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A N OVERVIEW OF THE ECONOMY:
UJS.A., SOUTHEAST, A N D A T L A N T A
Mr. Robert P. Forrestal, President
Federal Reserve Bank o f Atlanta
104 Marietta Street, N.W.
Atlanta, Georgia 30303
I am delighted to have an opportunity to take part in this seminar on the subject,
"Why Do Business in Atlanta and the Southeast?"
I would like to talk today about the
current economic situation and the outlook for 1985 and beyond, perhaps to the end o f
this century.
My remarks will cover the United States as a whole as well as Atlanta
and the Southeast. From my perspective, current economic conditions are quite healthy,
and the outlook for the U.S. is bright.
Moreover, prospects fo r Atlanta and the
Southeast are even more promising.
National Scene
The United States experienced rapid economic growth in 1984.
a rate far in excess o f what many, including myself, had anticipated.
GNP expanded at
Despite a sharp
slowdown in the third quarter, the full-year growth rate was nearly 7 percent, the
highest in over 30 years (Chart 1).
What’s more, we were able to achieve this rapid
growth without significant price increases. Inflation remained around 4 percent (Chart 2).
Our expansion was led by consumers whose purchases o f homes, cars, appliances, and
a myriad o f durable and nondurable items spurred businesses to increase production,
build their inventories, and expand their work forces. As a result, employment expanded
by over three million jobs, and the unemployment rate declined a full percentage point.
From December 1983 to December 1984, America's jobless rate dropped from 8.2 to
7.2 percent.
Business investment, particularly in machinery and other equipment, also
-2contributed significantly to the expansion we witnessed in manufacturing as well as
construction (Chart 3).
Growth should continue at a moderate but respectable and sustainable pace
throughout 1985.
The slower rate o f expansion is a welcome change from last year
when growth became so rapid, especially in the first half, that it threatened to rekindle
inflation.
Few imbalances or weaknesses currently exist in the U.S. economy.
Healthy
monetary growth and an inventory adjustment in the latter part o f 1984 have laid the
groundwork fo r expansion in 1985.
These factors should contribute to making this a
good year, with real GNP growth probably in the range o f 3 1/2 to 4 percent.
Because
this anticipated growth is slower than in 1984, unemployment will probably decline less
this year than it did last.
Still, I am quite hopeful that the proportion o f Americans
unable to find work will fa ll below the seven percent mark.
Import competition, lower
oil prices, and bountiful harvests should limit price increases to 3 1/2 or 4 percent,
close to recent trends.
Overall, I look for respectable economic growth consonant with
this stage o f an expansion.
Consumer
spending
is
likely
employment continue to advance.
to
remain
strong
since
personal income
and
Business spending on machinery, equipment, new
plants, and expanded production facilities should support expansion in 1985 because o f
the sustained growth o f final demand.
In addition, business investment in inventories
will likely rebound somewhat, following a sharp deceleration o f inventory growth that
occurred during the fourth quarter o f 1984 and a simultaneous improvement in final sales.
A major source o f short-term strength is fiscal policy, which is highly stimulative.
Defense expenditures, in particular, should work to maintain substantial momentum in
-3the nation’s factories, even if some federal budget cuts are applied in this area.
Another stimulus is monetary growth, which has been reasonably strong, particularly
for M l, the narrowest measure o f money (Chart 4).
This growth and earlier declines
in interest rates should encourage further economic expansion in 1985.
Problems
O f course, some potential problems and weaknesses loom ahead, and certain
sectors o f the American economy are less likely to be sources o f expansion this year.
Perhaps the foremost area o f continuing weakness is the international sector.
As you
well know, the value o f the dollar relative to the currencies o f our major trading
partners has risen substantially (Chart 5). A t one point it was almost 90 percent above
its 1980 trough.
The high exchange value o f the U.S. dollar and the slower recovery
in Europe and developing nations have sapped considerable strength from American
manufacturing and farming.
In past business cycles, high real interest rates adversely
affected construction and capital investment much more than other sectors o f the
economy.
In contrast, U.S. exports and American industries that compete heavily with
foreign producers have suffered the most in the current cycle.
