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Economic Research
Federal Reserve Bank of Atlanta
EconSouth

STAFF
Lynne Anservitz
Editorial Director

In This Issue

Volume 5, Number 2, Second Quarter 2003
CURRENT ISSUE

Lynn Foley
Kristin Hicks
Nancy Pevey
Managing Editors

Risk and Uncertainty

Stephen Kay
Contributing Editor

COVER STORY

William Smith
Jean Tate
Staff Writers
Elena Casal
Harriette D. Grissom
Nicholas Haltom
Contributing Writers
Carole Starkey
Peter Hamilton
Designers
EDITORIAL COMMITTEE
Bobbie H. McCrackin
VP and Public Affairs
Officer
Thomas J. Cunningham
VP and Associate
Director of Research
Pierce Nelson
AVP and Public
Information Officer
John C. Robertson

Defense Spending Flies
High in the Southeast
The recent U.S. defense spending
bill has been a boon for much of the
Southeast. New military contracts
will benefit the region?s shipbuilders
and aircraft manufacturers but will
mostly serve to retain jobs rather
than create new ones. Military
projects are also rejuvenating
technology and construction. But
without improvement in the
commercial sector, the economic
boost from defense spending is
unlikely to be sustained.

FEATURES
Glut of Office Space Plagues
Atlanta As Tenants Disappear
In the 1990s, the Southeast
experienced unprecedented
commercial real estate growth.
Atlanta, in particular, was the
paradigm for development and
investment. However, the boom
ended in 2001, and now Atlanta is

awash in vacant office space. When
can Atlanta?s commercial real estate
market expect to be back on track?
Not until at least 2005, according to
some analysts.

AVP, Research Department
Regional Section
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A Little Credit Goes a Long Way:
The Global Microfinance Movement

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1000 Peachtree Street, N.E.
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In countries around the world,
struggling entrepreneurs are turning
for help to a growing industry:
microfinance. Microfinance
institutions (MFIs), which have their
roots in agricultural development,
provide small loans and other
financial services to households and
businesses that otherwise would not
have access to them. MFIs have
become a profitable, self-sustaining
industry that aims to help the poor
break the poverty cycle.

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DEPARTMENTS
Research Notes & News
Dollar Index
The State of the States
Southeastern Economic Indicators

ISSN 0899-6571
Photographs courtesy of Lockheed Martin,
U. S. Department of Defense, Northrop
Grumman and Elizabeth McQuerry

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Economic Research

CURRENT ISSUE

Risk and Uncertainty
t the conclusion of its March 18, 2003, meeting, the Federal Open Market Committee (FOMC) released an
unusual statement.
Typically, after each periodic meeting, the FOMC issues a press release. This release announces the decision
the committee has made on interest rates and gives a brief rationale for the policy stance — a paragraph or two regarding
the balance of risks to the economy going forward. In its March statement, the committee wrote that it did not believe it
could provide a useful risk characterization of the economy because of the amount of geopolitical uncertainty present at
the time. In other words, the FOMC felt that the economic uncertainties overwhelmed any judgments about risks.
This announcement was made on the eve of the United States’ invasion of Iraq, which began on March 19.
Risk . . . uncertainty—what’s the difference?
Drawing a distinction between uncertainty and risk may seem odd. The terms may be used
almost interchangeably in conversation — but not by economists. In his 1921 book, Risk,
Uncertainty, and Profit, Frank Knight drew a significant economic distinction between the
words.
Risk, according to Knight, stems from a random, but known, process. In other words, while
any one particular outcome may be unknown, the chances of that outcome can be assigned.
Uncertainty, on the other hand, exists when the probabilities of outcomes cannot be assigned.
When uncertainty is sufficiently small, the probabilities of any one particular outcome — the
risk — can be determined and compared quantitatively to the likelihood of other possible
outcomes. Essentially, risk is measurable, but uncertainty is not.
It’s like insurance
Being able to quantify risk is the basis of insurance: We do not know who will be involved in an automobile accident today,
but we do know some accidents will occur. We share the risk of accidents’ costs by joining a large pool of other drivers,
paying premiums in accordance with relative risks. An adult pays a lower premium than a teenager because driving
record data show a higher accident rate among the teenage population.
If a new form of transportation were developed, however, there would be no immediate way to price insurance premiums
with the same degree of specificity as with autos. Insurance actuaries would have difficulty setting prices not because
they don’t understand risk estimation but because, with little experience with the new form of transport, there would be
tremendous uncertainty about the risks entailed.
This example of Knight’s distinction between insurable and uninsurable risk demonstrates the role information, or the lack
of it, plays in uncertainty. We can insure autos because the probabilities of accidents are fairly certain. We can’t insure the
new form of transport until the uncertainties are resolved.
Understanding the FOMC’s announcement
The FOMC knows that its decisions are closely scrutinized by millions, including financial analysts, business people and

the media. The committee’s March 18 statement signaled that the FOMC members, without recent experience in
considering monetary policy on the eve of military conflict, felt that they couldn’t predict with a great amount of certainty all
the possible outcomes that might arise from geopolitical uncertainty.
With the war’s outcome decided, other uncertainties about a number of issues still lie ahead. Besides the incident in
Saudi Arabia in May, will there be another large-scale terrorist attack on U.S. interests? What might be the economic
implications of a possible spread of the SARS outbreak?
The answers to these questions are unknown, with some possible outcomes more easily quantifiable than others. What
does this uncertainty hold for gauging the risks to the U.S. economy? That question is one that the FOMC members must
continually grapple with.
By Thomas J. Cunningham, vice president and associate director of research
at the Federal Reserve Bank of Atlanta

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Economic Research

COVER STORY

cross the Southeast, military contractors are producing everything from virtual reality training modules to boots and
breakfast cereal as part of the nation’s $243.7 billion 2002 defense spending bill.
Pockets of new jobs and higher salaries for the region’s military personnel are good news for the Southeast,
especially in states that have experienced high employment losses during the past few years. However, this timely stimulus
will not be sufficient by itself to spark an overall economic rebound in the region.
Businesses in Mississippi and Louisiana are on tap to add crucial new jobs as a result of $1.8 billion worth of ship contracts
won by Northrop Grumman. The boost to employment will be significant compensation for shrinking work opportunities that
have plagued both states.
Defense spending on aerospace production and research, concentrated in Georgia, Florida and Alabama, accounts for $8.7
billion of the $20 billion in military contracts awarded to the region as a whole. Rather than creating new jobs, however,
these contracts will mostly serve to retain jobs.
Technology and communications expenditures could breathe new life into the struggling high-tech industry, which is
especially important in Florida. Information technology, biomedical technology, modeling, simulation and training industries,
and plastics industries have “attained critical mass” there, according to Business Florida, along with the aviation, aeronautics
and defense industries. Aviation and aerospace industries alone generate more than $15 billion in annual sales in Florida.
According to one research study cited in the Real Estate Journal (published by the Wall Street Journal), technology-related
jobs account for $16.8 billion in wages annually, far outstripping the impact of tourism, which provides $9.6 billion each year.

