Econsouth (Second Quarter 2009)
Looking for Hopeful Economic Signs
In an economic update to Congress on May 5, Federal Reserve Chairman Ben Bernanke noted that "recent data suggest that the pace of contraction may be slowing."
Is the Southeast experiencing a slowing in economic contraction? For answers to that question, Atlanta Fed economists and analysts look at many indicators and gather insights from regional business contacts.
Although employment data tend to lag real developments in the economy, information on initial claims for unemployment insurance provides clues about potential labor market stabilization. If the number of workers signing up to receive unemployment insurance for the first time is leveling off or decelerating, that trend could indicate that fewer people are losing their jobs and could signal that the pace of overall economic contraction is slowing.
The data appear to show that the pace of initial unemployment claims could indeed be stabilizing in the Southeastern states. The chart tracks a significant deceleration in the four-week moving average for initial claims in Southeastern states in April. In fact, by the end of April initial claims had fallen nearly 10 percent from a month earlier while declining 3 percent for the nation as a whole. Initial claims declined in all six Southeastern states in April, with Alabama, Georgia, and Mississippi posting the most significant changes.
Although the news on initial unemployment claims improved in April, one should exercise caution in evaluating these data since they represent only a short period. Two factors help put these data into perspective. First, a sustainable drop in initial unemployment claims has accompanied a trough in the business cycle during the past several recessions. In other words, this drop could be a sign that the recession's grip is lessening somewhat. Second, business contacts throughout the region note that they are currently in a holding pattern with regard to their labor force. Most say they have already cut some jobs, but few report plans for additional cuts. Thus, the pace of economic contraction appears to be slowing somewhat. On the other hand, very few business contacts report that they are even considering adding to payrolls in the short term. This point serves as a sobering reminder that even though labor markets may be stabilizing, a return to prerecessionary employment levels does not appear likely anytime soon.
Another point Chairman Bernanke made during his May 5 testimony was that "the housing market has also shown some signs of bottoming," but major weaknesses remain. In the Southeast, indicators and surveys of Realtors and homebuilders confirm this outlook.For example, regional Realtor associations report that existing home sales are declining at a slower pace and even improving in some cases. Data from the Florida Association of Realtors indicate that existing home sales in Florida were up 30 percent year over year in March. The Alabama Center for Real Estate reported that existing home sales for that state increased in February and March on a monthly basis and that year-over-year sales were down 19 percent in March, an improvement from the 40 percent year-over-year decline in November 2008. Nashville, Knoxville, Baton Rouge, and New Orleans Realtors reported similar trends—monthly increases in February and March and a deceleration in year-over-year declines.
Realtors across the Southeast who are in contact with the Atlanta Fed's research staff also conveyed a sense of optimism, with most expecting home sales to rise above year-earlier levels over the next few months. Homebuilders, who for the most part have seen new home sales plunge significantly during the past two years, anticipate improved sales this spring and summer. However, it is important to keep in mind that, despite the expected improvement, overall activity in existing and new home sales reflect only a modest improvement from very low levels of activity. Nonetheless, the data and anecdotal reports suggest that housing is showing some signs of turning the corner.
Chairman Bernanke also said that "recent business surveys have been a bit more positive, but surveyed firms are still reporting net declines in new orders and restrained capital spending plans." In the Southeast, regional business surveys by the Atlanta Fed show some positive signs, including improving consumer confidence, but this optimism has not yet translated into increased business investment or stronger consumption.
The University of Alabama's quarterly Business Leaders Confidence Index (BLCI) showed a slight uptick in the second quarter of 2009 compared to readings in the first quarter. While confidence levels are still low, the report showed stabilization. Importantly, most firms surveyed in the BLCI report are further scaling back their capital investment during the second quarter of 2009.
The Southeast Purchasing Managers Index (PMI), produced by Kennesaw State University's Econometric Center, rose for the fourth consecutive month in April and now stands at 47.1. While the reading is below 50, showing that the sector is still contracting, the April reading is well above the low of 25.8 in December 2008. This improvement provides further evidence that the manufacturing sector may be stabilizing. The new orders component of the Southeast PMI remains below 50 as well, indicating that, despite some improvements, the region's manufacturers are still experiencing net declines in new orders.
