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THE ECONOMIC OUTLOOK FOR THE NATION AND THE SOUTHEAST Remarks by Robert P. Forrestal, President Federal Reserve Bank o f Atlanta To the National Association o f Bank Women, Columbus Chapter May 14,1987 Good evening! Fm honored to be a part o f your "executive night" program and lighted to have this opportunity to meet with the banking leaders o f west central iorgia and eastern Alabama, both those o f you who are members o f the National isociation o f Bank Women and your guests. Working as you do with banking institutions, i sure you have special interest in locally important econom ic activities like textile, parel, and food manufacturing as well as financial services. To understand what has en going on in these industries, I think we need to investigate national and even :ernational developm ents. For that reason, a good portion o f my remarks tonight will cus on the larger picture. I will, however, bring the outlook closer to home by saying a w words about the Southeast and then leave you with som e thoughts about the major ues that could adversely a ffe ct our econom ic prospects if they’re not resolved. When e finished, ril be happy to answer any questions you may have. onom ic Conditions and Prospects in the United States The Southeast's econom y w ill be a ffected by the main factors that will determine ; econom ic prospects for the nation as a whole through the end o f the year; so w ell ed to take at least a quick look at the national outlook in term s o f the three major iicators—gross national product, unemployment, and inflation—before narrowing our 3 us to our own region. I look for GNP to expand once again at a rate o f 2 1/2 percent even a bit faster this year. The first quarter rise o f 4.3 percent is not likely to be stained since much o f that growth was a buildup in inventories. I was pleasantly 'prised by the drop in April's unemployment rate to 6.3 percent from 6.6 percent in the evious month. Still, my outlook for only moderate GNP growth should not lead to much -2 - dditional reduction in unemployment. Inflation should accelerate from last year's verage pace o f less than 2 percent as measured by the consumer price index to 4 or even 1/2 percent in 1987. The im portance o f international developments to our dom estic econom y is driven >me in the outlook for 1987. The higher prices in my forecast—even greater increases lan in 1985—are in large part due to international factors. These include not only the :abilization o f oil prices but also the rise in other import prices, which as o f last year ere up 8 percent. The international sector is also critical to the outlook for GNP •owth. I look to the foreign trade front to provide the stimulus that will maintain our lOderate growth rate. The other major components o f GNP—consumption, investment, id government purchases—don't look all that strong. I don't think consumption will be eak, but neither do I expect it to be the main source o f growth in the econom y as it has sen in recent years. It is true that consumer assets are high in concert with gains in the ock market and home values. D ebt-to-incom e levels are also very high, though, and the wings rate has fallen to quite low levels. Consumers may very well want to bolster ieir balance sheets, and this makes faster growth in consumption unlikely. Sluggishness in the consumer component o f GNP reflects the beginning o f a trend e at the Fed have been predicting for some tim e, namely, smaller annual increases in it capita consumption. This is largely the inevitable "morning after" follow ing the rending binge that we as a nation have been on—both publicly and privately—almost nee the start o f this decade. Now we must embark on what will be a rather long period l paying back some o f the debt to the rest o f the world that we amassed to finance that nge. With consumption expected to slow, we must look elsewhere for econom ic stimulus. -3 - vestment, another com ponent o f GNP, is unlikely to lead growth either. On the one md, there was a temporary need for new investment to replace the considerable awdown o f inventories in the last quarter o f 1986. This cleared stocks and set the age for the strong growth in the first quarter o f this year as inventories were plenished. The positive impetus to production will probably be balanced, however, by ie fa ct that business investment has been declining, partly because o f low capacity ilization but mainly due to the overbuilding o f o ffice s and retail space. Changes in the x code have exacerbated this situation by treating some aspects o f investment less « vorably. In tim e this revision should lead to a more efficien t allocation o f capital as e revised tax code encourages investment dollars to be distributed more according to e dynamics o f supply and demand, hi the near term , though, we may see some (com fortable adjustments develop until excess space is absorbed. O ffice construction, ong with apartment and condominium building, is likely to be weak in the year ahead, hile m ortgage rates—up a