In Tennessee, a state hard hit by the waning domestic apparel industry, an
infusion of more than $1 billion in defense contracts to 2,000 companies will
be a significant help. Apparel employment there has halved since 2000.
Contractors across the region will benefit from construction stimulus. In
2001 the Southeast received $1.7 billion of the $10.5 billion allocated for
military construction in the nation as a whole. Analysts expect spending on
military construction to increase slightly each year through 2005, helping to
offset regional downturns in commercial construction that threaten to
continue throughout 2003.
In addition, a 4.4 percent pay increase for armed services personnel will add to discretionary income and boost retail
spending.
Defense spending remains important in the Southeast
The Southeast, which claimed about 16 percent of the nation’s direct expenditures for defense in 2002, has historically relied
on military spending as an economic spur. In 1996 the Southeast was the third-largest regional recipient of defense
contracts, behind only the Western and Mid-Atlantic states.
Cuts in defense spending in the late ’80s and early ’90s compelled manufacturers to turn military capacity toward civilian
production. For example, global positioning systems have been widely adapted for civilian use in navigation and agricultural
equipment, some shipyards building naval vessels turned to producing pleasure boats, and some airplane manufacturers
producing military planes switched to making corporate jets. While the orientation of traditionally defense-oriented industries
shifted, the clusters of technological expertise and skilled labor remain intact and have drawn defense contractors back to
the region. Georgia in particular has benefited, moving from eighth nationally in the amount of defense contract dollars
received in 1996 to fifth in 2001. Florida moved from fifth to fourth in 2001.
Although Louisiana, Mississippi, Alabama and Tennessee receive considerably fewer defense dollars than Florida and
Georgia, military spending is nonetheless an important factor in these states’ economies.
Aviation struggles despite defense demand
The Lockheed Martin plant in Marietta, Ga., one of the region’s largest benefactors of defense spending, landed a $4 billion
contract to produce 40 C-130J aircraft for the Air Force and 20 KC-130J aircraft for the Marines. However, the six-year
contract will not produce any new jobs at the plant; rather, it will ensure that the plant’s 7,000 employees retain their jobs,
according to a Lockheed spokesperson.

The story is similar to what’s going on elsewhere in the nation. Setbacks from the combined effects of terrorism and SARS
as well as curtailed travel during the war with Iraq have cut commercial aviation production dramatically. Companies that
would normally expand their facilities and workforce in response to the added demand of defense contracts currently have
excess capacity. So instead of adding employees, the defense business is helping to forestall layoffs and shutdowns by
contractors.
Boeing’s contract to assemble a missile interceptor in Huntsville, Ala., will also help maintain the status quo, providing jobs
mostly for its existing employees. The Arrow 2 interceptor, developed jointly by the United States and Israel, will be
produced along with the earlier Avenger system. Although Avengers are still being manufactured for export, demand is
flagging. Thus, Arrow 2 production will fill the gap. Boeing employs about 2,600 people in the Huntsville area on various
NASA and military projects.
According to industry analysts, shifting civilian capacity to military projects will offset, but not fully compensate for, shrinking
commercial demand in the aeronautics industry. Reduced production of commercial jetliners alone — down to 380 planes in
2002 from 526 in 2001 — cost aerospace manufacturing $6.8 billion in sales, about 20 percent of last year’s total, says
David Napier, director of the Aerospace Research Center.
Some of the region’s aerospace operations will still yield new jobs, however. For example, a Lockheed Martin operation in
Alabama’s Pike County to assemble THADD missiles will add 150 new jobs there. And a Decatur, Ala., plant that produces
Delta II and Delta III rockets will become the main headquarters for Boeing rocket production, adding another 160 jobs that
are being moved from Pueblo, Colo. A Boeing contract for $150 million to upgrade E-6 Mercury plane cockpits will add 80
jobs at the former Cecil Field Naval Air Station near Jacksonville, Fla. Boeing recently created 95 new slots at Cecil,
representing a doubling of the plant’s workforce in less than a year.
Although some big military contractors such as Lockheed Martin and
Raytheon have returned to profitability in recent months, the industry as a
whole continues to struggle. Boeing registered a net loss of $478 million in
the first quarter of 2003. In the aviation sector, military sales rose markedly
in 2002, accounting for $50 billion of a total of $148 billion. Although
increases in military sales helped offset losses in commercial sales, overall
sales in 2002 were still down by about 3 percent. Total employment in the
aerospace industry also dropped last year, sliding 72,000 from a total
estimated at 712,000 workers.
Despite projected increases in military production in 2003, commercial
production will continue to drop. Aviation industry analysts also project a
decline for exports, which accounted for about $57 billion in 2002. Industry
officials foresee a 6.8 percent downturn in total sales in 2003 — twice as
steep as 2002’s losses of 3.2 percent — despite welcome infusions of
military demand.
Technology shows signs of life
Defense spending has sparked rejuvenation, if not recovery, in the ailing technology sector, which is showing signs of life for
the first time since the technology bubble burst in late 2000. The demand for technological sophistication in weaponry and
battle strategy has given rise to a new round of research and development, providing hefty grants for university-based
research groups and independent firms.

Georgia Tech Research Institute was awarded $60 million in 2001 to continue work on research projects that could
eventually translate into superior weaponry. Researchers there are working on sensor systems to monitor cargo containers,
intelligence visualization systems to help determine the position of hostile troops, and standardized systems to evaluate
military efficiency and structure timelines for equipment updates.
Miltope Group Inc., a laptop computer maker based in Hope Hull, Ala., recently landed a $19.5 million contract to produce
2,000 computers that can endure the rigors of deployment and combat. Slated for use by the U.S. Army, the TSC-750M is
designed to withstand blowing sand and other atmospheric stresses and can be used on the field, in tanks or in helicopters.
Florida, which is well poised to make great strides in the technology arena through its decades of involvement in the defense
and space industry, has become the defense technology hub of the Southeast. The state’s 21 military bases and various
defense-related industries have a $32 million impact on Florida’s economy each year, according to economist Rick Harper,
director of the Haas Center for Business Research and Economic Development at the University of West Florida. Economic
developers hope to parlay this mutually beneficial relationship into an even more lucrative arrangement by becoming
technology pioneers in “cyberwarfare.”

Northrop Grumman’s Integrated Systems in Melbourne, Fla., has recently unveiled what it calls the Cyber Warfare
Integration Network, or CWIN. Using approaches that seem to combine Disneyland, Mortal Kombat, and Doom, these
facilities consist of multiple chambers that use sets, props and virtual reality to simulate battlefield conditions. The goal is to
train soldiers to prepare for war under many conceivable circumstances. CWIN facilities can also be used to train police and
firefighters for a whole range of critical scenarios. Another virtual reality training scheme is being hatched by a former Disney
employee through his i.d.e.a.s. corp. He plans to create a sort of military training theme park called Battle Stations on the
coast of Virginia. The military likes the idea: Simulation training centers are emerging throughout the region.
Government spending nationwide on computers, software and related services is projected to increase to $58.1 billion in

2003, up 17 percent from fiscal 2002. In an interview with Reuters news agency, senior defense analyst Jerry Weltsch with
Frost & Sullivan predicted that the U.S. market for simulation and training alone will expand at the rate of 3.5 percent each
year into 2008, with the Pentagon channeling $4.8 billion in defense dollars toward such high-tech projects.
Thus far, however, contracts have gone mostly to more conventional, proven applications such as a deal with Norcross, Ga.based EMS Technologies Inc. to produce electronic systems that jam enemy radar and briefcase-sized communication
systems that troops can carry into the field. According to a recent article in Fortune, entrepreneurs have been flooding the
market with defense- and security-related technologies. However, venture capitalists remain leery of funding projects aimed
at the Department of Defense.
Gulf Coast shipbuilding helps keep ailing economies afloat
Buffeted by diminished tourism, a steadily shrinking manufacturing sector and lackluster performance in services, Louisiana
and Mississippi are in need of the boost promised by Northrop Grumman’s multi-million-dollar shipbuilding expansions.
Northrop Grumman Ship Systems (formerly Ingalls) on the Mississippi Gulf Coast is the state’s largest private-sector
employer. It provides jobs for 11,000 workers in Pascagoula and Gulfport and hands out $8.6 million in payroll checks each
week. In addition, the shipyard’s impact extends to another 6,500 workers whose jobs depend on the huge operation,
according to a study by the Gulf Coast Economic Research Center at the University of Southern Mississippi.
A $288 million expansion of the Northrop Grumman facility on the Gulf Coast will create as many as 2,000 new jobs. The
expansion will convert the Gulfport yard to a facility that will build ships out of military-strength composites.
“When you talk about shipbuilding, you don’t think about high-paying, high-tech jobs, but our employees in Mississippi
average more than $40,000 a year,” says Den Knecht, vice president of Northrop Grumman Ship Systems, as reported by
the Atlanta Journal-Constitution. The construction phase could add another 6,000 jobs, according to an economic impact
study by Bob Rohrlack, executive director of the Mississippi Development Authority.
“That will be major,” says Rohrlack, in an interview with the Jackson Clarion-Ledger, “given the tough economic times we’re
seeing nationwide.” Mississippi suffered one of the sharpest percentage drops in employment in the nation in 2001.

