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The Outlook Remarks o f Robert P. Forrestal President Federal Reserve Bank o f Atlanta to the International Association for Financial Planning Atlanta, Georgia March 19, 1984 You have asked for my thoughts about the economic outlook and also about monetary policy. I would like to begin by commenting on the outlook. With that as background, I will shift the focus to monetary policy, relating it to fiscal policy and related matters. The recovery that took hold last year has matured into a solid expansion. The national economy should grow at a healthy rate this year, but the Southeast’s economy should grow a bit faster. And Georgia's outlook is even brighter than the region’s. Virtually all sectors and all areas o f the Southeast show promise as we move further into 1984. Georgia should run close behind Florida, whose economic growth seems likely to set the pace for the entire South. Alabama, Louisiana, and Mississippi, on the other hand, have more catching-up to do than Georgia and the rest o f the region. The strongest rebounds seem likely consumer goods or defense materials. in the southeastern areas that Defense spending will stimulate the local economies surrounding the region's many defense installations. produce -2 - The service industries promise to attract a continuing influx o f new residents into both Georgia and Florida. As employment rises in the service industries, increased spending for housing and consumer durables will help give a boost to the economies o f both states. Increasing consumer buying should mean more good news for the Southeast’s textile firms. Despite the rosy outlook for Georgia and Florida, the nation will continue to face problems that are both complex and stubborn. international trade and energy sectors. We are plagued with lagging We fire troubled by the woes o f heavily indebted less-developed countries, whose burdens carry far-reaching implications for the global economy. We still wrestle with high interest rates and unemployment. And perhaps most disturbing o f all, we have been unable to gain better control o f federal spending to reduce the federal deficit. I'll address those questions shortly. But first, le t’ s take a closer look at our prospects for 1984, starting with the national economy. The National Scene The year just past, obviously, was an encouraging one for our national economy, with recovery reaching full speed by the second quarter. It now seems that growth will continue at a safe and sustainable speed right through 1984, and possibly well beyond. Today we can find signs o f economic strength all around us. The nation's economy grew in real terms in the second and third quarters o f 1983 at rates o f 9.7 and 7.6 percent and at 4.9 percent in the fourth quarter. Those ringing cash registers you have been hearing in our department stores are one o f the most obvious signs o f the renewed economic vigor. month. Retail sales rose again by more than 2 percent last What's more, consumers aren't limiting their purchases to stereos and household -3 - goods; they are putting their money down on major acquisitions such as automobiles — and even homes. Consumer credit expanded by $6.6 billion in December. Sales o f automobiles in January were over 30 percent greater than in January 1983. With mortgage interest rates stabilized, even though higher than we might wish, the number o f housing permits issued late in 1983 remained strong. Housing starts rose 15 percent in January. Clearly, the consumer’s new-found willingness to spend is a sign o f improving national confidence. It offers indisputable evidence that Americans, who generally were reluctant to commit their hard-earned money during the recession months o f 1981 and 1982, now are convinced that better times lie ahead. They are encouraged, for instance, by a cooling o f the inflation that eroded our economy for so many years. Inflation, which averaged a frightening 13.5 percent in 1980 (as measured by the consumer price index) dropped to just 3.2 percent last year. The public’s new optimism spells good news for those who manage manufacturing industries, or who work for them. It is their happy lot to produce the goods sought by these purchasers. Predictably, industrial output has been gaining strength for months, with business equipment production leading the way. are reopening or are recalling furloughed workers. Idle plants across the country We are seeing this welcome trend in our own region, as I'll discuss in just a moment. With more people returning to their jobs, our worrisome unemployment picture is improving. Total employment, which had remained nearly flat throughout 1982, began to edge upward once again near the end o f 1983. in February, the lowest rate in over two years. The jobless rate fe ll to 7.8 percent That means more o f Am erica’s workers are taking paychecks home, which helps to explain both the retail spending activity -4 - and the renewed national confidence that it reflects. In fact, personal income increased by 1 percent in October, by 0.6 percent in both November and