While capital spending
and residential building proceeded apace last year, despite high real interest rates, the
merchandise trade d eficit for 1984 totaled over $123 billion, far higher than the previous
record shortfall o f $69 billion in 1983 (Chart 6).
The
outlook for
the dollar
is
uncertain.
Despite
narrowing interest
rate
differentials and large trade deficits, the dollar was strong in the early part o f this
year.
It has fallen a bit since then.
Even at lower levels for the dollar, however,
-4some time would have to elapse before our balance o f exports and imports improved
substantially since trade patterns adjust more slowly than financial markets.
Another problem, and one that I believe is the major source o f the imbalances
in our expansion, is the very large U.S. budget deficit.
to exert inward pressure on real interest rates.
Such government deficits tend
High real interest rates place a drag
on investment because capital spending is especially sensitive to credit costs. Investment
in inventories is also dampened when carrying costs are high.
Businesses have responded
to the high real rates that have prevailed in this expansion by holding inventory-to-sales
ratios at historically low levels.
Another problem related to high real interest rates is the apparent malaise in
America's financial markets.
High real interest rates and greater competition have
increased pressures on financial institutions.
Deregulation enabled traditional financial
institutions to compete with newer firms, although some were not really in a strong
enough position to do this well.
In a few cases, they sought riskier investments as a
means o f maintaining profit margins.
The number o f bank failures has been higher in
the past few years than at any time since the Great Depression o f the 1930s.
financial system is quite complex, perhaps unduly so.
agencies and many different types o f institutions.
Our
There are several regulatory
Recent developments seemed to
threaten first the viability o f one o f our largest banks and later some o f our savings
institutions.
Y e t these disturbing events produced no systemic risk, and I can assure
you that the safety and soundness o f the American banking system is intact.
On the
whole, there is no reason to be unduly alarmed by this evidence o f adjustment to a
more com petitive business climate.
However, lowering the deficit and thereby easing
-5pressure on real interest rates would certainly m ollify some o f the strains o f this
transition.
Longer Term Prospects
Notwithstanding these challenges, I believe the fundamental strengths o f the U.S.
economy are so great that our long-term economic outlook is extrem ely positive.
o f these strengths is technology.
One
We are witnessing and living through a miraculous
time in history in terms o f technological breakthroughs.
To cite only a few examples,
think o f the regular space shuttle flights with their scientific experiments and commercial
applications, the advent o f super-computers that will enable us to analyze problems of
mammoth complexity, the increasing factory use o f robots which free people from
performing dangerous and unhealthy tasks such as painting and welding and which
perform these jobs with a higher degree o f precision than humans could, and the
advances in genetics and medical science and their associated applications to agriculture
and surgical procedures such as the mechanical heart. Such truly wonderful developments
will enrich the lives o f people everywhere.
During the last recession, American
businesses learned, or rather relearned, the importance o f investing in technologically
advanced equipment and methods in order to compete in the global marketplace.
I
say relearned because the United States has historically been a technological leader.
The e ffe c t o f the recent resurgence in capital investment should be a reacceleration
in U.S. productivity growth.
Other factors should also enhance our nation's productivity.
For example, the
much-larger-than-usual generation born in the two decades a fter World War n has now
been educated.
As few er new students enter our schools, we should be able to devote
-6more resources to the quality o f education and few er to the addition o f new classrooms
and buildings that
population.
were
previously
needed
to
accommodate
our swelling student
Most members o f this generation also have found permanent jobs.
In the
future, therefore, a larger portion o f our national labor force will consist o f experienced
workers, who generally are more productive.
Businesses, too, are learning to be more productive.
They have found that such
improvements are necessary to survive and prosper in the more com petitive environment
created by two important developments—the rise o f a global marketplace and the
deregulation o f several major U.S. industries including transportation, communication,
and financial services.
As each o f these factors—technology, demographics, global
competition, and deregulation—fosters productivity gains, the United States should enjoy
healthy and enduring macroeconomic growth.
The Southeast
This expected national economic growth will provide a sound basis for continued
expansion in the Southeast, including Atlanta.