Northrop Grumman now has orders for $5.3 billion worth of ships to be made in its Pascagoula yard, including a commission
to head the team working on the high-tech DD(X) destroyer for the Navy. A number of other defense contract deals are
pending. Although Pascagoula won’t get all the work, the payback will help the state break even on its investment in
refurbishing the yards — $144 million over three years — by 2013, according to the impact study. The state of Louisiana,
like Mississippi, will contribute about $50 million to help refurbish its Avondale shipyard, now owned by Northrop Grumman,
which will match that amount to upgrade the facility.
The Avondale shipyard, the largest manufacturing employer in the state, received a $150 million contract to make LPD-17
dock-landing ships. Shipbuilding contracts for the state totaled $806 million overall in 2002.

Economist Loren Scott of Louisiana State University predicts that transportation equipment manufacturing will generate
about 3,000 new jobs in Louisiana. He believes the Avondale yard will provide a significant boost to the Thibodaux-Houma
metropolitan areas.
Military building shores up construction industry
Soldiers at Fort Rucker, Ala., are looking forward to better facilities. As part of the $10.5 billion military construction bill
signed into law in October 2002, the base will receive $32 million for additions and improvements, including six new TH-67
training aircraft, OH-58 Kiowa Warrior simulators for training, security barriers for the base’s gates and a new fitness center.
Florida’s Hulbert Field will be outfitted with new command and operation facilities and a 144-room dormitory. Fort Benning in
Georgia has been awarded $45 million for a new barracks complex and an urban assault course, while Fort Polk in
Louisiana will add a $31 million digital training range.
Military construction projects such as these will inject $1.7 billion into the region’s building industry. This amount should help
to offset slowing in the commercial construction industry that Atlanta Fed analysts expect to continue in most of the
Southeast in 2003.
A look at the longer term
Defense industry analysts seem to agree that while military spending is helping sagging economies throughout the nation, it
will not create a sustained rebound without considerable improvement in the commercial sector.
According to Wells Fargo economist Sung Won Sohn, as quoted in USA Today, “What tech really needs is for American
companies to start spending again. War spending is helpful, but only for a short time.”

According to U.S. Department of Defense projections, military spending in most categories is slated to peak in 2005 and
plateau through 2007, ensuring a few years of modest but reliable growth in defense contracts. However, Loren B.
Thompson, chief operating officer of Lexington Institute, a defense think tank, notes in an interview with Business Week that
defense money could be “leeched away” by Congress as it faces other spending needs approaching the 2004 election.

Plans for closing military bases in 2005 also loom. While decisions have not yet been reached regarding which bases to
close, the Pentagon has committed itself to weeding excess capacity. Base closures can have catastrophic effects on local
and state economies.
Critics of national priorities, such as Tennessee State Representative Kathryn Bowers, believe that the amount earmarked
for defense spending jeopardizes crucial domestic programs that fund education, roads, health care, public assistance and
the arts. States are also struggling to meet budgets. Bowers points out that Tennessee faces a $400 million budget gap and
that states collectively lack $17.5 billion to meet their obligations in fiscal 2003.
Regardless of the long-term impacts of military spending on the Southeast, most defense workers in Marietta, Pascagoula,
Gulfport, Huntsville and Jacksonville can count on their jobs for the next few years. Like many others across the nation,
these workers hope military contracts will prime the pump to keep the dollars flowing.
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Economic Research

REGIONAL FOCUS

Corporate downsizing has taken a toll on office landlords across the Southeast. But the overabundance of office space,
created by significant job losses and overbuilding, has been particularly severe in Atlanta, the region’s largest commercial
real estate market.
uring the mid- and late 1990s, the Southeast set the pace for the nation regarding commercial real estate
development and investment. The boom was most evident in Atlanta, where technology, telecommunications and
the area’s traditional base of blue chip companies expanded over an extended period of time — from before the
1996 Summer Olympics through 2000.
Even in early 2001, the outlook for Atlanta’s commercial real estate market was generally favorable. The office vacancy rate
was a healthy 11.6 percent during the first quarter. Certainly, the stock market was in decline and dot-com businesses were
faltering. But some major companies such as WorldCom (now MCI) and Mirant were still in expansion mode, and investors
remained eager to bankroll new office projects.
During 2001 and 2002, construction cranes were a frequent sight on Atlanta’s ever-evolving skyline as speculative projects
moved from concept to steel and glass reality. In early 2003, some three million square feet of new office properties were
under construction in the Atlanta area. (See the sidebar) for a look at commercial real estate conditions elsewhere in the
Southeast.)
“Phantom” vacancy haunts market
Many developers were counting on a continuation of Atlanta’s
strong job growth. In early 2001, however, the Atlanta jobcreation machine suddenly cranked into reverse. According to
the Bureau of Labor Statistics, after netting no fewer than
55,000 jobs each year between 1993 and 2000, Atlanta’s
payrolls grew by only 10,000 in 2001 and declined by 16,000 in
2002 (see the chart).

Atlanta: Total Employment, 1990Q1 vs.
2001Q2 Recession

The result: Atlanta today is awash in vacant office space. For
example, in 2002 Houston-based developer Hines completed
One Overton Park, a 380,000-square-foot office tower built
speculatively to accommodate an anticipated expansion of
corporate tenants in northwest Atlanta. As of early 2003, One
Overton Park is more than 80 percent empty. Even signature
buildings such as One Atlantic Center in midtown Atlanta have
large vacancies, and major new projects in the area such as
Atlantic Station (6.5 million square feet of office space) and the
41-story Symphony Center are in early phases of development
with pre-leased tenants.

Note: This chart compares the impact in the Atlanta
area of recessions that began in 1990 and 2001,
measured in terms of employment. The blue line
shows the downturn and recovery of 1990–93. The
red line shows the 2001–2003 downturn and
recovery; the data for 2003 are projections.
Sources: Economy.com; Torto Wheaton Research,
Spring 2003 Outlook

As the office supply has increased, so has the vacancy rate in
the Atlanta area, which has surged nearly 11 percentage points
in two years to more than 22 percent as of the first quarter of
2003. Moreover, many real estate professionals believe that
number is deceptively low given the undetermined amount of
“phantom vacancy” — a large volume of subleased office space
that has opened up as a result of corporate downsizing. If such phantom vacancies are factored in, the city’s actual office
vacancy rate is probably closer to 30 percent.
“I’m worried about Atlanta,” said Raymond Torto, a principal with Torto Wheaton Research in Boston. “There has been a
tremendous development spigot in recent years, and it’s affected virtually all property types.”
How out of balance is the supply of real estate in Atlanta? Even without considering the phantom subleased space, the
market confronts some daunting arithmetic. Currently, some 25 million square feet of vacant space exists. The market needs
to absorb 10 million square feet to get that number back to a healthy level of about 12 percent to 13 percent vacancy.
Assuming the most optimistic scenario — in which Atlanta’s economy kicks into high gear later in 2003 and reports the same
rate of job growth that it delivered during the late-1990 boom years — Torto projects the market will return to balance in
about seven quarters, or sometime in 2005. If growth is slower — a prospect that Torto and others believe is more likely —
the office vacancy rate could remain above 20 percent well beyond 2006.
Charlie Croker vs. Bernie Ebbers
Atlanta has an impressive track record of growth, and some signs are positive when looking ahead. Newell Rubbermaid
recently announced it would relocate its headquarters from Freeport, Ill., to Atlanta’s northern suburbs. The company is
planning to lease or build about 300,000 square feet in north Fulton County as the new home for some 350 corporate staff.
With its premier airport, highway system, low corporate tax rate, wide variety of housing options and low cost of living in
comparison to California and the Northeast Corridor, Atlanta is an attractive location for major corporations. But how the
area will fare in the next 12 to 18 months is the subject of some concern.

