Regional economy stabilizes

EconSouth, Fall, 2009

The first half of the summer has witnessed further signs of economic stabilization in the Southeast. Data reports and information the Atlanta Fed research department gathers from business contacts show steady, albeit weak, economic activity in most sectors. While the regional economy is expected to improve throughout the rest of the year, the rate of improvement will likely be very modest.

The main reason for the sober outlook is the numerous headwinds businesses and consumers continue to face. In particular, consumers are not expected to embrace additional spending as they strive to pare back expenses. This cautious consumption is likely to continue for some time, especially in light of the weak employment outlook. Sales tax revenue for the Southeastern states declined, on a year-over-year basis, for seven consecutive quarters through June 2009, with second-quarter revenue more than 5 percent below year-earlier levels. Households are expected to increase their savings and limit spending as long as the economic environment remains uncertain.

Tourism-related spending, an important and typically buoyant component of retail activity in several parts of the Southeast, is also suffering. For example, the Florida Department of Revenue estimated that sales tax revenue for tourism and recreation activities was down more than 10 percent in June 2009 from a year earlier. In addition, estimates from Visit Florida, the state's official tourism marketing corporation, show a 9.4 percent drop in the total number of travelers to the state in the second quarter compared with the same period in 2008. Information from hospitality industry contacts supports these data. Some areas noted a significant decline in business-related travel and convention attendance.

One area that has seen modest improvement is single-family residential sales and construction. Permits for new single-family residential construction remain well below year-earlier levels in all Southeastern states, but all six states have posted monthly gains since January 2009. Existing home sales also are improving. Data from the Florida Association of Realtors show a 28 percent year-over-year increase in single-family sales in June. The outlook among builders and Realtors, which had improved in the spring, moderated over the summer. The condo market remains in distress. Vacancy rates remain high, and since many condo sales are second or vacation homes, the outlook for future sales continues to be bleak.

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Another construction-related sector that remains under stress is commercial development. Office and industrial vacancy rates have been trending upward, with some areas reporting greater availability of sublease space. Developers continued to report fewer backlogs, and more projects were delayed. Recent data support the view that commercial construction activity will continue to soften.

Regional factory activity continued to climb from very low levels over the summer. Overall production continues to contract, albeit at a much slower pace than earlier in the year. Kennesaw State University's Southeast Purchasing Managers Index (see this issues "Data Corner" on page 15) rose to 50 in July, indicating that manufacturing activity was neither expanding nor contacting. The report also showed that new orders were rising, a sign that future production will likely tick up.

Business hiring plans remain very conservative, according to most of the Atlanta Fed's business contacts. Although layoffs continue, businesses are implementing layoffs at a more modest pace than earlier in the year. The chart shows that initial claims for unemployment insurance for the combined states of the Southeast, although still elevated, have declined steadily since April. While the worst may be over regarding job losses, the unemployment rate appears set to remain high as hiring plans continue to be cautious.