The downturn in economic activity has been deeply felt in Florida, which has suffered steeper declines in real estate activity, home values, and employment than any other Southeastern state. So when the University of Florida reported that its consumer confidence survey had improved significantly in April, people took notice. However, Atlanta Fed analysts have not seen significant improvement in retail sales reports from contacts across the region. Most retailers continue to report weak results, and few are anticipating an increase in sales in the short term.
Overall, data and reports from regional contacts support the conclusion that the decline in economic activity in the Southeast is stabilizing, but activity is still at low levels.
Continuing Unemployment Insurance Claims
Data from the U.S. Department of Labor on initial and continuing unemployment claims, discussed in the previous "Data Corner" (EconSouth, first quarter 2009), provide a useful gauge of labor market conditions. This issue's "Data Corner" takes a closer look at continuing claims data.
Continuing claims represent the total number of people receiving unemployment benefits. As a measure of ongoing unemployment, continuing claims provide some indication of how difficult it is for the unemployed to find new jobs, with the length of time someone continues to file claims corresponding to the degree of difficulty.
Continuing claims for the Southeastern states rose through March 2009, maintaining an upward trend that began in 2007. In December 2007, when the current recession began, continuing claims in the Southeastern states stood at 296,000. In March 2009 that number had risen 144 percent to 733,000. The rate of increase seems to have slowed, however; claims in March rose only 1.9 percent from a month earlier after monthly increases of 7 percent in February and 15 percent in January. (Since these data are not seasonally adjusted, such month-to-month variations should not be overemphasized).
Analysts can get a sense of how labor markets are faring in various sectors by studying Labor Department reports on the percent of total continuing claims by industry. For example, in March nearly 88 percent of continuing claims in the region were reported in the services industries while about 4.5 percent were in construction and just under 8 percent were in manufacturing. A year earlier, 74 percent of continuing claims were in services, 11 percent in construction, and 13 percent in manufacturing. The greater share of continuing claims in services is not particularly noteworthy since that sector is much larger than construction or manufacturing. What is significant is the acceleration in the share of continuing claims in services compared with the deceleration in the shares for construction and manufacturing. These trends signal that the job losses in this recession have been broad-based.
States' Tough Stretch Persists, Studies Show
As 2008 came to a close, many people were apprehensive about the economy in the coming year. Forecasts by some members of the Atlanta Fed's Local Economic Analysis and Research Network (LEARN) at academic institutions explain that uneasiness.
MIHL predicts a turnaround in the state's economy for 2010, slightly behind national trends. This outcome, though, depends on the effectiveness of stimulus spending by the federal government as well as other factors.
The Big Easy eases on
According to the report, since the start of the recession the New Orleans unemployment rate compared favorably with that of the United States. (When the report was published in February 2009, New Orleans' unemployment rate was 5.3 percent while the national rate was 8.1 percent.) However, recent data indicated that job growth there was slowing. In the third quarter of 2008, New Orleans gained an average of 13,500 jobs relative to the same period a year earlier, but by the fourth quarter, the city had only gained an average of 3,700 jobs. The report anticipates job growth remaining flat for 2009.
For 2009, nonfarm jobs in Tennessee are expected to fall at least 2.2 percent and then fall another 0.3 percent in 2010, according to the forecast; the number of jobs in the state's manufacturing sector will drop 6 percent in 2009, with further losses of 3.8 percent expected in 2010. The center expects the unemployment rate to rise steadily during the year during 2009 and peak at 9.8 percent in the first quarter of 2010.
Savings, Recessions, and the Paradox of Thrift
The paradox of thrift was a theory put forth by the British economist John Maynard Keynes during the Great Depression. In its most typical form the theory can be stated as follows: During recessions, if households decrease consumption to increase their savings rate, the national level of income will drop because each household's spending is a source of income for someone else. This decreased level of household expenditures will translate into lower revenues for firms, which will choose to hire fewer workers and invest smaller amounts of capital, thus lowering production. This lower level of gross domestic product can possibly lead to a simultaneous higher savings rate and a lower aggregate level of savings. Hence the paradox: What is best for a household—to save more—is not necessarily best for the economy because after the drop in national income all households end up saving less.