“Atlanta is home to a number of industries that are in downsizing mode,” said John Robertson, assistant vice president and
team leader for the Atlanta Fed’s regional research group. Because of the city’s heavy concentration of technology and
travel-related industries, which were particularly hard hit in the latest recession, Robertson forecasts that Atlanta’s recovery
will probably lag that of the rest of the nation.
Developers are accustomed to boom and bust, particularly in high-profile markets such as Atlanta. Some of the biggest
players in today’s real estate market survived the painful shakeout of the mid-1970s, and most were around to experience
the demanding years from 1989 through 1991.
How is the present market different from these difficult past episodes? It’s too early to write a book about it, but it’s likely the
story will be different from Tom Wolfe’s A Man in Full, a 1998 novel about the fall of high-living Atlanta developer Charlie
Croker in the early 1990s. In Wolfe’s story, the fictitious Croker battles lenders for control of his largely vacant real estate
buildings in Atlanta. Eventually, he loses control of his real estate — along with his “trophy wife” and lavish lifestyle.
Perhaps a better symbol for today’s battered real estate market is Bernard Ebbers. While he was chairman of WorldCom,
the company was accused of inflating its financial performance and stock price. After the story broke about WorldCom’s
actual performance, the company declared bankruptcy and laid off thousands of workers. In the process, large chunks of
empty office space became available, much of which was located at the company’s Mississippi headquarters and major
regional offices such as Atlanta.
The drop in demand for space has been painful for developers, who say they were responding only to what appeared to be
a legitimate need for office supply. “We didn’t overbuild the market — we overleased it,” said Tad Leithead, senior vice
president of Cousins Properties in Atlanta. “The problem was an unrealistic expectation among tenants for the amount of
space that they would need.”

Recovering from a “perfect storm”
Much of the development has been funded through publicly traded real estate investment trusts (REITs). For its part, the
banking industry has probably mitigated the excess space problem somewhat by tightening underwriting standards. Savings
and loans are not a major factor in the market as they were in the 1980s, and tax-driven deals are less of a problem now
than they were before the IRS code was revised in 1986. Today, underwriters typically refuse to lend more than 70 percent
of the value of the project, compared with 100 percent 15 years ago.
But even with stricter guidelines, the real estate market may be in a difficult position. How could this happen? Leithead
describes an unforeseen “perfect storm” that struck the Atlanta economy with particular vengeance. A convergence of
multiple forces took the area by surprise, pounding the area’s office, industrial and multifamily real estate sectors while
leaving the residential market (at least for now) relatively unscathed.
Elements of this storm include
• The collapse of demand from dot-com tenants. Firms such as eTour leased hundreds of thousands of square feet in
Atlanta. Many of these companies are now out of business or significantly downsized.
• The telecom meltdown. Atlanta was a major center for telecom firms that attracted a great deal of investment during
the 1990s. For example, WorldCom left behind a swath of office space in northwest Atlanta after the company
declared bankruptcy in 2002.
• The terrorist attacks of Sept. 11, 2001. Atlanta is a major destination for business travel and conventions, two
industries that have been hit hard following the attacks. Cutbacks in the airline industry, particularly Atlanta-based
Delta Air Lines, also have hurt the area economy.
• Corporate layoffs. Major corporations such as Coca-Cola, Cingular Wireless and BellSouth have trimmed payrolls in
an effort to sustain profits during a period of sluggish sales growth.
The impact of low interest rates
The Federal Reserve’s low-interest-rate policy has also had a significant impact. Many property owners have coped with the
financial strain of falling rentals by refinancing to low-interest, adjustable-rate debt. When short-term rates do begin to rise,
however, some property owners may experience renewed pressure to make payments on their loans.
The Southeast’s once-booming multifamily housing sector has had an especially difficult time adjusting (see the sidebar).
The lowest mortgage rates in 40 years have bolstered the single-family residential market, enabling first-time home buyers
to qualify for mortgages. This trend has prompted an exodus of apartment tenants across the Southeast because even lowand moderate-income residents are able to afford homes of their own.
A surplus of space also has developed in the Atlanta area’s low-profile industrial sector, which is typically less susceptible to
real estate cycles. Corporate cutbacks have taken a toll on Atlanta-area warehouses and factories; industrial vacancy rates
jumped from 7 percent in early 2001 to more than 17 percent in the first quarter of 2003. Other Southeastern cities report

similar patterns with continued consolidation, downsizing and the migration of operations to low-wage labor markets
overseas.
Smoother sailing ahead?
The Atlanta real estate market will eventually recover. The question, though, is when and how. Egbert Perry, a member of
the Atlanta Fed board of directors and chairman and CEO of Integral Group, an Atlanta firm that develops apartments,
envisions an expansion of jobs in the area but nothing spectacular in the foreseeable future. His forecast: “Trickle-along
growth, then a slow ramp-up.”
Real estate development is not for the faint of heart, and optimism runs deep in Atlanta. Leithead envisions short-term
uncertainty and inertia, followed by a rapid, steady upturn as the area’s corporate executives realize that they need to hire
more employees to grow and become more profitable. Once that happens, empty office space will start to fill up. “Irrational
exuberance has been replaced by irrational pessimism,” he said. “But the market will even out in the long run.”

Mostly Sunny for Florida Office Market; Other Areas Cope with Overbuilding

Commercial real estate in Florida depends on a broad range of industries — tourism, support services, small
businesses and investment from Latin America. Although some of these sectors have faltered, key real estate
markets across the state are prospering, with the trend improving in recent quarters.
“Florida has been stronger than the nation because of its service industry focus,” said John Robertson, an officer
in the Atlanta Fed’s research department. “There has been a lot of migration into Florida. Our best guess is that
this trend will continue.” For a number of years Florida’s population has been growing at twice the rate of the rest
of the country, driven significantly by migration from Latin America and by retirees.
Miami sidesteps overbuilding
Urban and cosmopolitan southeast Florida is an example of this
trend. Miami’s reliance on small and medium-sized businesses
has worked to the area’s advantage during a period
characterized by corporate downsizing. Miami has avoided
severe overbuilding because it has not traditionally attracted the
big-money investors who have fueled rapid development in
other markets such as Atlanta.
In a pattern mirrored elsewhere in Florida, Miami lost a
moderate number of jobs in 2001 but began posting job growth
in late 2002. Latin American banks and corporations continue to
expand, along with law firms, trade consultants and other
service organizations. The office vacancy rate for Miami is up
from 10 percent in 2001 to more than 15 percent in the first
quarter of 2003, but it appears to be leveling out. Demand for space is particularly strong in the downtown and
beachfront areas.
Real estate analysts cite a trend toward 24-hour communities, with businesses moving back into historic urban
areas and demand on the rise for environments where businesses and residents mingle. Miami, in particular,
with its vibrant and colorful nightlife and ethnic diversity, has benefited. At the same time, many of the cookiecutter office buildings in sprawling suburban locations across the Southeast have struggled.
Autos and health care drive other parts of the region
Other major commercial real estate markets in the Southeast have benefited from job growth in the automotive
sector, which has partly offset reductions in relatively low-wage manufacturing fields such as textiles and apparel.
Saturn and Nissan have expanded production facilities outside of Nashville. Computer manufacturers Dell and
Hewlett-Packard also are absorbing more space in the area.

Nashville has avoided severe overbuilding, but excessive construction has created a modest glut of suburban
office/industrial space. The office vacancy rate is close to 16 percent. Also working in Nashville’s favor is a strong
medical sector, which is less vulnerable to swings in the economy.
A similar situation applies in Birmingham. The University of Alabama has expanded its Biomedical Research
Institute although the Birmingham office market may have suffered a setback with the recent SEC investigation
involving Birmingham-based HealthSouth.
Alabama’s automobile manufacturing sector has increased demand for industrial space and has caused a ripple
effect, which has helped the market. Five major plants are located within 85 miles of Birmingham (Mercedes,
Hyundai, Honda, Fiat and Toyota), and many other businesses have opened in the area to provide parts and
services to the auto industry.
During the 1990s, Birmingham’s office space was scarce. But the supply has now caught up with demand.
Several downtown office projects, including Concord Center and One Federal Place, were launched in the
downtown area in recent years. The result: Birmingham’s office vacancy rate increased from under 6 percent in
1999 to about 10 percent as of early 2003, and it may go a bit higher still.
Commercial real estate will continue to be a major contributor to the Southeast’s economy. It may be a while,
however, before enough businesses can be found to fill some of the abundant vacancies. But eventually it’s likely
these assets will be utilized to support future growth.

