January 2008

Moderator: Welcome to the Federal Reserve Bank of Atlanta's EconSouth Now podcast. Today, we're joined by Julie Hotchkiss and John Robertson. Julie is a research economist and policy adviser, and John is vice president in the research division here at the Atlanta Fed. They will be speaking about the Southeast and national economy, respectively. Thank you for joining us today, Julie and John.

Julie Hotchkiss
Julie Hotchkiss
John Robertson
John Robertson

Julie Hotchkiss: Pleasure to be here.

John Robertson: Good morning.

Moderator: Julie, we'll address the first set of questions to you. The economic performance of the six Southeastern states [in the Sixth District] has been mixed this year. Can you talk about the highlights of 2007 for each of the states?

Hotchkiss: Well, in alphabetical order, Alabama has benefited this year from strong demand in the aerospace industry. The housing market decline also hit the state relatively late in the year compared to the other states in the region. I guess you could say that tourism was the brightest spot for Florida in 2007. With a weak dollar pulling in international tourists and high airfares keeping regional tourists close to home, Florida regained the title of the nation's top tourist destination—incidentally, taking that title away from California. The booming services sector and expanding ports served to support Georgia's economy through 2007. The declining value of the dollar has kept the ports busy, with Savannah being ranked as the second-fastest-growing container port in the country.

Even in the face of ongoing Katrina recovery challenges, Louisiana has benefited from a continued rise in the price of oil and the expansion of deep-water oil extraction activities. 2007 also saw a sustained growth in tourist activity at a level even above that seen before Katrina.

Mississippi's gaming industry is leading that state in its ongoing recovery from Katrina. Through October 2007, the gaming industry generated more revenues than in any other year prior to Katrina between January and October.

With the ever-increasing gasoline prices, people are likely to vacation close to home. In 2007, this proved to be a real boon for Tennessee, whose tourist industry depends heavily on day and weekend visitors that live in the region.

Moderator: Florida represents the Southeast's largest economy and pool of workers. What are the prospects for increasing unemployment in Florida in 2008, and what toll will that extract on Florida's economy?

Hotchkiss: Florida has seen a 1 percentage point increase in its unemployment rate over the past year, from 3.2 percent in October 2006 to 4.2 percent in October 2007. This translated into about 100,000 more people without jobs in October compared with October last year. Of course, the impact will be seen in the rise in number of people claiming unemployment insurance, an increased burden on social safety net programs, and lower consumer spending as households' incomes suffer from job loss.

On the other hand, total employment in the state is still growing at about 1.4 percent year over year in October, with employment in most sectors, other than construction and manufacturing, continuing to grow at healthy rates. For example, employment in leisure and hospitality posted a monthly year-over-year growth rate of more than 2 percent in all but the first two months of 2007. While there are people definitely hurting from the housing slump, Florida as a state is well diversified, which should help it weather the storm.

Moderator: Clearly, the manufacturing sector's housing-related industries have suffered, but what are the bright spots in manufacturing in the Southeast for 2008?

Hotchkiss: Well, the biggest gains in manufacturing expected in 2008 will probably be in aerospace, oil extraction, and shipbuilding industries. Demand from defense contractors is fueling the aerospace manufacturing activity in Florida and Alabama and the shipbuilding activity in Louisiana and Mississippi. Ongoing expansion of deep-water oil extraction, mostly off the coast of Louisiana and Mississippi, will provide demand for the manufacture of products to support those activities, as well.

Moderator: The deep drought that gripped the Southeast certainly didn't help agriculture, but the international demand for poultry continues to grow. What are the best prospects for agriculture next year?

Hotchkiss: Livestock and cotton farmers in Georgia and Alabama appear to be suffering the most from the direct impact of the drought conditions across the Southeast. But in addition to the direct impact of the drought, nursery growers, who are heavily concentrated in Florida, are suffering from two fronts: Homeowners are forgoing the purchase of landscaping materials because they're not allowed to water outside, and the decline in housing construction has put a damper on demand for landscaping products as well.

Growing foreign demand, along with the declining value of the dollar, are at least helping the cotton farmers a bit, allowing them to get higher prices for what they're able to actually harvest. In addition, it seems as though the world loves Southern-grown chickens. The poultry-producing industry in the Southeast is expected to continue to benefit from growing world demand and relative advantage the weak dollar gives to U.S. products produced.

Moderator: We've heard a lot about the problems in the residential housing market, but are there areas of real estate that are doing well or that are at least holding their own?

Hotchkiss: No, not really, actually. There's a lot of uncertainty related to the subprime lending programs, and those are just going to have to play out.

Moderator: Are there any other sectors that you are keeping a particularly watchful eye on as we move into 2008?