In fact, the outlook in this section o f
the United States is even brighter than that o f the nation as a whole because the
region's economy is based on a set o f diversified, fast-growing economic activities.
Evidence o f the Southeast's well-balanced economic base and the associated strong
growth can be found by comparing jobless rates in the two largest southeastern states
with those in the nation (Chart 7).
As you can see, our performance measured by this
important indicator o f economic activity has been consistently better than the nation's.
Even during the depths o f the two recessions in the early 1980s, Georgia's and Florida's
jobless rate remained below that o f the United States as a whole.
-7The Southeast, at least that portion o f U.S. Federal Reserve System over which
I have responsibility, encompasses six states—Alabama, Florida, Georgia, Louisiana,
Mississippi, and Tennessee (Chart 8).
states.
North and South Carolina are also southeastern
Their economies are quite similar to those o f the other six states.
This
eight-state region covers approximately 391,000 square miles or over 1 million square
kilometers, almost tw ice the size o f France.
The population o f this region, including
the Carolines, is over 42 million, about 18 percent o f the United States and around
three-fourths o f the population o f France.
Not only does the Southeast constitute a substantial portion o f the United States,
but also it is one o f the fastest growing.
From 1970 to 1984 the number o f people in
this eight-state area increased 30 percent, whereas the United States as a whole grew
only 16 percent (Chart 9).
other Americans.
It is not that southeasterners have larger families than
Rather, people and businesses from other areas o f the United States
have been moving to the Southeast.
Their reasons for doing so include our milder
climate, a set o f popular attitudes expressed politically in state and local laws that
are highly favorable to business, a modern transportation system, and abundant water,
forestry, energy, and other natural resources.
The Southeast’ s transportation network includes not only rail lines, modern
airports, some o f the newest and safest portions o f the U.S. interstate highway system,
and the mighty Mississippi R iver but also a soon to be opened canal which will appreciably
reduce the time required to ship coal and other southeastern commodities to port.
This
canal, linking rivers in Tennessee and Alabama, should boost international shipping
especially into and out o f Mobile, Alabama, one o f the Southeast's seven major ports.
These seven ports already handle a large volume of exports and imports.
Several have
-8recently undergone expansion and modernization.
Thus, it is not surprising that the
value o f goods handled at the majority o f ports in the Southeast grew more rapidly than
in the nation as a whole in 1984 (Charts 10a, b).
The influx o f businesses and people drawn to the Southeast because o f our region’ s
transportation, climate, and resources has been a positive economic force in itself.
It
has helped to increase personal income at a faster rate than the national average
(Chart 11).
In-migration also spurs demand for new homes, apartments, and o ffic e
buildings as well as for theaters, restaurants, stores, and doctors.
Thus, it is not
surprising that construction, wholesale and retail trade, and services are three mainstays
o f the southeastern economy.
The rapid growth o f population and personal income has
made the Southeast an attractive retail market.
R etail trade has increased by a larger
margin in Atlanta and the Southeast than elsewhere in the United States (Chart 12).
Residential building has also been growing at a faster pace than nationally, largely
because o f this in-migration (Chart 13).
The importance o f construction complements
the Southeast’ s abundant forest resources, which are able to supply over one-fourth of
Am erica’s lumber needs.
Another source o f strength in the southeastern economy is defense.
The region
has numerous m ilitary bases and produces a considerable portion o f the nation’ s
defense-related electronics and transportation equipment.
The space program also has
several important centers in the Southeast, particularly Florida and Alabama.
Defense
manufacturing together with space-related economic activity has sown the seeds for
private sector development o f a variety o f businesses that research, develop, and market
technologically advanced products and processes.
These private companies are located
primarily in Florida, Alabama, Georgia, North Carolina, and Tennessee.
-9I’ m not saying that the Southeast is a utopian region where there are no problems
whatsoever.
We in the Southeast are concerned with the current situation o f some
farmers, producers o f energy-related commodities like coal in Alabama and natural gas
in Louisiana and Mississippi, and textile and apparel manufacturers in the Carolinas,
Tennessee, Mississippi, and Georgia.
industries,
the application o f
compete effectively.
