devastating 2011 natural disasters, but economic
output fell in the third quarter as both domestic demand and
exports weakened.
A recession in the euro zone and tepid growth in the rest of
the developed world have put the brakes on growth in exportoriented emerging market economies, including commodityexporting countries. Although domestic demand has by now
become an increasingly important source of growth in emerging
markets, exports continue to be a key driver of economic activity. Most developing countries still cannot grow at their trend
rates if growth stays weak for a long time in advanced economies. Recently, domestic demand itself has lost momentum in
key developing countries, in part as a result of earlier policy
tightening as well as increased global risk aversion that dampened capital flows to emerging markets.

20 EconSouth Fourth Quarter 2012

For emerging Asia, the outlook markedly deteriorated,
mainly because of the deceleration in China. The world’s
second-largest economy was hit by a double whammy of weakening European demand for its exports and earlier domestic
tightening measures intended to cool the red-hot real estate sector. China’s economic expansion has been decelerating for more
than two years. In response to slowing growth, the country’s
authorities recently introduced a package of fiscal and monetary
stimulus measures. While it may take time for these measures to
affect the economy significantly, the latest available data show
that at the end of the third quarter, growth momentum in China
had picked up somewhat.
Economic conditions have also notably deteriorated for
India. The country continues to suffer from a poor business
environment and a lack of much-needed structural reforms. The
country has dealt with two years of political gridlock, which
has resulted in a failure to implement major reforms. India also
continues to struggle with high public deficits and debt, as well
as elevated inflation. Putting more downward pressure on economic growth in 2012 were unfavorable weather conditions that
negatively affected agricultural production.
Latin America has also experienced slowing growth. The
region’s weak economic numbers mainly reflect a sharp slowdown in Brazil. As Brazil’s economy began to slow in 2011, the
country’s central bank started aggressively easing monetary
policy. The easing, combined with some fi scal measures, has had
CONTINUES ON PAGE 22

For emerging Asia, the outlook markedly
deteriorated, mainly because of the deceleration
in China.

SMOOTHER SAILING
IN CHALLENGING TIMES
In today’s economy, knowing which way the wind is blowing can make for a bumpy ride, at times
uncertain and risky. You can depend on the Atlanta Fed, however, as a credible and trusted source
of timely, relevant financial and economic information that can provide the basis for making sound
financial decisions. We can help you navigate the rough waters.

POINT TO FRBATLANTA.ORG
READ
LISTEN
WATCH
FOLLOW

Southeastern & National Economy
Banking Information
Inflation Updates
Small Business Trends
Financial Markets
Real Estate Resources
Community & Economic Development
Retail Payments & Risk
Latin American Economy
Economic Education
Foreclosure Resources

frbatlanta.org 21

CONTINUED FROM PAGE 20

a new wave of monetary easing. Many emerging markets’ central
banks have been easing their policies as well, but few are in a
position to undertake aggressive monetary easing because of domestic capacity constraints and inflation that is at or often above
official targets.

Chart 2
Changes in GDP Forecast for 2012
7

Developing economies

World

Percent change in real GDP,
fourth quarter over fourth quarter

6

Advanced economies
2011 GDP

5
4
3
2
1
0
April forecast

July forecast

September forecast

Note: The black dots in the September forecast are to facilitate comparison of GDP between actual growth in 2011 and
expected growth in 2012.
Source: International Monetary Fund, World Economic Outlook, September 2012

some positive effect—monthly data indicate that in the
third quarter of 2012, industrial production grew for
the fi rst time in more than a year.
Globally, slowing growth has led to a number
of policy actions, mainly in the monetary policy
realm since, in general, goverments and their
citizens largely lack the appetite for additional fi scal stimulus. In addition, many
of these countries are already coping
with high levels of public debt. In
advanced economies, the Federal
Reserve and the ECB let loose