December, and by a little more than 1 percent in January after adjustment for both inflation and seasonal factors. That represents a solid gain in real buying power. Do we need more evidence that the recovery is moving ahead at good speed? Consider that corporate profits rose by one-third over the second and third quarters o f 1983 and by nearly two-thirds in the fourth quarter, an increase that is having a profound e ffe c t in generating new business investment. A recent special survey by the Wall Street Journal indicates corporate profits may have risen at nearly double that rate in the fourth quarter. Early last month, Chrysler reported profits o f over $700 million, and Ford and GM had earlier reported profits o f nearly $2 billion and about $3 billion, respectively. Business inventories and new factory orders are both gaining and will continue to do so, since inventory-to-sales ratios remain very low. Commerce Department’ s Index o f Leading Indicators, And the which monitors our overall economic health, increased for 14 consecutive months before it paused to catch a breath in November. It resumed its rise in December. So much for last year. What’ s ahead for the national economy in 1984? More o f the same, I believe, except that we can look for a more moderate — and more sustainable — growth rate. stage. That might be the best thing that could happen at this A realistic growth projection seems to be something in the neighborhood o f 5 percent, give or take a few tenths o f a point. That should help ease the upward pressure on interest rates that might be caused by more rapid growth. persistent federal deficit problem also tends to provide upward pressure. that later. However, the More about -5 - Prices seem likely to behave quite respectably over the year, although they probably will rise a bit more than they did in 1983. Even the most pessimistic economic prophets expect consumer prices to rise little more than 6 percent in 1984 on a fourthquart er-to-fourth-quarter basis, while the more optimistic predict an inflation rate of 5 percent or below. Finally, with real economic growth continuing -- even though at a moderate pace — unemployment should decline further. With a continued decline, consumer spending should continue to fuel the recovery into 1985. The Southeastern Recovery Turning now to the regional economy, we find the Southeast entering a new stage o f the recovery. While the entire nation faces rather bright prospects for the remainder o f 1984, some parts of our region seem likely to grow even more vigorously. Georgia is one such area promising vigorous growth. The Southeast, like the nation, began a strong upturn in the first half of 1983. The revival in residential construction that became evident late in 1982 stimulated the Southeast's construction-related industries. The substantial furniture and carpet manufacturing industries in parts o f the Southeast began to expand rapidly to meet the renewed demand for the things that help to make a house a home. As unmistakable signs o f recovery encouraged consumers to resume spending, sales o f autos and textiles grew briskly. More recently, the recovery has spread to the Southeast's heavy concentration o f auto parts and textile manufacturers. As we move further into 1984, the recovery seems to be rolling along at a comfortable clip. Employment continues to grow nicely, and unemployment is declining, although the Southeastern states hardest hit by the recession — Alabama, Louisiana jiff'll and Mississippi — Astill suffer from jobless rates in the 10-12 percent range. \<uaa^c\ rev\<^( (S in ^ (?odr Vt i / The l V • ' -6 - average rate for the region has dropped from near 11 percent at the beginning o f 1983 to about 9 percent by yearend. A second year of economic expansion nationally almost certainly will bring further improvement in the Southeast's unemployment picture. And that, in turn, suggests that there will be money in local consumers' pockets to keep merchants restocking their inventories. F 1.1 , '-/C j In Georgia, unemployment had already fallen below 7 percent by December. The - picture is almost the same in Florida, another state enjoying brisk economic activity. The mix o f service-related industries in Atlanta and Florida protected them, during the recent recession, from the more painful layoffs that afflicted neighboring areas whose economies are more heavily dependent on manufacturing. Y et even manufacturers in Alabama, Mississippi, and Tennessee are beginning to rehire workers in response to the nation's recovery. Louisiana, whose economy remains heavily dependent on the sluggish ' a/S * n petroleum industry and international trade, also has begun- te show good improvement,, re rM although it began its turnaround later than the other southeastern states. Earlier, I suggested that some parts of the Southeast, those that produce consumer goods or defense materials, seem likely to grow faster than the nation in 1984. While defense spending will stimulate the local economies surrounding the region's many military installations, the greatest benefits should