“Bottom Fishers” Drive Southeastern Housing

As the economy in the Southeast has slowed, housing has emerged as a notable area of strength. Brisk
residential construction has sustained growth in myriad related fields, from building materials to financial
services.
“We continue to be amazed by the strength of the market,” said John Wieland, an Atlanta-based homebuilder
and former chairman of the Atlanta Fed’s board of directors. “March (2003) was a record month for us, and April
was strong as well. It’s all being fueled by incredibly low (interest) rates.”
Many consumers perceive the 40-year-low mortgage rates as a fleeting opportunity to buy. So-called bottom
fishers (people who are motivated to buy or refinance homes because of low interest rates) are rushing into
purchasing decisions while rates remain favorable, and the number of people who qualify for mortgages has
never been higher.
For now, buyers have a strong hand, with “some areas reporting
a softening in market conditions,” according to the Atlanta
District section in the April 2003 Beige Book, an anecdotal
report on current economic conditions released eight times a
year by the Federal Reserve. “High-end homes remained
difficult to sell in most parts of the District.” What’s lacking, at
least for now, is substantial job creation or relocation into parts
of the region, according to the report.
Perhaps the softest price range for homes is $500,000 to
$700,000. “A lot of people who buy in that range have taken it
on the chin with investments,” said Phillip Rassel, a vice
president with Metrostudy, a residential real estate information

service.
The decline in stock wealth has been broad but not catastrophic
for a significant number of affluent families with the means to bid
$1 million and up for their dream home, Rassel said. As a result,
the value of some houses in exclusive neighborhoods continues
to appreciate, and the second-home vacation market remains
strong in certain locations.
Strength in the housing sector has applied to most parts of the
Southeast. New Orleans has recovered from a slump in tourism
late in 2001, and home-sale prices increased 7.5 percent during
the first nine months of 2002. Sales activity also increased
despite weak sales of multifamily dwellings.
Housing permits in 2002 were at or near peak levels in
Birmingham, Nashville and Atlanta. And the residential market for Florida has been “exceptionally strong,” said
Brad Hunter, director of Metrostudy’s south Florida office. “There’s been a lot of capital flight from Venezuela and
Argentina, and people are choosing to put it in the Miami market,” he added.
Given the weak economy and the disparity between residential and commercial real estate, speculation exists
about a “housing bubble” that could lead to a sudden decline in home prices and hence in equity.
Typically, this sort of bust would occur after a housing market boom. But that doesn’t appear to be the pattern in
the Southeast. Homes have been appreciating steadily at about 7 percent annually, compared with surges of 20
percent or more that prompted past collapses in California and elsewhere. “There hasn’t been the
hyperappreciation that lends itself to the bubble that people have been talking about,” Rassel said.
Wieland agrees, adding that the price of building supplies (lumber, concrete and wallboard, for example) has
fallen, helping to dampen the cost of housing. “There’s nothing to collapse on sticks and bricks,” he said.
Demand is expected to continue for well-situated homes built with quality construction techniques and materials,
said Wieland. Residences that are hastily built on small or poorly located lots are more vulnerable to price
correction.
When it comes to housing, the Southeast has inherent advantages. People continue to move south, and
longstanding migration trends are unlikely to change because of interest rates. The region’s track record for
creating jobs, while it has lagged in the past two years, bodes well for this key driver of today’s economy.

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INTERNATIONAL FOCUS

A Little Credit Goes a Long Way: The Global Microfinance Movement
A proverb says that “ready money works great cures.” Unfortunately, many of the world’s citizens have little or no “ready
money” to cure the ills of living in poverty. But a decades-old movement that makes credit available to low-income families
and businesses is gaining momentum worldwide, offering millions of people hope for greater financial security.
f it’s true that “a little credit goes a long way,”
then Lucila Mendoza Moisin of Otava, Ecuador,
is living proof of the adage. Through access to
small loans, known as microcredit, Moisin was
able to start her own crafts business, which
provides a relatively steady income for her family
and enabled her to buy a small house. Moisin and
millions of people just like her have launched or
are working in small businesses made possible by
small loans and other financial services that were
previously unavailable to them. They are benefiting
from a global movement known as microfinance.
Microfinance is commonly defined as the provision
of a broad range of financial services — including
loans, savings deposits, payment services, money
transfers and insurance — to low-income
households and their respective microenterprises.
Microenterprises are more difficult to define
because the term covers such a wide range of
business types. However, in general,
microenterprises have the following characteristics: They are run by their owners, they depend on family labor, they employ
fewer than 10 workers, and they have limited access to formal financial services.
Recipients of microfinance services are typically struggling entrepreneurs who lack much-needed access to credit.
Recipients may also include people who have lost their jobs as a result of a weak economy as well as underemployed
workers earning extremely low pay. In the short term, access to microfinance services can help individuals increase their
income, smooth consumption, build small enterprises and reduce their vulnerability to economic shocks. In the long term,
microfinance aims to break the poverty cycle by contributing to food security, children’s education, investment opportunities,
self-empowerment and gender equity.
One hallmark of the microfinance industry is its outreach to women, many of whom otherwise would not have an opportunity
for fiscal independence. Especially in some developing countries, women are traditionally excluded from commerce and
have limited access to most financial services. Approximately half of all microfinance clients worldwide are women, with
many programs targeting them exclusively.

But microcredit is not a handout. It constitutes a loan, bound with the expectation of repayment of both principal and interest,
which is often well above market rates because of high transaction costs. Several studies show that clients willingly, and
successfully, pay the higher interest rates necessary to ensure long-term access to credit.
Currently, thousands of institutions commonly referred to as microfinance institutions (MFIs) exist to provide loans and other
financial services to the world’s poor and their microenterprises. Just as people such as Moisin benefit from greater access
to financial services, MFIs benefit from being able to draw on a vast pool of underserved potential clients, who in the
majority of cases have proved creditworthy, with average repayment rates higher than 90 percent.
As an industry, microfinance has grown remarkably. From its origins in the 1950s — when its roots were based in
agricultural development — microfinance has broadened its range of services and in many cases has grown into a
profitable, self-sustaining industry.
The evolution of microfinance
In the early development of microfinance, state-run Rural Development Institutions (RDIs) in the developing world provided
small loans at highly subsidized terms to farmers to enable them to slowly increase their assets and build their small
businesses. These programs had mixed success. Although farm production improved, loan repayment rates were extremely
low.
From these experiences of early RDIs, microlending programs learned to focus on greater institutional sustainability and
emphasized achieving high loan repayment rates. Nongovernmental organizations (NGOs) then dominated the landscape,
and the concept of microlending began to broaden, encompassing other industry sectors, including simple manufacturing
and trade.
Grameen Bank in Bangladesh emerged as a leader in this new environment. Grameen’s microlending program was one of
the first to provide very small loans of roughly $50 to $100 to the country’s poor to build microenterprises. Nearly 95 percent
of Grameen Bank’s clients are women. On average, Grameen Bank has reported a recovery rate of 98 percent, which
matches traditional banks’ recovery rate. By the mid-1980s, other programs began to notice Grameen Bank’s success.
Microlending programs started emerging all over the world, including in developed countries such as the United States,
Britain and Canada (see the sidebar).
The success of microlending programs eventually led to an institutional structure for microfinance. Microfinance also
expanded financial services available to the poor. Most notable has been the growing presence of formal, regulated MFIs.
Some of these formalized institutions have transformed from NGOs into regulated institutions. Others include already formal
credit unions, consumer finance companies and private commercial banks, all of which have a small portion of their assets
devoted to financial services for the poor.
At the most basic level, formalized MFIs emerged as a result of rapid growth and the need to finance that growth. A
regulated, commercial environment has afforded these institutions greater credibility, freed them from the constraints of
donor funding and allowed them to pursue a range of other viable financial services. In most cases, microcredit NGOs are
not allowed to accept savings deposits from the general public and are restricted to offering only limited savings services to
their own borrowers. Regulated MFIs enjoy greater flexibility in administering a wide range of financial services, including
credit, savings and insurance. Despite the growing presence of formalized MFIs, informal NGOs still predominate. NGOs
receive the majority of their funding from multilateral institutions, such as the World Bank and the United Nations
Development Program, bilateral institutions such as aid agencies of donor countries, and individual governments.
The current microfinance landscape
The World Bank estimates that more than 7,000 MFIs exist worldwide, serving more than 16 million people in developing
countries. MFIs are widely spread across the globe; a particularly high concentration of MFIs exist in Latin America.
Statistics from the International Food Policy Research Institute support this picture. For example, in 1999 Latin America had
the greatest concentration of microfinance clients as a percentage of population at 1.6 percent, followed by 1.5 percent for
Asia and 1.0 percent for Africa.
The Inter-American Development Bank (IDB) estimates that Latin America has more than 65 million microentrepreneurs,