However, even in some o f
these traditional
advanced technologies is enabling southeasterners to
The carpet mills o f north Georgia, for example, have invested
in sophisticated computerized equipment used in the production o f rugs.
therefore, able to produce carpets fashioned virtually
to
They are,
the tastes o f individual
customers while charging prices low enough to vie successfully against foreign producers
with much lower labor costs.
A tlanta
Atlanta, the economic center o f the Southeast, is a concentration o f the best
aspects o f the southeastern economy with none o f the region’s few weaknesses.
Atlanta
is a major city, with all the amenities associated with urban living (Chart 14).
A t the
same time, Atlanta is a beautiful place in which to live.
The city is noted for its
gently rolling hills, abundant streams, trees, and flowering shrubs (Chart 15). Atlanta's
people are a diverse and cosmopolitan mixture o f old-time Southerners and newly arrived
Northerners, who enjoy working and playing together and who are bound by their common
love o f Atlanta (Chart 16).
Atlanta’ s economy is based on the distribution—by air, rail, and truck—o f goods
throughout the Southeast and the nation, on business and personal services, and only to
a minor extent on manufacturing (Chart 17).
Atlanta's population is growing at a rate
-10that is among the fastest o f any city in the United States.
As in the rest o f the
Southeast, population in-migration to Atlanta stimulates construction.
We have already
seen that the pace o f residential construction in Atlanta exceeded that o f both the
Southeast and the nation.
Commercial construction has also been booming in Atlanta.
Although vacancy rates recently began to rise slightly, demand has largely been expanding
fast enough to keep up with the surge in supply. Last year, Atlanta businesses absorbed
more than 4.5 million square feet, over 427,000 square meters, o f new o ffic e space.
In addition, in-migration fuels the growth o f various business and consumer
services such as health care, entertainment, accounting, and engineering. Such economic
activities are usually less affected by changes in the business cycle than is manufacturing.
Therefore, Atlanta's economy is more stable over time.
Along with an abundance o f
general business and consumer services, Atlanta enjoys the additional benefits o f a
large and growing convention industry.
This service industry is based on Atlanta’s Hartsfield Airport and the city's
extensive hotel and convention facilities.
Atlanta has about 35,000 first-class hotel
rooms and, by 1986, will have almost 40,000 (Chart 18).
Most o f these were built
within the last decade and o ffe r lower rates than do comparable first-class and luxury
hotels in other convention cities.
Atlanta's airport, the second busiest airport in the
world (Chart 19), is newly built and specially designed to handle large numbers o f air
travelers smoothly and efficien tly while offering quick and reliable linkages to all parts
o f the nation and around the world.
As you know, Atlanta-based Delta Airlines just
inaugurated direct service to Paris. In 1984, Atlanta's Hartsfield Airport handled almost
39 million passengers.
This figure represents an increase o f 3 percent over 1983.
International passenger tra ffic rose even more rapidly, 13 percent.
Atlanta's air tra ffic
-li
fe located in a single airport, whereas the other cities boasting higher air travel—Chicago
and New York—have two or three airports, respectively, thus making connections less
convenient.
Atlanta’ s excellent air transportation is enhanced by its outstanding
expressways and a new rapid rail system, serviced by French-made trains.
Together
with the recently expanded World Congress Center, these transportation and lodging
facilities contribute to Atlanta's rank as the third busiest convention center after
New York and Chicago, cities which have much larger populations and longer established
reputations as convention centers (Chart 20).
Manufacturing is a relatively minor aspect o f Atlanta's economy.
The city has
two major auto assembly plants, which have rebounded sharply in this expansion as a
result o f the upsurge in auto sales nationally and extensive investment in modernized
equipment locally.
The increase in American defense spending has been a boon to
Atlanta in this expansion since the Lockheed plant, located on the outskirts o f the
city, won a major contract to produce C-5B cargo planes.
single largest employers in Atlanta.
Lockheed is one o f the
A growing share o f our city's manufacturing base
is in the rapidly expanding "high-tech" industries.
