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Statement by Robert P. Forrestal, President and Chief Executive Officer, Federal Reserve Bank of Atlanta before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, March 10, 1993.

I am pleased to appear before this committee today to discuss economic conditions in the Sixth Federal Reserve District and to provide my views on appropriate monetary policy. I will first review current economic conditions in the District and the prospects for 1993. Then I will turn to the longer-term outlook for the region and some challenges related to lingering disparities in income growth in the southeastern states. This perspective will bring me to my final subject, monetary policy.

The issue of sustainable growth is of special concern to me because of the uneven performance of the Southeast. Over the past few decades we have experienced some relatively rapid growth, most notably, perhaps, in the Atlanta environs. Middle Tennessee has also performed relatively well, as have most of Florida and sections of Alabama.

However, the Sixth Federal Reserve District is an extremely diverse economy, encompassing Georgia, Florida, Alabama, two-thirds of Tennessee, and the southern halves of Mississippi and Louisiana. For many decades the states that make up this District were some of the most impoverished in the nation. Even today, by many measures of social well-being, Sixth District states continue to underperform the nation. For example, the proportion of children living below the poverty line exceeds the national average in every District state and reaches about 30 percent in Mississippi. All the District states, with the exception of Florida, have lower-than-national-average per capita disposable personal income. And Florida, Georgia, and Louisiana represent three of the four states across the nation with the lowest high school graduation rates. These few figures hint at my views about macroeconomic policy. As I will share with you, I favor a policy mix that fosters long-term investment. Only through the creation of physical and human capital can the poorer areas of the Sixth District share in the successes of the more prosperous areas.



As background to this view, let me begin with current economic conditions in the Sixth District. After sharING weak conditions with the rest of the nation, the southeastern economy began improving in the middle of last year. Regional nonfarm payroll employment increased moderately through the end of 1992. From January 1992 to January 1993, states in the Sixth District reported more than 300,000 new jobs, a 2.2 percent growth rate. This compares with a 0.6 percent increase in payroll employment for the nation over the same period. Most of the increases were posted in services, construction, wholesale trade, and durable goods manufacturing. The District's seasonally adjusted unemployment rate stood at 7.3 percent in January of this year, fed by high jobless rates in Alabama, Louisiana, and Florida that pulled the regional average above the nation's. However, Florida, the only state with more recent employment statistics, experienced a sharp decline in unemployment in February--to 6.7 percent.

After enjoying significant increases in holiday sales, with many areas showing double-digit percentage gains over year-ago levels, retailers saw sales holding up fairly well in the first quarter. Realtors and homebuilders have been seeing ongoing improvements in most single-family markets. Manufacturers are reporting modest increases in production. Bankers indicate that consumer and business loan demand is picking up. Except for some construction materials, wholesale and retail prices have remained stable and wage gains modest. Contacts across the District suggest that consumer and business confidence has revived.

In 1993, growth in the Southeast should outpace the nation. The region's concentration in household textiles, furniture, appliances, and lumber production will be boosted by national strength in single-family construction, while new construction to replace losses from Hurricane Andrew will add further to demand. In addition to the housing rebound, the Southeast, which has been treating timber as a cultivated crop for decades, stands to benefit from environmental restrictions in the Northwest through the 1990s.

Drags from defense cutbacks and state government fiscal problems are also likely to have relatively less impact in the Southeast. Although defense contractors in the region are suffering, the Sixth District is expected to be hurt relatively less by spending cutbacks because defense production is a less important factor than in other regions. In addition, the Southeast will probably not be hit as hard as the rest of the nation by the U.S. Defense Department's current base reduction plans.

The Southeast is also comparatively less hampered by state and local government budget problems. Although several states are currently considering some form of revenue enhancement and budgets have certainly been tight, the problems generally have not been as significant as those found elsewhere, nor are they expected to be.

Of course, lingering problems will keep growth only moderate. Several forces that limited employment gains in 1992 are still in effect. Excess real estate investment from the 1980s will continue to dampen office, apartment, and condominium construction. Employment in service industries should grow more rapidly in 1993 as demand for business and personal services picks up, but the possibility of further consolidation in several industries, including banking, airlines, and communications, will continue to restrain total employment growth through 1993. On balance, however, the Southeast's economy is likely to expand more rapidly than the nation's in 1993.

Retail Activity

According to the vast majority of our retail contacts, after a strong holiday season with increased spending noted across a wide range of goods from apparel and household textiles to big-ticket items such as electronics, appliances, and furniture, year-over-year. consumer spending growth continued in January and early February. Most retailers are upbeat about near-term prospects, and they are also generally happy with current inventory levels. Auto sales growth, however, has been less uniformly positive across the region.