Hotchkiss: Well, certainly all eyes will be on housing and the financial sectors. The Southeast has a relatively large exposure to the fallout of the subprime lending market; but the impact of that fallout will only be known over time. The oil and gas industry will be very dynamic going forward. Although oil prices have moderated some, they are expected to remain at historically high levels. This should continue to support ongoing growth and exploration off the Gulf Coast.

Moderator: Thank you, Julie. And now we'll ask John Robertson to tell us about the national outlook. John, how do you think issues with the weakening housing market and credit availability will impact growth in 2008 on the national scene?

Robertson: Well, the contraction in the national housing sector has caused a great deal of distress on Wall Street, within the walls of Congress, as well as among Main Street consumers and nonfinancial businesses. Nearly six consecutive quarters of declines in the housing sector are taking an obvious toll on some parts of the economy. Businesses with direct ties to housing, such as construction firms, suppliers of building materials, real estate and mortgage brokers, providers of landscape services, and so on, have especially felt the brunt of the housing downturn. In addition, delinquency rates on nonprime mortgages have increased throughout the past year.

The pricing of financial products that contain repackaged nonprime mortgages has become quite problematic. This uncertainty has fed into contraction in the availability of nonprime mortgage financing. In fact, it could be argued that the volatile financial market conditions have added uncertainty to the economic outlook and may have introduced additional risks for near-term economic growth. At this time, most forecasts call for a temporary slowing in real economic growth. The most glaring weakness in the economy will continue to be the housing sector.

Moderator: Are there any signs about when the housing market will reach the bottom and begin to see improvements?

Robertson: Most forecasters do not anticipate any stabilization in national housing market conditions until at least the second half of 2008. However, the depth and length of the downturn in the housing sector also remain quite uncertain and will depend on variables like the number of foreclosures that will add to the supply of homes on the market, the extent to which borrowers are closed off from mortgage markets, and the amount by which home prices decline.

Moderator: In your opinion, can consumer spending, which has been the driver coming out of the 2001 recession, continue to support a slowing economy?

Robertson: The prospect for consumer spending in 2008 is one of the risks for the overall economic outlook. The combination of declines in the value of real estate holdings, reduced or more expensive access to other modes of financing, and higher oil prices are all likely to have a damping effect on the pace of consumer spending. Subdued auto sales during 2007 may be one indicator of this weakness. In addition, some retailers appear to be bracing for what they anticipate to be a relatively disappointing holiday sales season. However, estimates of the magnitude of this so-called "wealth effect" on consumer spending are imprecise, and U.S. consumers have proven to be surprisingly resilient in the past. So far, most forecasts expect consumer spending to continue to grow, but at a more moderate pace than in 2007.

Moderator: How well will business spending hold up in 2008, given the spillover from the declining housing sector?

Robertson: Business investment spending is another important component of the economic outlook. Investment spending in 2007 was reasonably strong overall. Also, despite some tightening in credit standards in the second half of the year, credit availability to nonfinancial businesses generally appeared to be well maintained. Nevertheless, at least anecdotally, it also appears that business sentiment towards capital outlays has softened somewhat amid heightened economic and financial uncertainty, potentially restraining investment outlays in some industries.

Moderator: The growth of exports has been one bright spot in the national economic equation. What's the outlook for U.S. exports in 2008?

Robertson: Yes, export growth has been one of the few consistent bright spots in 2007. Steady depreciation of the dollar has improved international competitiveness, and global demand growth has been reasonably robust. Economic growth outside the United States is expected to remain firm. Overall, the continued strength of global growth and declines in the foreign exchange value of the dollar are expected to support exports going forward.

Moderator: And finally, John, does the lower value of the dollar and higher energy prices pose a risk to the inflation outlook for 2008?

Robertson: While the lower foreign exchange value of the U.S. dollar during 2007 has been a boon for domestic exporters, it also raises some concerns for the near-term inflation outlook. The decline in the dollar's value, along with increases in the prices of energy and other commodities, are factors that could potentially exert upward pressure on prices for non-food and energy goods and services in the near term. However, the cost pass-through of higher import costs to consumers has typically been mitigated by competitive pressures that limit firms' ability to fully pass on their cost increases. In addition, forward-looking indicators point to an expected moderation in oil prices in 2008, and this outcome would alleviate some inflationary pressures.

Moderator: Thank you, Julie and John. Again, we've been speaking today with Julie Hotchkiss and John Robertson, economists at the Atlanta Fed. This concludes our EconSouth Now podcast on the Southeast and national economy. For more information, please see the fourth quarter 2007 edition of EconSouth magazine. On our Web site, frbatlanta.org, you can read the full article about this topic or subscribe to EconSouth in print. Thanks for listening, and please return for more podcasts. If you have comments, please send us e-mail at podcast@frbatlanta.org.