who collectively employ more than 100 million people. This pool represents an enormous potential market for microfinance
services. Although the level of market penetration is limited at this point, the growth in microfinance in Latin America has
been astoundingly rapid. According to MicroRate, a leading microfinance tracker, from 1998 to 2001 leading Latin American
MFIs expanded their loan portfolios by an average of 32 percent, even amid regional instability and banking crises (see the
sidebar).
The move toward commercialization. The tremendous growth in microfinance has spurred and reflected a rapid
movement toward formalization and commercialization unmatched in any other region of the world. In terms of loan volume,
formalized MFIs now dominate in Latin America. In 2001, formalized financial institutions provided 76 percent of the
microloans to borrowers in Latin America. In addition, regulated MFIs have achieved much greater leverage — as
expressed in their debt-to-equity ratios — than their nonregulated peers.
Perhaps the most pronounced example of the transformation from a nonregulated to a regulated MFI is Bolivia’s BancoSol.
Bolivia has long been the most concentrated microfinance market in the Western Hemisphere. BancoSol emerged from a
not-for-profit organization and received a full banking license in 1992. It now operates as a licensed commercial bank
subject to the supervision of Bolivia’s banking authorities. One of Latin America’s leading MFIs, BancoSol possessed a
gross loan portfolio in 2001 of U.S.$81 million serving 61,368 clients (see the table).
Still, the overwhelming majority of MFIs in Latin America remain unregulated NGOs. These NGOs remain dependent on
donor funding and focus on small market niches that large formalized institutions are less interested in or are less able to
penetrate.
Benefits. The shift toward commercialization has produced some favorable outcomes for Latin American MFIs and their
clients. In particular, loan products and other financial services have become more diversified. Traditionally, microfinance
NGOs in Latin America implemented group-lending techniques because a peer dynamic acted as a suitable proxy for
collateral. These lending methods included solidarity group lending and village banking, in which group members provide a
mutual guarantee of loan repayment. While many MFIs, including BancoSol, remain committed to group lending, individual
lending is accounting for an ever-greater proportion of the market. Greater institutional scale has provided MFIs increased
means and resources to handle individual transaction costs and creditworthiness issues, enabling MFIs to respond to
clients’ preferences for individual loans.
Meanwhile, the push toward formalization has also increased Latin American MFIs’ capabilities in providing other financial
services, such as savings. Savings are desirable for several reasons. Savings provide a relatively stable source of funds to
MFIs, enabling them to become financially self-sufficient. In addition, savings services provide low-income clients with both a
safe place for funds and increased liquidity, allowing them to better manage their day-to-day lives. Savings services can help
smooth out income for low-income individuals who face special circumstances, including life-cycle events such as festivals
and marriages, and emergencies such as floods and drought. Savings services also enable low-income individuals to take
advantage of business investment opportunities and can provide funding for life-enhancing activities such as children’s
education and home improvement.
Drawbacks. Unfortunately, formalization of the microfinance industry in Latin America has not always led to positive
outcomes. Increased competition has in some cases led to market saturation, predatory lending practices and a shift toward
a higher-income clientele. The most salient example of such problems is the Bolivian Borrowers’ Revolt of 1999. An influx of
consumer lending agencies into the Bolivian microfinance market was soon followed by microentrepreneurs becoming
overindebted, often juggling several loans at once. Borrowers organized into large groups demanding debt forgiveness.
Since that time, increasing evidence shows that Bolivian MFIs are shifting their focus toward a higher-income market. This
example illustrates how market saturation, coupled with a shift to more profitable markets, can lead MFIs to drift away from
serving the poor — the very clientele MFIs evolved to serve.

Leading Regulated and Nonregulated MFIs in Latin America
Institution
Regulated MFIs

Country

Gross Portfolio
($US mil)

Debt/Equity
Ratio

Number of
Clients

BancoSol

Bolivia

$81.0

5.6

61,368

Caja los Andes

Bolivia

$52.6

7.3

43,530

Peru

$50.0

6.5

50,209

El Salvador

$31.9

3.2

36,318

WWB Cali

Colombia

$17.7

1.4

38,063

ADOPEM

Dominican Republic

$9.9

0.8

28,079

Colombia

$9.6

0.5

36,049

Dominican Republic

$5.3

1.9

3,367

Caja Municipal Arequipa
Calpia

Nonregulated MFIs

WWB Popayan
Fondesa

Source: Table (The “MicroRate 29”: December 31, 2001) from The Finance of Microfinance, MicroRate,
October 2002
Assessing impact and future direction
This development brings up an obvious question. What impact has microfinance had on the poor? Most efforts to evaluate
microfinance have been geared toward monitoring the financial performance of MFIs in accordance with best practices
lending techniques. Understanding the effect of microenterprise development on the world’s poor is largely limited to various
case studies of individual programs. These studies’ findings are generally positive.
For instance, a study of Crédito con Educación Rural (CRECER), a Bolivian MFI, showed that the income of two-thirds of its
clients had increased after joining the program, while 86 percent of clients reported increased savings.
Other studies have shown that children of microfinance clients are more likely to go to school and to stay in school longer.
Households of microfinance clients appear to have better nutrition, health practices and health outcomes than comparable
nonclient households do.
What does the future hold for microfinance and the world’s poor? Microfinance has made great strides in extending muchneeded financial services to underserved populations throughout the world. Going forward, MFIs are geared for continued
growth in loan portfolios and increased mobilization of savings deposits. MFIs also are moving toward incorporating
business development services into their strategy.
Many microfinance practitioners are mindful of potential mission drift. They emphasize the need to balance the institutional
approach, focused on industry expansion and financial self-sufficiency, with a community approach, committed to alleviating
poverty among the very poor. But even a more balanced approach will face limitations in its outreach, especially in serving
the extremely poor.
Microfinance practitioners recognize the risk of pushing these individuals further into debt and poverty with high-interest-rate
loans they cannot repay. In spite of the limitations and downside risks, the success of many of these programs cannot be
ignored. Microfinance provides a unique opportunity to help many low-income individuals improve their circumstances.
This article was written by analysts Elena Casal and Nicholas Haltom of the Atlanta Fed’s research department.

Microfinance in the United States and Other Developed Countries

In the United States more than 300 microfinance institutions — including
the Good Faith Fund (GFF), promoted widely in Arkansas by former
President Bill Clinton, and Working Capital in New England — have
emerged to promote microenterprise development.