Tourism continues to be a positive force in the regional economy. Air passenger traffic, particularly international arrivals, was significantly above year-ago levels in December. Reports of convention attendance in early 1993 show that it is exceeding year-ago levels; industry contacts indicate that advance bookings through at least midyear are strong.

Looking ahead, Hurricane Andrew will continue to generate a spending surge on building materials and related household goods in southern Florida and Louisiana through most of the year. Although localized, the stimulus is likely to be large enough to boost regional sales an additional 1.5 percentage points, to well above 1992 levels and comfortably above the expected national pace. In addition, previously postponed purchases of autos, household goods, and other big-ticket items as well as increased home sales--new and resales--will support purchases of appliances, furnishings, and household textiles next year.

The stimulus from Hurricane Andrew will peak in the second half of the year as insurance proceeds are exhausted. When hurricane-related construction slows after midyear, spending generated by rebuilding in Florida and Louisiana will begin to fade, in turn causing overall consumer spending gains in the region to decelerate. Stimulus from moderate increases in total employment and incomes will be left, but that cannot sustain the current pace of consumption growth in the Southeast. Nonetheless, the retail work force is expected to expand somewhat faster than total employment through 1993.


Manufacturing in both the Southeast and the nation currently employs between 16 percent and 17 percent of the nonagricultural work force. However, the regional average does not accurately reflect the importance of manufacturing activity in the different District states. Low manufacturing concentrations in Florida and Louisiana veil the importance of factories as employers in Georgia, Tennessee, Alabama, and Mississippi. The Southeast's considerably greater dependence on nondurables production-52 percent of total factory employment versus 43 percent nationally--has given the region an advantage since mid-1991.

District manufacturers reported moderate increases in activity through February. Industry spokespersons note that production and shipments continue to increase for textile and apparel plants. An improving national housing market is supporting carpet production, although the glut of office space nationally is depressing the outlook for commercial textile products. Contacts also note improving conditions for electronic equipment and rubber and plastic producers. According to preliminary figures from the Atlanta Fed's monthly survey of southeastern manufacturers, almost two-fifths of responding plants indicated increased production during February, compared with 15 percent reporting declines. More than half of the respondents expect production and shipments to increase over the next six months. About half of the survey respondents think that new orders will be greater six months from now. A third of responding firms expect to increase investment over the next six months.

Among specific industries within the manufacturing sector, textile and apparel producers account for a large proportion of regional employment. Textile and apparel factories began adding jobs in mid- 1991 as the national housing recovery spurred orders for carpets and household textiles generally and rising apparel sales inspired retailers to begin rebuilding inventories that had been sliced to the bone during three tough years. The upward tick in apparel demand through early 1992 provided only temporary relief to an embattled industry, however. By the second half of the year, apparel employment was already beginning to look unsteady. The long-term trend toward lower employment should resume over the next year as apparel production continues to become more capital-intensive or is moved offshore. Fortunately, gains in housing activity and stability in the nonresidential sector should continue to strengthen the demand for textiles.

The region also has a concentration of producers of pulp and paper products and food processors. Production of pulp and paper products advanced convincingly in 1992 as improved shipments and distribution activity stirred demand for boxes and paperboard. Food processing also continued to expand at a steady pace last year. The expansion nationally should continue to boost demand for pulp and paper products through 1993, and steady growth in food processing should be sustained.

Regional and national producers of machinery, fabricated metals, and electronics all suffered during the past year. In general, however, their troubles struck the Southeast less severely because these industries are not as crucial to the region's total factory output as they are in the nation in general. The expansion of auto production capacity in Tennessee provided a welcome respite to an otherwise gloomy transportation equipment sector in the region. The national upturn in demand for durable goods bodes well for these industries.

The main weakness--past, present, and future--in durables production nationally revolves around defense, but regional declines in defense-related activity should be comparatively less significant than in the United States as a whole. The six-state region represents 13.5 percent of total U.S. employment but, according to the U.S. Department of Defense, is home to only 10.5 percent of the nation's defense-related jobs. In a recently released Congressional Budget Office ranking of states by projected effects of defense employment declines through 1996, no southeastern states appear in the top ten. Declines in the region's defense-related production should also be mitigated somewhat by a national recovery in demand for durable goods. All in all, manufacturing should lend strength to the southeastern economy in 1993.