Global outlook remains uncertain
At the moment, the world economy is in a precarious state. In
September, the International Monetary Fund (IMF) revised
down its 2012–13 growth forecast for the global economy for the
second time since April, citing the persistent intensity of the
European crisis and policy uncertainties that have hurt confidence around the world (see chart 2). Similarly, the Blue Chip
consensus forecast has recently showed broad-based and, for a
number of countries, continued markdowns for growth this year
and in 2013.
The IMF expects only modest acceleration in economic activity from 3.3 percent this year to 3.6 percent in 2013. In the euro
zone, diminishing austerity measures and easing fi nancial conditions are hoped to spur some positive growth. Most forecasters
project continued lackluster growth in advanced economies, but
relatively solid growth in emerging markets. In these markets,
economic expansion is likely to accelerate, helped by relatively
strong fundamentals in many countries. Still, the developing
world’s growth rates are not likely to return to precrisis levels in
the near term.
The outlook for the global economy is highly uncertain and
subject to a number of serious downside risks. The inability of
European policymakers to contain the region’s crisis is at the
top of most forecasters’ list of risks. Another risk is the so-called
fi scal cliff in the United States. A sharp slowdown in China’s
economy and a jump in oil prices are also on forecasters’ radars.
All the risks and uncertainties are weighing on businesses’ and
consumers’ decisions to invest, hire, and spend and are not allowing the global economy to gather strong growth momentum
heading into 2013. ❚
This article was written by Galina Alexeenko, director, Regional
Economic Information Network at the Atlanta Fed, Nashville Branch.

22 EconSouth Fourth Quarter 2012

SMALL
CONTINUED FROM PAGE 1

Underemployed workers in this category—
also called “part-time for economic
reasons”—grew during the recession.
Another factor shaping labor
markets is the rate of participation,
which has been falling since the early
2000s. This trend is largely the result
of demographics—namely, the aging
population. Of course, some of the decline in participation rates also reflects
recent economic conditions. Consider,
for instance, the millions of “marginally

In my view, efforts to evaluate
employment conditions must
consider the complexity and
dynamism of the U.S. labor
market.
attached” workers—people who indicate
that they are ready and willing to work
but are not actively searching. Many of
these individuals will likely return to the
labor market as conditions improve.
Additional aspects include the
variations in employment conditions
across regional labor markets, as well as
the way in which new jobs are created.
Research indicates that new and earlystate businesses are responsible for a
significant share of jobs created in this
country. At the same time, young fi rms
often do not survive past five years.
Indeed, job creation in our country is
in a state of continuous churn as jobs
disappear due to business failure and
are replaced by jobs in newer, growing
industries.

us to the challenge my FOMC colleagues
and I face as we consider the labor
market’s progress toward “substantial
improvement.” My framework for defi ning this important milestone is, admittedly, a work in progress. Although the
monthly unemployment rate and payroll
figures are a good starting point, I will
look to additional data elements to
reinforce and enrich movements in these
two statistics.
Examples of what I would look for
include a lowering of the unemployment
rate that is driven by a steady stream of
job-seekers into employment. Discouraged workers leaving the labor force
would also lower the unemployment rate,
but I would not necessarily interpret that
as a sign of improvement. I’d also look
for growing public confidence in labor
markets, as indicated by greater labor
force participation. I would like to see
employment gains that are associated
with reductions in underemployment.
And fi nally, I’d look for signs that these
improvements are gaining momentum,
are sustainable, and are complemented
by forward-looking indicators such as
falling initial claims for unemployment
insurance.
Adding context to the term “substantial improvement” is important, I believe,
because future monetary policy actions
by the FOMC hinge on improving labor
market prospects. The latest monetary
policy actions announced by the FOMC,
in addition to earlier measures, demonstrate its commitment to the Fed’s dual
mandate of price stability and maximum
sustainable employment. We will not
waver on that commitment. ❚

BITES TO FILL

BIG
APPETITES

macroblog
In less time than it takes to eat
lunch, the Atlanta Fed’s macroblog
will keep you well-informed about
today’s economic developments,
monetary policy, and much more.
You’ll find commentary directly from
our economists, who also invite you
to share your insights.

FRBATLANTA.ORG/RESEARCH/BLOGS
GO TO FRBATLANTA.ORG/ABOUT/FOLLOW
and subscribe to receive macroblog e-mail

Determining what improvement
looks like
Hopefully, these factors provide some
insight into the complexities that shape
the U.S. employment market. This brings

frbatlanta.org 23