Microfinance programs in developed countries, such as the United
States, operate in a different environment from those in developing
countries. Microenterprises and MFIs in the United States face greater
competition and barriers to entry from larger, well-established firms and
financial institutions. Also, the abundance of wage jobs, a welfare safety
net and a comprehensive regulatory environment increase the costs of
self-employment and small business development relative to such costs
in developing countries. In addition, American individualism limits the
effectiveness of joint liability, a feature that makes community-based
lending effective in developing countries. Working Capital has committed
itself to group-lending methodologies, but this practice is an effort to build
social capital rather than to take advantage of it.
Operating under a notably different economic and financial structure than
in developing countries, microfinance programs in developed countries
have been pushed to use different tools and approaches in achieving
their goals. In particular, these MFIs have placed a greater focus on
providing structured training programs that help clients build skills
necessary to survive and thrive in a competitive economic atmosphere. Additionally, MFIs in developed countries
tend to offer higher loan amounts and to focus on simple service-producing enterprises, such as childcare, hair
salons, retail sales, transportation, and home and office maintenance.
Elliot Farmer’s story offers an example of the workings of microfinance in the United States. After losing his
Atlanta-based job in the telecommunications industry during the recent recession, Farmer pursued his dream of
running his own catering business. He applied and was accepted for a loan with ACCION USA.
Farmer currently owns The Farmer’s Kitchen, a successful catering company in metro Atlanta.

Latin American Microfinance Institutions and Recession

Economic recession in Latin America in the late 1990s dealt a
significant blow to the region’s commercial banking sector. Loan
portfolios stagnated, profitability fell and delinquencies rose. But
MFIs in the region did not suffer the same fate, according to
statistics provided by MicroRate, a leading microfinance tracker.
In Colombia, for example, where real GDP declined 4.2 percent in
1999, six leading MFIs tracked by MicroRate showed loan portfolio
growth of near 10 percent while commercial banks’ loan portfolio
growth declined 20 percent. In addition, the average return on
equity in 1999 in Colombia was 7.1 percent for MFIs but –7.1
percent for commercial banks. Similar results were reported for
Peru and Bolivia, but the greater maturity, market penetration and
leverage of Bolivian MFIs did lead to a pronounced slowing in their
portfolio growth and profitability.
Why have MFIs performed so well in comparison to commercial
banks? Most of their success stems from their close ties with the
communities they serve. MFIs typically know their borrowers and

markets well and possess a strong ownership structure, with
investors and donors keenly interested in monitoring the MFIs’
management and performance. Also key is the often-displayed
strong repayment ethic of microentrepreneurs and other lowincome borrowers.
In addition, MFIs and microentrepreneurs may actually benefit
from hard economic times. Some borrowers may shift from
traditional banks with rigid lending procedures to local MFIs
specializing in flexible relationships with microentrepreneurs. At
the same time, microentrepreneurs may benefit from consumers’
preferences for less expensive goods during a recession.

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Economic Research

Research Notes and News highlights recently published research as well as other news from the Federal Reserve Bank of
Atlanta. For complete text of summarized articles and publications, see the “Publications” section of the Atlanta Fed’s World
Wide Web site.

Are online currencies “virtual banknotes”?
The history of money is marked by innovations that have expanded the role of “inside money” — money created by the
private sector. For instance, the past few years have seen the development of several types of online payment
arrangements, some of which have been dubbed “online currencies.”
An article by Stephen F. Quinn and William Roberds examines the likely success or failure of online currencies by means of
a historical analogy. The discussion compares the introduction of online currencies to the debut of the bearer banknote, the
direct predecessor to modern currency, in London in the late 1600s.
The key innovation of the earliest banknotes, the authors argue, was to provide final payment under circumstances in which
extant payment systems could not. The discussion considers how online currencies may be able to fill the same role in the
context of e-commerce.
The authors note some conspicuous similarities between online currencies and physical banknotes. Both payment methods
emerged to meet the need to conduct remote transactions (via the Internet or across physical distance), both face the risk of
buyer-side fraud, and both have responded to the need for a new payment technology to allocate this risk. The authors stop
short of calling online currencies “virtual banknotes” because it remains to be seen whether online currencies will gain
sufficiently widespread acceptance to become a circulating medium of exchange.
Economic Review
Second Quarter 2003

Emotion and financial markets
Psychologists and economists hold vastly different views about human behavior. Psychologists contend that economists’
models bear little relation to actual behavior. This view is supported by a large body of psychological research that shows
that emotional state can significantly affect decision making.
Economists, on the other hand, argue that psychological studies have no theoretical basis and offer little empirical evidence
about people’s decision-making processes. The reigning financial economics paradigm — the efficient market hypothesis
(EMH) — assumes that individuals make rational investment decisions using the rules of probability and statistics. A newer
branch of financial economics called behavioral finance applies lessons from psychology to financial decision making, but

most of these studies have focused on cognitive biases rather than emotion.
An article by Lucy F. Ackert, Bryan K. Church, and Richard Deaves argues that emotion has important, and possibly
beneficial, influences on financial behavior. After defining the term emotion and describing how emotions can be
categorized, the authors consider how emotions influence human behavior. The discussion focuses particularly on three
aspects of emotion and financial decision making: emotional disposition and stock market pricing, the feeling of regret, and
investors’ emotional response to information.
No new financial economics paradigm that incorporates behavioral influences and better models actual behavior has yet
emerged to replace the EMH. Yet the authors believe that emotional behavior’s influence on financial decision making
should be taken into account in future research.
Economic Review
Second Quarter 2003

Take an online tour
This spring the Atlanta Fed launched an online tour of its Visitors
Center and Monetary Museum. The virtual tour “walks” Internet
visitors through the central exhibits of the museum, which present
the story of money’s evolution from barter to modern currency,
focusing particularly on money and banking in America. Ancient
Greek coins, African throwing knives, Chinese shoe money, and
wampum are just a few examples of the rare and unique artifacts,
coins, and currency on display.
The virtual tour of the Visitors Center continues with photos and
information about the bank’s interactive and multimedia exhibits.
These exhibits offer an in-depth look at the role of the Federal
Reserve in the U.S. economy: how and why the Fed conducts
monetary policy, the Fed’s role in bank supervision and regulation,
and the ways the Fed provides payment system services.
The online exhibits also introduce visitors to the bank’s cash
processing operations, where millions of dollars are counted and
sorted each day. This portion of the tour offers a glimpse of the
bank’s automated vault, a look at the robotic transports that do the
heavy lifting of cash and coins, and a close-up view of a currency
transport, or cash bus.
For security reasons, the Atlanta Fed currently offers only prearranged, guided tours of its facility to school and business groups.
But through the online tour, the bank is able to make its Visitors
Center and Monetary Museum available to a much broader
audience — anyone who has access to the Internet.

ATLANTA FED DOLLAR INDEX

The dollar continued its decline in the first
quarter of 2003 against the 15 major currencies
tracked by the Atlanta Fed. The drop in March
was the dollar’s fifth consecutive monthly
decline. In January decreases were registered in
all subindexes except the Americas subindex.
The Americas and European subindexes fell in
February. In March the dollar’s decline was
concentrated in the Americas subindex while the
European and Pacific subindexes rose.
Note: For more detailed, monthly updates and
historical data on the dollar index, see the Atlanta
Fed’s World Wide Web site at
www.frbatlanta.org/econ_rd/dol_index/di_index.cfm.

Take the virtual tour of the Atlanta Fed’s Visitors Center and
Monetary Museum at www.frbatlanta.org/atlantafed/visitors_center/vc_index.cfm.

Managing money matters
Personal financial education is one of the Federal Reserve’s ongoing commitments. As part of a broad initiative to improve
financial literacy, the Fed rolled out a grassroots campaign to spread the word about the importance of sensible financial
practices across all levels of the economy.
In a public service announcement aimed at raising awareness of the need for financial education, Federal Reserve Board
Chairman Alan Greenspan stresses the benefits of sound economic and financial education. “No matter who you are,

making informed decisions about what to do with your money will help build a more stable financial future for you and your
family,” notes Greenspan in the message, which is airing on major television networks and radio stations.
This initiative builds upon existing efforts to foster financial education. Using the public service message, a new brochure,
enhancements to the Fed’s financial education Web site as well as sponsorship of key programs and events, the Fed hopes
to make people aware of the need to be knowledgeable about personal finance.
For more information on financial education, visit the Federal Reserve education Web site at
www.FederalReserveEducation.org.
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Economic Research
THE STATE OF THE STATES
Recent events and trends from the six states of the Sixth Federal Reserve District
Alabama
• Defense spending is boosting the state’s economy. An
Alabama-based laptop computer maker, for instance, won
a $19.5 million contract to supply the U.S. Army with
2,000 battlefield laptop computers and accessories. In
addition, some components of a missile interceptor will be
assembled at a Boeing Co. plant in Huntsville.
• Although some of the states’ steel producers and
fabricators continue to operate well below capacity, firms
producing pipe used in oil fields in the Middle East
anticipate increased orders in the coming months.
• Venture Industries recently announced that it will
construct a $100 million plant in Prattville to produce
vehicle components for Hyundai Motor America. The
facility, scheduled to open in June 2004, will eventually
employ 600 workers.