Construction in the Southeast reached a trough in late 1992 after four years of steady decline. Since its peak in 1988, when the industry employed nearly 790,000 workers in the region (7 percent of the total job base), 125,000 jobs have been lost, paring construction employment to 4.5 percent of the work force--equal to the current national average. Most of the job losses occurred in Florida and Georgia, the Southeast's boom states in the 1980s. Alabama and Tennessee posted modest construction layoffs while Louisiana and Mississippi registered offsetting gains.

After adjusting for seasonal variation, realtors reported that home sales continued to rise in most areas of the Sixth District into the first quarter. They noted increased traffic and interest in low- to mid-priced new and existing homes. While most reported little change in inventories, a growing minority have seen some absorption of excess space in the resale market. Home prices have remained mostly steady except for new construction, where higher materials prices are reported to be pushing housing prices up. Realtors attributed sales gains to low mortgage rates and increased consumer confidence. The majority are optimistic about sales prospects during 1993.

Looking at construction activity, single-family building continues to improve. Permits continued to edge higher through the end of 1992, and most builders contacted anticipate further sales gains in 1993. Multi-family development in the Southeast continues to be plagued by relatively high vacancies, only moderate economic growth, a demographic shift that has reduced the traditional pool of young adult renters, and the declining relative price of starter homes. Still, with a virtual absence of new development in most markets since 1991, occupancy rates are edging higher, effective rental rates are firming, and bottom-fishing investors are more active in buying up nonperforming properties. While offering little sign of recovery, the supply imbalances are clearly abating, and the long slide in multifamily development appears to be over. Modest gains in multifamily development could occur in 1993, but the recent rebound in residential investment will probably slow except for hurricane-initiated activity.

Commercial construction remains stagnant in most markets in the District. Potential developers of speculative projects are still having a hard time finding credit. Stagnant office development reflects developers' sober assessment of how slowly the growth in white-collar employment is likely to absorb excess office supply. Some positive signs are beginning to appear, however. Large contiguous blocks of space are becoming scarcer in major metropolitan areas, and effective rental rates are inching upward. In some areas, the lack of new product has resulted in lower vacancy rates amid a slow recovery in net absorption. The value of contracts for nonresidential private construction in the region appears to have hit bottom in mid-1992. As net absorption slowly gains momentum in 1993, it should set the stage for modest increases in office development beginning late in 1993 or in early 1994.

In addition to these regionwide developments, Hurricane Andrew has ensured a temporary construction boom in southern Florida and, to a lesser extent, southern Louisiana. Repairing $15 billion to $20 billion in damages to residential, commercial, and public structures may require 20,000 to 30,000 additional construction laborers at the work's peak in the second half of 1993. However, by late 1994 the withdrawal of these jobs and incomes will begin to exert a significant drag on those local economies.

Service Sector

Performance of the region's business and professional service producers typically parallels the nation's. Although regional demand for transportation, telecommunications, and financial services is likely to rise in 1993, employment growth in these industries will be constrained by continued restructuring. Major corporations continue to announce long-term commitments to reducing staff levels. Telecommunications and software companies are facing intense competition. Airline bankruptcies have served a particularly hard blow to the region in the past two years. While remaining carriers have taken up most of the slack in service, most of the laid-off employees have not been rehired and remaining carriers are cutting jobs.

Business services employment, which rebounded in 1992 after declining in 1991, reflects broad efforts at consolidation and cost reduction. Part of 1992's rebound can be attributed to temporary agencies, which are defined as a business service. Increasingly, firms--ranging from insurance agencies to hospitals--use temporary agencies to meet fluctuations in demand for services and to hold down costs, to limit long-term commitments, and to screen prospective employees.

Employment gains in health services, which maintained rapid employment growth rates during the recession, have begun to slow, perhaps the victim of excess capacity as competition among hospitals and physicians is intensifying. While employment growth in this sector will continue to advance more rapidly than total employment in 1993, the rate should slow significantly.

State legislatures in the District have reconvened. Coincident with the pickup in regional economic activity, state and local tax revenues are generally improving. Nevertheless, Alabama, Florida, and Louisiana are all considering ways to increase revenues. Tennessee legislators may make permanent a state sales tax hike temporarily imposed last year. Georgia is enjoying relatively vigorous growth in its tax receipts, and Mississippi is actually running a moderate budget surplus.