bit now but still considerably low er than a few years ago— ould continue to boost the single-fam ily housing market, I don't expect to see much rther increase in housing starts since they are already at a pretty healthy level. The lief determinants o f new home sales will probably be demographics and overall :onomic growth. As for government purchases, budget d eficits are thankfully on a •wnward slope, but this, o f course, means much less fisca l stimulus than in the past. This leaves us net exports as an engine for the expansion. An improvement in the .S. international sector is expected for two reasons. One is the decline in the value o f e dollar in foreign exchange markets. While this fa ctor works with a lag, the dollar has ten declining for two years now and we have begun to see an im pact. In fa ct, exports igan picking up in real terms in the last three months o f 1986 while imports flattened, the first three months o f this year, real net exports—the change in exports less that in lports—improved by $13.8 billion. The second reason to expect a turnaround in the ade sector is related to something I mentioned earlier, namely that we cannot keep icreasing our borrowing from abroad indefinitely. For som e tim e now we have been >ending more on consumption, investment, and government than we actually produce :>mestically. The substantial expansion o f the federal budget d eficit has contributed to tis situation. To m eet our aggregate demands we have been importing far more than we cport and borrowing from abroad to finance these im ports. O f course, this cannot go on trever. Our creditors may becom e less willing to lend, and, just as any borrower /entually learns, debt service inevitably rises along with the debt and becom es a irden. So the tim e has com e to start repaying. While GNP or national output will grow : about the same rate in 1987 as it did last year, more o f that increase in output will be cported and less o f it will be available for dom estic use. Even taking my concerns about foreign debt into account, I am confident that creased exports and dom estic sales together with the lower level o f energy costs we >w enjoy should be sufficient to sustain the econom y for another year. The same >rces, steady oil prices and shifts in international trade, will dominate the inflation cture. Prices o f petroleum and other com m odities are still well below their levels o f a ;ar ago. Without the boon o f declining energy and com m odity prices, however, ensures o f inflation are likely to return to their pre-1986 pattern, though not to the a ccep tably high levels we saw earlier in the decade. If inflation remains basically in leek, gains in production to m eet greater demand for American-m ade products should tip us achieve the m oderate rate o f growth I foresee even if overall consumption does >t increase much. utlook for the Southeast The satisfaction o f more demand dom estically, together with another positive jvelopment—the recent stabilization in energy prices—would help those areas o f the -5 - Duntry most dependent on mining and manufacturing. These developments would foster greater balance among econom ic sectors and regions o f the country than we have icperienced in the last several years. More balanced growth would be especially elcom e news to certain parts o f the Southeast, which includes not only prosperous and ist-growing localities like Atlanta, Nashville, and most o f Florida, but also weak or even ^pressed places such as Louisiana, which is part o f the oil patch. The econom ies o f labama and Tennessee as well as much o f rural Georgia are more oriented to anufacturing and as such have been facing many o f the same foreign trade-related ♦ ffieulties as the nation. 2 In contrast, the service-based econom ies o f Florida and rtain m etropolitan areas in other states have been doing quite well and seem likely to >ntinue on that path. The main factors that will determine U.S. econom ic perform ance this year will also ive a primary bearing on how this part o f the country does. Stabilization o f the energy sctor will be especially important to Louisiana and parts o f Mississippi, both o f which ive been adversely a ffected by the sharp fall in oil prices last year. There is reason to >pe that things will not get any worse even if they don't get much better any tim e >on. The rig count has been inching up. While recent oil prices have not been flat, the end does seem to be toward far more stability than last year. If oil prices remain near 1 a bit below recent levels, at least the losses should be stemmed even though little 'owth is on the horizon. Along with the energy sector, agriculture will be the lingering area o f weakness, >t only during 1987 but perhaps for several years to com e. Heavy indebtedness incurred iring periods o f prosperity will continue to go unserviced, resulting in additional mkruptcies and foreclosures among borrowers and loan losses for lenders. Moreover, irming in the Southeast as a whole is less dependent on grain crops and hence on export -6 - arkets, which are