Over 150 high-tech firms operate in
the Atlanta metropolitan area, employing more than 33,000 people.
Many o f these are
in the field o f electronics, telecommunications, and computers.
Their genesis and
development owe much to Atlanta's outstanding colleges, universities, and technical
schools.
base.
Finally, Atlanta has progressive financial institutions to round out its economic
A ll these factors make the potential for "doing business in Atlanta" in 1985 and
well beyond immensely promising.
L et me conclude where I began.
Nineteen Hundred Eighty-Five will be a year
o f good economic growth for the United States, with relatively low inflation and
-12unemployment.
There are and always will be dangers, problems, and uncertainties, but
I really believe Am erica's future holds enormous promise. This macroeconomic outlook
will enable advantages held by Atlanta and the Southeast to support even faster economic
expansion than anticipated for the nation.
These advantages—rapidly growing markets,
low taxes, favorable laws covering business, an excellent transportation system, and a
growing base o f high-technology manufacturing—w ill make international opportunities
for "doing business in Atlanta" not only pleasurable and profitable but also the source
o f enormous future growth. Why do business in Atlanta? I think the reasons are obvious.
Remarks at Atlanta Chamber o f Commerce Business Seminar
Paris, France
April 23, 1985
Chart 1
U.S. GROSS NATIONAL PRODUCT GROWTH
Federal Reserve Bank of Atlanta
Chart 2
CONSUMER PRICE INDEX
16
Monthly Year—Over—Year Percent Change
i
Federal Reserve Bank of Atlanta
Chart 3
REAL BUSINESS FIXED INVESTMENT
Index, Trough=100
QUARTERS FROM START OF RECOVERY
Federal Raaarva Bank of Atlanta
Chart 4
MONEY S U P P LY -M I
Federal Reeerve Bonk of Atlanta
Chart 5
VALUE OF U.S. DOLLAR
TRADE WEIGHTED AGAINST 10 COUNTRIES
Chart 6
U.S. FOREIGN TRADE
(CURRENT DOLLARS)
$ Billions
500 450 -
Im ports
418.5
QIV
400
Exports
369.4
350
QIV
300 i
250
80
81
82
83
Federal Reeerve Bonk of Atlanta
84
85
Chart 7
UNEMPLOYMENT RATE
P ercent
----- U.S.
Fodoral Ratarw Bonk of Atlanta
Chart 8
ATLANTA AND THE SOUTHEAST
Chart 9
POPULATION GROWTH 1970-1984
Federal Reserve Bank of Atlanta
Chart 10A
SOUTHEASTERN PORT ACTIVITY
Exports
40
30
20
10
0
-1 0
-2 0
Federal Reeerve Bank of Atlanta
Chart 10B
SOUTHEASTERN PORT ACTIVITY
Imports
Percent Change
($ Value)
40
30
20
10
0
Federal Reeerve Bank of Atlanta
Chart 11
INCOME GROWTH 1 9 7 0 -1 9 8 4
Federal
Reserve Bank of Atlanta
Chart 12
RETAIL SALES GROWTH 1977-1982
Fodorol R m rv i Bank of Atlanta
Chart 13
GROWTH OF RESIDENTIAL CONSTRUCTION
1970-1984
Chart 14
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Chart 17
EMPLOYMENT DISTRIBUTION
Southeast
Atlanta
Manufacturing
%
Manufacturing
14%
21
Finance
Finance
5%
Construction
Construction
6%
7%
5%
Services
22%
Transportation
Government
^0*
19%
16%
Fodoral Ri
Transportation
Services
Government
19%
Bank of Atlanta
24%
Chart 18
HOTEL ROOMS
1984
—
,
------------------------ ---------- 1
ATLANTA
CHICAGO
Federal Reeerve Bank of Atlanta
------------------------
I
NEW
YORK
Chart 19
AIRLINE PASSENGERS
1984
YORK
Federal Reserve Bank of Atlanta
Chart 20
CONVENTION ATTENDANCE
1984
Federal Reeerve Bank of Atlanta
YORK
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