go to areas producing sophisticated defense hardware. Florida will get the alligator's share o f the contracts, but Georgia stands to benefit as well. It was, o f course, the sharp upsurge in national housing demand through the fall of 1983 that did the most for Georgia's industrial "horseshoe" where manufacturing is concentrated in such cities as Columbus, Macon and Rome. And the near-term outlook is for continued strength in the housing market; therefore, the mills and other light -7 - industries that feed carpets, upholstery fabrics, furniture, lumber, and similar items to the nation’s homebuilders and buyers should enjoy a profitable year. For the longer term, the national prospect for housing and for textiles and apparel generally is bright: the baby boom generation is entering the 25-to-45 age group that has traditionally spent a high proportion o f its income on housing, home furnishings, and apparel. However, the tufted carpet industry in northwest Georgia is extrem ely sensitive to changes in housing demand. This region, which accounts for three-fifths o f U.S. carpet production, is particularly dependent on sales o f new homes. Indeed, most of the state's work force concentrates on manufacturing nondurable items. T extile and apparel goods, in particular, account for about 35 percent o f Georgia's manufacturing employment. Apparel plants, which form tw o-fifth o f that figure, are scattered across the state, but textile factories are concentrated in this horseshoe area. As you know, it is not uncommon for smaller towns in this horseshoe to be dominated by a single apparel or textile plant. This concentration in manufacturing leaves this region vulnerable in two ways. The first is vulnerability to the business cycle. Nondurable manufacturing generally is less volatile than the durable "smokestack" industries, but distinctly more volatile than the service-and-government orientation o f the Atlanta area. The vulnerability o f manufacturing in the horseshoe was demonstrated during the recent recession. Between the beginning o f 1982 and July 1983, fully 43 plants employing more than 100 persons each closed in Georgia. Twenty-one were in the horseshoe area, including four o f the six closed plants that once employed more than 500 persons. o f the six large closed plants produced textiles, and a fifth produced apparel. Four -8 - With the recession behind us, this manufacturing area's greatest challenge is posed by foreign competition, particularly in textiles and apparel. More than 14 percent o f the U.S. tex tile market now is supplied through imports, while nearly 6 percent o f apparel sales is foreign-produced. And, because foreign production can produce stock tex tile items with much lower labor cost, these numbers are growing. But I don't want to exaggerate the bad news. There is plenty o f good news to leave us optimistic. A continuation o f the national economic recovery through 1984 should set many sectors of our regional economy to humming. The airline, tourism, and convention businesses, important throughout the Southeast, should grow sharply as conventioneers and vacationers flow into attractions like Atlanta's convention facilities, Disney's EPCOT Center, and the 1984 World's Fair in New Orleans. It could be a banner year for Southern hospitality industries. Another troubled sector is our region's agriculture and agribusiness. A severe drought across most o f the Southeast in 1983 le ft our farmers hard pressed to repay the debts they had accumulated over several years o f adversity extending back to 1977. For the survivors, however, the outlook is brighter for 1984 despite some extreme temperature swings during the past four months. farmers are likely to resume full-scale planting. Since crops were short in 1983, That means the merchants who sell them seed, fertilizer and equipment should see a resurging demand for their wares. The demand for farm products should be strengthened by the general improvement in our nation's economy and by growing international trade that should boost agricultural exports. -9 - That's a thumbnail description o f the outlook, as I see it. The Southeast's economy, which has done its share o f sputtering since 1980, finally has begun to hum like a well-tuned automobile. I f consumer and business spending remain strong, more plants should resume full operations, brightening the employment picture further. Construction and manufacturing firms are gearing up for what they are confident will be a second consecutive year o f growth. A ll in all, the economic picture is quite encouraging. many o f us find ourselves dissatisfied with it. better. Y et, somehow, a good Good as it is, we know it could be And we wonder what is holding us back. Problem s Remain Clearly, the nation's economy retains some worrisome trouble spots. The international trade and energy sectors, which slumped in the 1981-1982 recession, remain somewhat sluggish even now. A strong dollar and world recession cut into international trade flows throughout most o f 1983, including the flow o f agricultural and energy products at most ports