Florida
• Reports from the tourism sector have been mixed. In
south Florida, a successful spring break season helped
offset weakness in international travel. Central Florida
theme parks are offering summer discounts and new
attractions in an attempt to bring back tourists.
• Favorable yields and stable prices should boost
profitability for Florida’s sugarcane and vegetable
farmers. International competition continued to squeeze
citrus prices.
• Miami’s exports to Brazil, Venezuela and Mexico are still
off sharply from 2002 levels. However, apparel and
textile-apparel machinery exports to Central American
countries posted healthy gains.
Georgia
• The Pentagon approved a $3 billion contract for
Lockheed Martin to produce 20 more F/A-22 Raptor
fighter jets. The planes are assembled in Marietta and
account for about 1,700 jobs there. A sharp decline in
business jet sales means that Savannah-based
Gulfstream is likely to furlough some 1,000 workers in
July.
• The Atlanta office market weakened further during the
first quarter. The vacancy rate reached a new high of
almost 22 percent, and net absorption remained negative.
Commercial construction levels were down sharply from

last year.
• Higher export and import volume has resulted in a 33
percent increase, a new record, in the number of autos
handled by the Port of Brunswick during the fiscal year
that ended in February.
• Ford Motor Co. is considering building a new $1 billion
factory in Georgia to assemble its next generation of
midsized cars.
Louisiana
• Higher oil and gas prices have not translated into
increased drilling activity in Louisiana. ChevronTexaco,
however, will reportedly hire additional staff in New
Orleans for the Tahiti oil prospect, the firm’s largest
deepwater find in the Gulf of Mexico.
• Louisiana’s tourism and hospitality sector has reportedly
softened. New Orleans’ Jazzfest attendance numbers
were below expectations. The state’s riverboat casinos’
revenues fell almost 5 percent from a year earlier.
• To cut costs, Hibernia National Bank recently laid off 120
workers, 70 of whom worked in the New Orleans area.
The company reportedly expects to eventually lay off 5
percent of its 5,800-person workforce.
Mississippi
• Military contracts continue to stimulate the state’s
economy. Northrop Grumman plans to spend $288 million
to expand its shipbuilding operations in Pascagoula and
Gulfport. The shipyards already have contracts to develop
prototypes for the next generation of destroyers.
• Local chemical companies report that high natural gas
prices are adversely affecting their bottom lines and
causing some production disruptions.
• Gaming operators along the Mississippi Gulf Coast
continue to post good numbers. Gross gaming revenues
from casinos were up by about 6 percent in March from a
year earlier. A new casino was recently announced for
Biloxi. This casino, the first new gaming house in
Mississippi since 1999, will employ 500 workers.
Tennessee
• New auto parts manufacturing facilities were recently
announced. Bridgestone will build an $11 million parts
plant in Dickson to supply shock-absorbent pads and
interior cushions for Honda, Toyota, and Nissan vehicles.
Bodine Aluminum chose Jackson as the site for a new
$124 million plant to build Toyota engine blocks.
• With the state’s transportation budget reduced by some
$65.8 million, the Tennessee Road Builders Association
anticipates significant cuts in the state’s road construction
employment.
• Verizon announced plans for a new call center in
Murfreesboro, scheduled to open this fall, that will initially
employ 400 workers and could eventually employ more
than 1,000.

Compiled by the regional section of the Atlanta Fed’s research department
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Economic Research
Southeastern Economic Indicators
Alabama

Florida

Georgia Louisiana Mississippi Tennessee

6th
District

U.S.

Total Payroll
Employment
(thousands)a

2003Q1

1,877.0

7,253.5

3,903.2

1,898.9

1,126.2

2,663.5

18,723.0

130,596.3

% change
from

2002Q4

–0.5

0.1

–0.1

0.1

–0.2

–0.1

0.0

–0.2

% change
from

2002Q1

–0.5

1.4

–0.2

0.1

0.1

0.2

0.5

–0.1

Manufacturing
Payroll
Employment
(thousands)a

2003Q1

297.0

396.6

457.8

158.7

183.4

415.6

1,909.1

16,394.0

% change
from

2002Q4

–3.8

–1.7

–4.2

–0.6

–0.7

–2.0

–2.5

–0.8

% change
from

2002Q1

–4.5

–3.9

–1.9

–2.2

–4.5

–3.1

–3.3

–2.9

Civilian
2003Q1
Unemployment
Rate

5.6

5.3

4.6

5.8

6.2

4.8

5.2

5.8

Rate as of

2002Q4

5.9

5.3

5.3

6.2

7.0

4.9

5.5

5.9

Rate as of

2002Q1

5.8

5.6

5.0

6.1

6.6

5.4

5.6

5.6

Single-Family
Building
Permits
(units)b

2003Q1

15,404.2

139,422.2

72,608.7

15,286.5

9,505.5

% change
from

2002Q4

–5.3

–0.8

–2.0

–2.3

4.2

–6.1

–1.9

–4.8

% change
from

2002Q1

–0.1

6.2

–0.5

0.1

7.0

0.9

3.2

3.1

Multifamily
Building
Permits
(units)b

2003Q1

3,938.8

54,949.7

17,698.0

745.7

1,711.4

2,805.9

81,849.6

411,216.8

% change
from

2002Q4

158.1

7.3

–20.5

–80.7

–8.2

–39.8

–4.8

–1.6

% change
from

2002Q1

56.9

–9.7

–22.1

–60.7

–57.6

–40.6

–15.4

1.4

Personal
Income
($ billions)b

2002Q4

114.2

502.0

249.3

115.6

65.2

162.5

1,208.9

9,035.0

% change
from

2002Q3

0.9

1.1

0.9

1.2

1.1

0.9

1.0

0.9

% change
from

2001Q4

4.0

4.8

3.4

4.2

4.4

5.0

4.4

3.9

28,366.9 280,594.0 1,338,381.5

Atlanta Birmingham Jacksonville

Miami

Nashville

New
Orleans

Orlando

Tampa

Total Payroll
Employment
(thousands)a

2003Q1

2,179.6

479.1

565.0

1,022.3

673.7

611.7

915.9

1,231.7

% change
from

2002Q4

0.5

0.2

0.4

–0.1

–0.1

0.3

0.1

0.7

% change
from

2002Q1

0.0

–0.3

1.0

0.9

0.7

–0.3

1.6

1.1

2003Q1
Civilian
Unemployment
Rate

4.9

4.3

5.0

7.3

3.6

5.2

5.1

4.5

Rate as of

2002Q4

5.3

4.6

5.1

7.4

4.0

5.4

4.9

4.6

Rate as of

2002Q1

5.2

4.1

5.2

8.1

4.1

5.4

5.9

4.6

a Seasonally adjusted
b Seasonally adjusted annual rate

SOURCES: Payroll employment and civilian unemployment rate: U.S. Department of Labor, Bureau of Labor Statistics. Initial
unemployment claims: U.S. Department of Labor, Employment and Training Administration. Single- and multifamily 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. All the data were obtained and seasonally adjusted by Regional Financial
Associates. Small differences from previously published data reflect revisions of seasonal factors.
For more extensive information on the data series shown here, see the Atlanta Fed’s World Wide Web site at
www.frbatlanta.org/publica/econ_south/2003/q2/dist_data.htm.

Total Payroll Employment

Manufacturing Payroll Employment

Civilian Unemployment Rate

Single-Family Building Permits

Multifamily Building Permits

Personal Income

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