glutted. Thus, the Southeast stands to gain less from expected ternational developments than, say, the Midwest, but the basic picture is also less bleak begin with. We can only hope that the current shortage o f rainfall will not becom e as rious as last year's drought and add to farm ers' d ifficu lties. Improvements in the trade balance would spell good news for many southeastern anufacturers who were subject to either intensified import com petition or greater fficu lty in marketing abroad after the dollar appreciated in the early 1980s. iprovement would probably not be dramatic in the short run, however. Any The apparel dustry, for exam ple, faces im port com petition from the newly industrialized countries the P acific rim—Taiwan, Hong Kong, and Korea. The currencies o f those countries ve only recently begun to move up slightly against the dollar, and so U.S. apparel akers have not had measurable re lie f from the e ffe cts o f expensive dollars. The textile justry, which also com petes with cheaper products from abroad, has taken an gressive approach to the problem and rebounded to better health. By substituting pital for labor, fabric and carpet producers were able to turn record profits last year, lfortunately, this adjustment won't save jobs, since more efficien t producers need wer workers to produce the same amount o f goods. Thus, whatever turnaround the xtile industry and others in similar situations undergo is not likely to have a dramatic pact on em ploym ent. Any rise in output will generate som e new jobs, but employment ins will not be proportionate to advances in output. Other locally important industries are likely to fa ce mixed prospects this year, ito and related manufacturing, for instance, which is a significant and growing onom ic activity in Georgia, Tennessee, and Alabama, may not have as strong a year as st if consumer spending for durables tapers o ff at the national level. Defense contracts e the bread and butter o f many o f the region's electronics producers as well as makers -7 - transportation equipment like aircraft. With spending by the federal government pected to slow, activities in these industries may be hampered. Much o f Florida's dustrial sector produces electron ic and transportation equipment tied to the defense d space programs, and the resumption o f serious work on the space shuttle will have sitive e ffe cts for numerous private industries there. Unfortunately, the benefits o f w shuttle efforts probably won't be fe lt until after m id-year. However, the lower liar's e ffe ct on prices o f electron ic parts and products abroad should bolster high tech anufacturing in Florida and elsewhere to some extent. Aside from the e ffe ct o f m acroeconom ic factors like the downward trend in d eficit ending and the anticipated correction in the trade balance, this region's growth is avily influenced by some unique regional factors. Probably the most important o f ese is population growth, or more specifically in-m igration. Continuing inflows o f ople and corresponding gains in employment and personal incom e are major reasons for e more rapid growth o f Florida and Georgia. Florida's population has expanded at a te three tim es as fast as the national average in the 1980s. The influx o f new residents mulates demand for new houses, apartments, o ffice s, and retail space, in turn making r a bustling construction industry. Recent arrivals also generate greater demand for a riety o f services ranging from schools and hospitals to recreation and the whole gamut retail establishments. Expectations o f continued growth nationally suggest that movement to the utheast w ill persist, since most people who want to relocate will be able to sell their mes elsewhere. In addition, the dollar's decline should have a positive im pact on other kind o f in-migrant—a temporary one, namely the tourist. Florida attracts more reign visitors than any other state. A lower dollar translates into more visitors from road as w ell as more dom estic travel by Americans. Tourism tends to stimulate amand for services and trade in much the same way that permanent population growth :>es. Therefore, workers will continue to find jobs in the expanding service and trade reas so that the region's total employment should increase by about half a million new >bs in 1987. Construction—the other population-driven econom ic sector—will not, however, do > well as one might expect, given the anticipated amount o f population expansion. ngle-fam ily housing may continue to expand, but m ultifam ily building along with * instruction o f o ffice s and retail space is likely to be weak. The reasons for this jparent anomaly are the e ffe cts o f the tax law change on business investment and the ict that many loca l markets were substantially overbuilt in recent years and need time >r all the new space to be absorbed. Despite probable weaknesses in construction and energy, together with mixed jrform ance in manufacturing, the Southeast overall seems likely to benefit from the lief forces that will shape U.S. econom ic perform ance