o f our region. The economic recovery in the United States and other nations should help to stimulate the volume o f crucial exports, such as coal, phosphate, pulp and paper, and chemicals. It should also increase imports o f oil and machinery into the United States. That would be good news for Savannah and Brunswick, as well as for other Southeastern ports. O f course, increased imports may not be such good news in view o f our persistent deficits in world trade; we must hope to balance them with a rising level o f exports. In the new year, our nation's widening merchandise trade deficit should help to increase the value o f key foreign currencies in terms o f our dollar on foreign exchange markets. That would enable those nations to buy more goods from manufacturers in the United States. I f that happens, the export o f goods manufactured in the United -1 0 - States should grow steadily — although probably slowly — over the year. That would supplement the increased trade flow arising from economic growth elsewhere around the world. Another global problem that could cause us trouble locally is the plight o f heavily indebted less-developed countries — the so-called "LDCs” that have been so much in the news recently. The list o f nations hard-pressed to pay their national bills is a long one — including nations such as Brazil, Mexico and Argentina in our own hemisphere and Poland a world away. They may be remote in terms o f miles, but their financial crises carry momentous significance to us both in political and in financial terms. What about other problems that still trouble us? High interest rates and unemployment are two o f those problems. In both cases, we can take comfort in the fact that their levels have retreated from the peaks that they reached not so long ago. Y et real interest rates remain high by historic standards, and any renewal of an upward trend could help squelch the expansion that we are enjoying. Unemployment, although continuing to decline, also remains high; our 7.8 percent rate represents around 9 million workers out o f jobs — an affront to our national wish to see all citizens share in the nation’s prosperity. I noted earlier the success that our nation has achieved in standing up to another problem, the menace o f inflation. contribution to that effo rt. We in the Federal Reserve take pride in our I believe that it demonstrates the great importance o f an independent central bank that can take appropriate monetary action without regard to short-run political considerations or pressures. The fight against inflation has been a -1 1 - painful experience for many, yet it had to be waged to halt the truly terrifying erosion o f our national resources that we saw during the 1970s. But has the job been completed? Many in the marketplace are skeptical. They question our willingness as a nation to keep a rein on wage settlements and price hikes, and they question the determination o f the Federal Reserve to stick by its guns. But I can assure you that we will continue to fight inflation with vigor. We will not surrender the gains that have been won at such considerable cost and pain to many in our society. The 1984 monetary policy targets announced last month by the Fed's Chairman Volcker should reassure the nation on that score. But, if our monetary policy is to remain resolute, what about the other side o f the coin? What about fiscal policy? Can the federal government regain control o f our budget and its persistent deficits? Monetary and fiscal policy must operate hand in hand if we are to achieve our goal o f smooth economic growth. You simply cannot drive for long with one foot on the brake and the other on the accelerator. Do D eficits Matter? One o f the debates in contemporary economics is centered around the question o f whether federal budget deficits matter. I am convinced that repeated deficits in the hundreds o f billions o f dollars do, indeed, matter. When the federal government must borrow so heavily from the limited pool of credit that must also meet the needs o f business people like yourselves, it has important implications for the economy. It affects the ability o f businesses and consumers to obtain the credit they need — at an interest rate they can afford. I am not suggesting that the deficit problem should be solved by levying a tax or surtax to offset the projected deficit. exchange one problem for another. That would simply The consumers who are playing such an important -1 2 - role in fueling our recovery cannot spend money that has been taxed out o f their pockets and into the federal coffers. By the same token, funds taxed out o f the private sector are no longer available to finance our crucial private capital investment. In any event, our experience over the last half century suggests that increased tax revenues are unlikely to be used for debt reduction. The temptation to channel them into increased federal spending seems irresistable. In the long run, then, the solution to the deficit problem must come in the form o f better control o f federal spending. spend ourselves out o f