December 2008

Moderator: Welcome to the Federal Reserve Bank of Atlanta's EconSouth Now podcast. I'm Tom Heintjes, and 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'll be speaking about the Southeast and national economy, respectively. Thank you for joining us today, Julie and John.

Photo of Julie Hotchkiss
Julie Hotchkiss
Photo of John Robertson
John Robertson

Julie Hotchkiss: No problem.

John Robertson: G'day.

Moderator: What factors do you see most affecting the economy in 2009?

Robertson: While most economic indicators slipped into recessionary territory during 2008, consensus forecast point to GDP (gross domestic product) contracting through the first half of 2009 in response to a fall in household and business spending and weakness in foreign demand for U.S. exports. If that consensus is correct, this would likely be one of the longest recessions in the post-World War II period. The overall magnitude of the recession is still in doubt, but it is disconcerting that the speed of this recession seems to be accelerating at a time when the past two recessions had ended. The depth and duration of the decline in GDP could be mitigated by a possible expansion in fiscal stimulus in the early 2009, however, the magnitude of the stimulus and its likely effects are very uncertain. The main risks to the outlook for the coming year center on the extent and duration of the financial market strains and problems in the housing sector. In addition, this downturn is very global in nature, so our recovery partly depends on recovery of other nations as well.

Moderator: What will the effect of lower fuel prices be on the larger economy since so many industries rely on it?

Robertson: Well, consumer price inflation accelerated through the first half of 2008, pushed up by rising oil prices that topped $140 per barrel during the summer. However, sharp drops in oil prices towards the end of 2008 have helped ease inflation pressures. The downward pressures on prices will reverse the acceleration and inflation measures seen earlier in the year. So far, most of the price declines are concentrated in the goods sector and persistent inflation in the large service component of consumption is likely to mitigate the likelihood of a broad-based and sustained price deflation. Over the long term, inflation expectations influence actual inflation, and the University of Michigan's consumer survey reading for December indicates moderating inflation expectations for 2009 and beyond.

Moderator: And Julie, what about the Southeast?

Hotchkiss: Well, as you know, Tom, the oil and gas industry is important to the economies of the Gulf States. Over a third of the country's oil production, and nearly half of the total U.S. refining capacity is found in Louisiana, Mississippi, Alabama, and the federal offshore areas. The rising oil prices over the past couple of years have spurred a flurry of oil exploration activity in the region, to the benefits of the Gulf States. The benefits, of course, include jobs and revenues to the states. If oil prices remain at their current, relatively modest levels, however, this does put many of the long-term exploration projects into question.

Moderator: How is the current recession similar to past recessions, and how is it different?

Robertson: Typically, as a recession unfolds the resulting increase in job losses and reduced business profitability translates into a tightening in the availability of credit in the economy. However, this recession is distinctive in the fact that credit availability began to tighten in advance of the onset of broad-based economic weakness. In fact, reduced credit availability partly contributed to the downturn. As a result, there is a substantial risk of a negative feedback loop as a reduction of credit constrains activity, which in turn limits credit availability further.

Moderator:Within the Southeast, what sort of variation have you seen in so far as the severity of the economic downturn?

Hotchkiss: Well, there seems to be some common threads to the pain experienced throughout the Southeast. Of course, declining consumer expenditures have hit each state particularly hard. Fewer sales not only means lower revenues for businesses, but also lower sales tax receipts in those states that have a sale tax. This puts considerable pressure on state and local governments in terms of continuing to provide services. The slowdown in spending reflects the fact that growth and personal income in the Southeast is now as low as it was at the beginning of 2003 and that people's personal wealth has taken a hit from declining home values. The housing sectors in Florida and Georgia have been hit particularly hard by the residential real estate correction. Florida and Georgia lead the Southeast in the percent of subprime loans that are seriously delinquent, and that means loans that are 90 days past due at least.

The decline in house construction has hit other industries as well. Tennessee has suffered significant employment declines in the furniture manufacturing sector, and Georgia's textile manufacturing sector is also suffering. Fewer new houses being built also means less demand for landscaping materials, which inflicts a double whammy on Florida from the housing decline. Florida is the nation's second-largest producer of greenhouse nursery crops.