Modern macroeconomics has moved beyond such a theory when it comes to explaining aggregate consumption and savings during business cycles. Several reasons explain this shift. First, the savings rate in the economy generally decreases during recessions and rises during booms. The current crisis is no exception: The rate of gross national savings—made up of private sector (personal and business) and government savings—declined from 15.3 percent at the end of 2006 to 12 percent at the end of 2008. At the same time, however, the personal savings rate—that of households—rose from 0.9 percent to 3.1 percent.
Second, expenditures on such items as machines and commercial real estate are expenditures for the overall economy in much the same way that buying a flat screen television is a household purchase. If a household buys fewer televisions, those savings can be channeled toward the purchase of capital goods. This channeling of funds occurs through financial markets, either through the banking system or through other types of financial intermediaries.
Finally, a rising aggregate savings rate during booms is consistent with both common sense—"saving for a rainy day"—and with standard theories of consumption and savings behavior in the face of income fluctuations, such as the permanent income hypothesis. (This hypothesis states that consumers' spending patterns are determined not by their current income but by their expectations of income in the long term.) These theories stress that the drop in consumption observed during recessions is the result of households predicting a lower level of future income and reacting accordingly.
By Pedro Silos, Atlanta Fed research economist and assistant policy adviser
An Interview With Lee Jones, Regional Executive at the Atlanta Fed's Nashville Branch
What are some of the more significant challenges you've encountered as regional executive? My particular challenge, which is different from that of most other regional executives, is the fact I have only recently returned to the Nashville area after six years in Birmingham, Ala. When I was the assistant branch manager in Nashville from 1992 to 2001, the focus of my efforts was on internal Atlanta Fed operations rather than external involvement. Our branch Regional Economic Information Network (REIN) coordinator, Amy Pitts, and I spent the lion's share of our work over the past year establishing new external relationships and contacts in support of the REIN initiative.
What relationships have you formed that will help you gather solid regional intelligence? Locally, in addition to becoming involved with civic and business groups, we've partnered with a number of organizations to conduct business roundtable meetings and arrange speaking venues for me and for Atlanta Fed economists and officials, including Research Director David Altig and Dennis Lockhart, the Atlanta Fed's president and chief executive officer. For example, we've gathered intelligence from home builders, residential and commercial real estate agents, and the chief executive officers of the city's largest banks as well as meetings with both the Nashville and Tennessee chambers of commerce and various civic groups, such as the Kiwanis, the Rotary, and Commerce Clubs.
Are you tapping the economic expertise of the area's academic institutions? We've been engaged in establishing relationships and exploring partnership opportunities with universities throughout the state, including the University of Tennessee, the University of Tennessee-Chattanooga, Middle Tennessee State University, Tennessee State University, East Tennessee State University, Belmont University, and Lipscomb University.
Have your information-gathering efforts reached outside the Nashville metro area? I've spent a good deal of time in East Tennessee visiting business leaders, chambers of commerce, and educators, particularly in Chattanooga, Knoxville, and the Tri-Cities area of Bristol, Johnson City, and Kingsport. A goal I have is to establish a more visible presence in East Tennessee. In the past much of our involvement did not extend far beyond the Nashville–Middle Tennessee area.
What role will small businesses have in your information gathering? A major initiative for us was putting together the Small/Midsize Entrepreneurial Business Advisory Council. Advisory councils are being established in all Atlanta Fed branch offices. Our council is a bit different in that it is not specific to a particular industry or sector. Instead, we've recruited 12 members who represent a broad spectrum of business from throughout the Southeast. The common denominator is that all these people represent relatively small businesses. We feel they have a unique perspective on the economy and how economic conditions affect their success. We conducted our first advisory council meeting in April.
The D6 Factor continues to decline, ending the first quarter of 2009 at –6.4. The index's negative values for the past 10 quarters show a continued pattern of weak economic conditions. The D6 Factor began setting new historical monthly lows at the start of the current recession (December 2007).