in 1987—particularly an iprovem ent in the trade balance and more stable energy prices. In addition, the region lould retain and even increase its attractiveness to new residents and businesses, both om elsewhere in the nation and from abroad. The states that are likely to do best are, ice again, Florida and Georgia due to their disproportionate population growth and the versity o f their econom ies. The Columbus-Phenix C ity area has a similar balance itween manufacturing, ranging from textiles and apparel to iron castings and packaged ►ods, and services such as insurance and credit card processing. Thus, I would expect >ur loca l econom y to participate in the expansion I anticipate for the state in general, juisiana and Mississippi, whose econom ies are based primarily on farming, forest •oducts, and energy, will probably end up at the other end o f the spectrum . Alabama id Tennessee are likely to turn out to be somewhere in the middle. Whatever happens -9 - » manufacturing nationally should be reflected closely in these two states. Though owth in this region may decelerate somewhat from last year, it is still likely be fast tough on average to stay ahead o f the nation. sues and Problems There are several weighty issues that could, if unattended, arrest or reverse the iticipated modest rate o f expansion. These issues include imbalances in global trade itterns, inappropriate fisca l policies, and protectionism . First, world trade patterns ted to undergo a major correction . To begin with, the United States must increase its ports. 1 believe that in the short run, net exports are being pushed in this direction by e exchange rate realignm ent. In the long run, however, the American business immunity's heightened awareness o f international conditions must be translated into eater sensitivity to foreign markets. We must find ways to sell as aggressively in itside markets as we do at home, and this means becom ing more fam iliar with other iltures, learning to speak the languages o f foreign purchasers, and interpreting their ispoken signals. With Americans' experience in the psychology o f marketing, it should i obvious that a product's appeal to overseas consumers is conditioned by subtleties o f cal taste and custom . Y et we persist in remaining international illiterates, paying uch less attention to understanding foreign cultures than foreigners pay to investigating rs. It may be that the loss o f our com petitive edge that so many mention, is due more our failure to understand others than it is to inefficient production and lack o f quality. Aside from the steps Am erica might take to bring balance to trade flow s, other Ivanced industrial econom ies need to rely less on exports and more on dom estic mand. Japan and West Germany could stim ulate their econom ies by accelerating tax its and implementing a generally more expansive fiscal policy. Both countries' onomies could benefit from such policies since both have high unemployment rates. -1 0 - >t only would fisca l stimulus relieve joblessness, but it would make more money ailable for consumption o f both dom estically manufactured and imported goods—a velopment that would speed the reduction o f Am erica's trade d eficit. I am concerned that if the world's industrialized econom ies don't act soon to bring out this shift in trade patterns, the forces o f gloom could undermine our econom y ?ng with the rest o f the world's by burdening American trade policy with protectionist ggage. While I sympathize with the agony o f industries, some o f them here in our own gion, which are losing ground to foreign com petition, I look with dismay upon the many 11s for protection. Tariffs, subsidies, and other trade barriers cannot guarantee that Dtected w ill becom e industries more viable—a fa ct which the experience o f riculture, one o f the most heavily insulated industries, illustrates all too w ell. Instead weakens them further by shielding them from com petition. It almost certainly arantees retaliation from our trading partners, and erosion o f our purchasing power and ;e choice as consumers. Rather than overreacting to short-term imbalances, it is critical for us to continue pending our vision to include all the possibilities held out by the evolving international jer. Our recent positive experience with Canada convinces me that through gotiation rather than confrontation we can convince our trading partners to assume >re o f their own responsibility for keeping the exchange o f goods and services as well labor and capital as unrestricted as possible. We should continue to call on Taiwan and pan in particular, two nations with extraordinarily high trade surpluses and substantial port barriers, to lower the protective walls which make it impossible for many o f our ods and services to penetrate their markets. Raising protectionist barriers is an tempt to "beggar your neighbor" and get a larger share o f the output pie. History iches us, however, that in reality it only reduces the size o f the pie and ends up hurting
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