Moderator: What sectors of the Southeast economy might be strong performers in 2009?

Hotchkiss: Well, in spite of the cries for help from the U.S.-brand automobile manufacturers, the Southeast has a relatively solid, although currently weak, automobile manufacturing sector. Now don't get me wrong, all manufacturers of automobiles are suffering; volatile gas prices and job losses have seen to that. However, relative to their northern counterparts, automobile manufacturing in the Southeast has some bright spots on the horizon. Production of Mercedes brand vehicles in Vance, Ala., help to contribute to a small, but positive growth in motor vehicles employment in that state for the year through September. In addition, Kia Motors will begin a new production line West Point, Ga., in late 2009. And even though the official groundbreaking for Volkswagen's $1 billion factory in Chattanooga, Tenn., won't take place until January, construction has already started on the plants auto body shop. Now, Volkswagen plans to produce 1,000 cars per day when it begins full operation in 2011. Alabama will also gain from losses in the sector elsewhere in the country. Honda will transfer production of its Ridgeline pickup truck from Canada to the state, and the Accord production line will be moved from Ohio to Lincoln, Ala., in 2009. In spite of all this activity, however, the Southeast isn't completely immune to the pains resulting from lower demands for cars. Toyota just announced that it has indefinitely delayed a plant in Mississippi that was slated to start producing the Prius in 2010.

Now, the Southeast also has a strong and growing aerospace industry. The Brazilian aircraft manufacturer Embraer has begun construction on its first U.S. factory to be located at the Melbourne International Airport in Florida. Florida also welcomed the announcement by Piper Aircraft that it will keep the headquarters in Vero Beach. And a company called Leading Edge, located in Greenville, Miss., was awarded the contract to repaint Northwest Airline airplanes, which of course need a makeover after the merger with Delta Air Lines.

Now, tourism is typically a beacon in the Southeast when other sectors are hurting. Before slowing a bit in the most recent quarter, tourism helped prop up the bad news from other industries in the region. Popular destinations, such as Disney World in Florida, attract both domestic and international travelers, but when people are cutting down on their long-distance travel, there's plenty to offer from drive-to destinations, from the casinos and cruise operations along the Gulf Coast, to family-oriented attractions in Tennessee. Atlanta is currently hosting two major exhibits that are expected to attract considerable number of visitors, Tutankhamun the Golden King and the Great Pharaohs is at the Civic Center and, Tom, you shouldn't miss The First Emperor: China's Terracotta Army, which is now at the High Museum.

Moderator: International markets have been a boon to Southeastern exporters. Might a global economic slowdown therefore effect the Southeast directly?

Hotchkiss: Well, there are two factors that are likely to impact the demand for regional exports during the coming year. The global economic slowdown, as you mentioned, will decrease the demand for products produced in the U.S. That [lower demand] has decreased shipments through the region. At the same time, since the summertime, the dollar has been strengthening against currencies of our trading partners making our products more expensive, which, in turn, decreases the demand for our exports. The question going forward is who will emerge from the global recession first. If it's the U.S., the global demand for our products will remain low. If the rest of the world rebounds first, then exports may serve an important role in helping the U.S. economy recover.

Moderator: What do you believe will lead the economy out of the recession?

Robertson: Well, a key assumption in most forecasts for 2009 is that financial conditions will stabilize and soon begin a gradual improvement. Signs of this turnaround include a narrowing in credit spreads and an improvement in the functioning of markets. While indicators tentatively suggest that an easing in credit conditions in some markets may be under way, concerns about credit losses and financial institutions' solvency pose a plausible risk to the outlook.

Moderator: Julie, what will help lead the Southeast out of the recession?

Hotchkiss: Well, one of the key factors for the current economic woes in the Southeast, in particular, is the state of the housing market. I would venture to say that we won't see an overall rebound in the southeast until we start seeing some real stability and recovery in that sector.

Moderator: Thank you, Julie and John.

Hotchkiss: You're welcome.

Robertson: You're welcome.

Moderator: 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 2008 edition of EconSouth magazine. On our Web site,, you can read more 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