them. We must learn to prevent problems, not try to To gain that kind o f control, we must be more sensitive to the need for national priorities. Instead o f heeding the countless special interest groups clamoring for increased federal spending, our representatives realistic national priorities. must develop They must remember always to ask this essential question when considering an appropriation: Can we afford it? asked has been: Do we want it? Too often, the only question We simply cannot continue to promise our people increased social spending, increased defense spending, low inflation, full employment — and lower taxes at the same time. But Congress does not deserve the full blame for this overspending. Our legislators reflect the pressures directed at them by their constituents. The solution must come, at least in part, in the form o f public information efforts that cultivate a broad understanding o f basic economic realities. In our commendable zeal to improve the equity with which we divide our national wealth, we may have devoted inadequate attention to those who produce it. As a result, our nation’ s productivity has improved more slowly than that o f some competitors in the world marketplace. -1 3 - Let me emphasize that I thoroughly support the idea o f dividing the fruits o f our national prosperity fairly. inequities. History shows rather clearly that there have been serious A number o f social institutions, such as labor unions, sprang to life and were given considerable power because of a widespread recognition that those inequities were all too real. But I do want to suggest that we must keep before us the fact that it is economic growth that provides the resources we must have if we are to address our social problems. Improving productivity will involve not only technology but also the sociology o f our economic world. they could achieve For example, the recession helped some companies to see that substantial gains through more cooperative labor-management relations, in good times or bad. Both labor and management must continue to evolve. That message is clearly conveyed by the lessons we are learning from our form er students, the Japanese. The relationship and between labor and management can become more collaborative productive. We must also continue the program o f selective deregulation now underway. That program is intended to untie the hands o f our economic producers whenever greater operating freedom will serve the broad public interest. We must judge regulations not only on the basis o f their stated intentions, but also their actual, overall impact. And we must abandon regulations that serve only narrow special interests at the expense o f the society as a whole. -1 4 - Making the Transition Just what are the long-run implications o f our increasingly successful efforts to enhance productivity through robotics, innovations as yet undreamed of? w ill we need? computerization, and other technological How many programmers and computer technicians What percentage o f our working population has the potential to acquire the needed skills? How frequently will we need to retrain them? O f those who cannot compete in those high-tech occupations, how many can be absorbed by our growing service industries? How may our nation's businesses make this transition into a new era? private enterprise and government keep pace with this social revolution? How may The Atlanta Fed will continue to serve as a forum for such crucial economic questions as those regarding productivity and competitiveness. But I hope that these questions also will be discussed earnestly in our universities and our state legislatures and, o f course, on Capitol H ill — decisions. in all the forums that collectively provide a basis for public policy I f we fail to address these questions in seeking realistic economic policies, we may find ourselves in the position o f an astronaut trying to control a spaceship with a buggy-whip. Let me conclude by saying that my optimism about our nation and our region transcends the good economic news o f 1983 and 1984. To be sure, if history is any guide, we will have low as well as high points in the business cycles in the years ahead. However, we have just survived a serious recession with our political, business, and financial institutions not only intact, but perhaps even stronger than before. Equally important, we weathered the storm with less social unrest than we might have expected a few years ago. -1 5 - I am convinced that our nation's ability to emerge from that recent ordeal in such good shape is due in no small measure to the strong will o f the American people to rise above adversity and to continue with rugged determination to achieve a quality o f life made rich not just by material goods but by justice and spiritual values as well. That is why I am further convinced that our great nation will continue in its historic role as the leader o f the Free World. And that essentially is why I remain constantly optimistic about our future and our destiny. — 0O0 —
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