Federal Reserve Bank of Atlanta

For more than a decade, Florida's economic growth has outpaced the rest of the Southeast and the nation as a whole. A booming housing market has been the dominant factor driving this growth in recent years (see the chart). But Florida's housing market experienced significant declines during 2006 and will face continued headwinds and mixed prospects in 2007.

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Employment growth in Florida remained strong relative to the nation in 2006, but growth slowed throughout the year. Moreover, this moderating growth was reflected in state tax collections. Specifically, sales tax collections, which account for about 75 percent of all state tax revenue in Florida, grew about 6 percent year-to-date during 2006 compared with 15 percent in 2005.

Combined with the weakening housing sector, these moderating trends suggest that Florida's economy is likely to be less robust in 2007 than it has been for a number of years.

Real estate gets a reality check
Florida's housing market experienced a rapid increase during the period 2002–05, driven partly by strong investor demand. However, a decline in this demand, along with higher construction costs and significant increases in homeowners' insurance premiums, caused sales to fall sharply during 2006.

According to the Florida Association of Realtors, sales of existing single-family houses are down 34 percent in the third quarter, and sales of condominiums are down 33 percent. In addition, the growth in the average price of single-family homes sold, which had been in the double digits since the first quarter of 2004, fell to zero in the third quarter while the median price of condominiums fell 3 percent (see the chart).

Photo by Brad Newton

Florida homebuilders also reported a significant decline in new home sales, resulting in a growing inventory. Builders became very generous with nonprice incentives for buyers of single-family homes and condominiums, allowing moderate growth in new home prices. Conversions of apartments to condominiums virtually halted, and some condominiums reverted to rental properties.

Homebuilders have cut production levels to compensate for slowing demand. Consequently, permits for both single- and multifamily homes declined. Year-to-date, permits for single-family homes fell more than 22 percent below year-ago levels while multifamily home permits declined 19 percent. The large backlog of unsold homes suggests that the pace of home construction will remain muted during 2007.

Services and tourism remain strong
Employment in Florida's important service sector grew almost 3 percent in 2006, well above the national level of around 1.5 percent. Professional and business services, which make up about 17 percent of the state's total nonfarm employment, grew at a rate of nearly 5 percent. Architectural and engineering services grew moderately at just under 2 percent, well below the level for the nation as a whole, reflecting the trends in construction occurring in the state. The employment services, trade, and finance components all grew faster in Florida than in the nation as a whole. However, in all of these industries, the trend over the last one or two years has been one of moderating growth, with no expectation of increasing growth in 2007. Health care is one of the few service industries where growth has remained stable, with a growth rate of just over 3 percent.

Florida Housing Market, 1999–2006

Note: Chart indicates existing single-family homes. Source: Florida Association of Realtors

Employment in the important leisure and hospitality industry grew by more than 4 percent in 2006. This growth was led by expansion in the food services industry and at the state's amusement parks. Attendance numbers were solid at resorts and attractions, and the cruise ship industry posted strong bookings. However, some reports indicate that hotel occupancy for the state as a whole slowed over the course of the year, and tourism and recreation tax collections increased more slowly than in 2005.

The outlook for the state's tourism industry is guarded. A key factor that may moderate growth is the slower macroeconomic outlook for the U.S. economy. Uncertainty about gasoline prices also clouds the outlook. However, the favorable exchange rate environment will continue to boost the number of foreign visitors to the state.

Manufacturing remains flat
Manufacturing, which accounts for only 5 percent of Florida's employment compared with 10 percent for the nation as a whole, experienced little growth in 2006. However, manufacturers for the aerospace industry increased employment by just over 2 percent because of new military contracts and the resumption of the space shuttle program. Ship and boat building saw strong employment gains, partly related to repair or replacement of hurricane-damaged vessels.

However, nondurable industries—including textiles, food processing, paper and printing, and plastic and rubber products—posted declining employment over the year.

The outlook for the state's manufacturers is mixed and is expected to follow national trends. Defense spending will continue to boost the state's military contractors while the nondurable goods sector will struggle to expand.

Banks Set for Continued Strong Performance

For the banking industry in the Southeast, 2006 was a good year. Banks reported strong earnings through the third quarter, which generally was attributed to their excellent credit quality and strong deposit growth. In a recent study by the Federal Deposit Insurance Corp., Georgia had the highest deposit growth rate over the last five years of all Southeast states. The study also found that, during that period, Georgia and Florida led the Southeast in growth in the number of banking offices.

Mortgage lending slowed from its frantic 2005 pace but remained respectable. Refinancing and home equity lines of credit also slowed during 2006. Commercial and industrial lending by banks in the region was strong through the third quarter of 2006, but analysts expect it to be flat through the end of the year. Commercial real estate lending remained strong in the Southeast, with some banks reporting commercial real estate portfolios at historic overall highs. Although the Florida housing market has cooled, banks there remain strong.

Banks' healthy reports came in an economic environment that differed from 2005. Competition for deposits increased in 2006, and the deposit mix changed in favor of higher-interest certificates of deposit or time deposits, squeezing net interest income and margins in the third quarter. Low loan loss provisions, owing to excellent credit quality, allowed banks to show strong earnings.

Overall, banks' credit quality should hold up. Some banks reported higher loan loss provisions in the third quarter, which was a good development because credit quality could fall from its current high-quality state. Any such change, however, is not likely to be sharp or cause serious concern. Competition for deposits and managing net interest margins will remain important issues.

Foreclosures increased significantly in the third quarter of 2006 in Florida, Georgia, and Tennessee. With the imminent resetting of some types of mortgages' interest rates, this trend could continue.

Banks with business concentrated in mortgage lending or residential construction lending are likely to feel the effects of the slowing housing market, although continued migration to the Southeast from other parts of the country will boost the region's banks. The mood among bankers along the Gulf Coast (including those in New Orleans) remains upbeat for the most part as rebuilding and construction activity is expected to give a boost to the region's banks.