Wages and Prices

Upward wage pressures are virtually nonexistent in the District at this time. Corporate restructuring and downsizing continue to hold back wage increases and new hiring. Most respondents to the previously mentioned manufacturers' survey reported no changes in prices received for finished products or prices paid for materials in February. Only one-fourth of surveyed firms hope to raise finished-product prices in the next six months. Discussions with other contacts reveal some uncertainty about whether modest price increases will stick because of the competitive environment.

A Comparison of District States

Turning to the outlook for specific states, Georgia, Tennessee, and Florida have more growth potential in 1993 than the other states of the region. By year's end 1992, both Georgia and Tennessee were exhibiting well-entrenched and relatively balanced, moderate economic recoveries. Georgia seems to be back on a favorable track after having absorbed several significant negative economic shocks over the past four years, but it faces some drag from the shrinkage in airline and defense payrolls. Tennessee is experiencing employment gains in manufacturing, especially in auto-related industries. Both states should grow moderately faster than the nation. Florida, the most populous state in the District, has lagged behind the region in recovery. It began to show signs of doing better in the latter part of 1992. Despite the effects of defense cuts on Florida's manufacturers, improved tourism and exports to Latin America will probably be enough to put Florida's growth on par with the region's in 1993. Added to those forces, rebuilding after Hurricane Andrew will provide an additional boost for jobs and incomes. Thus, Florida is also likely to grow at a rate above the regional average, but this momentum may begin to fade by year-end.

Mississippi and Alabama mostly steered clear of the national recession during 1990 and 1991. However, Mississippi's prospects in 1993 are dimmed by expected defense-related layoffs, and Alabama's modest growth should not measure up to the regional average because of deceleration in apparel, textiles, and public-sector employment. Louisiana's energy-based economy may be running against the region's general trend and faces the prospect of a continuation of the state's current economic slump in 1993 even as the moderate national expansion builds momentum.


The Southeast's generally positive short-term prospects are based mainly on temporary advantages. In the longer term, sustaining and broadening the growth that many parts of the Southeast are likely to experience in 1993 will depend upon the region's ability to attract capital and labor and its response to underlying structural changes in the domestic economy as well as to international competition. Comparatively low wages and taxes in the six southeastern states will continue to draw relatively labor-intensive investment. Unfortunately, however, many areas of the Southeast are not set to deliver the skilled, flexible work force increasingly needed to use sophisticated factory and office technology and to compete internationally.

Growth in the Sixth District over the past two decades has been fed and sustained by attracting capital, both physical and human, from other parts of the country and overseas. The substantial rise in incomes in middle Tennessee has sprung in large measure from decentralization of manufacturing. Atlanta's growth has come from this trend, decentralization of corporate headquarters, and outsourcing of business services, along with a spectacular rate of successful small business start-ups. What all these sources of jobs have in common is a long-term commitment of capital and skills to the region.

These commitments would not have been made without the expectation of a long-run payoff to the investments. The Ph.D.s, engineers, and highly skilled workers who have relocated to the Southeast would not have come were it not for their expectation of a better standard of living as a result of their move. The physical capital would not have been attracted to the region if the investors did not think that the long-term payoff would be higher here than elsewhere. In short, our growth has been based on a variety of decisions that are, in one form or another, motivated by relatively favorable long-term views of the Sixth District.

However, the region has not succeeded in economic improvements to all localities or segments of the population. The disparity in the 1993 outlook for the six states as well as the statistics on educational attainment and per capita personal income I provided at the outset attest to this shortcoming. To overcome it will require more long-run investment in both physical and human capital. However, such a lasting commitment requires a hospitable economic environment that people expect to be maintained over time. Moreover, this stability cannot be maintained on a local or regional level without the sustained presence of appropriate macroeconomic conditions, attendant with a sound fiscal and monetary policy mix. This observation brings me to the third and final aspect of my remarks, namely, monetary policy.


The most important role of monetary policy is to provide an environment in which the most productive outcomes will occur. Such an environment is one that allows for a focus on the longer run; it is one in which resources are not distracted or diverted to deal with short-term distortions and temporary imbalances. In such circumstances, resources, both physical and financial, can be used to their greatest efficiency and yield their highest output and reward.

I am well aware of the loss, inefficiency, and waste that is behind the human tragedy of unemployment, and I am equally aware of the terrible cost of inflation. The role of monetary policy is to put some credible bounds on expectations about inflation and unemployment. Thus, the Federal Reserve not only must provide assurances that inflation, now or in the future, will not be allowed to rise enough to become an important consideration in private decisions but also must support expectations that disruptions to the economy in the presence of unforeseen and unwelcome shocks will be mitigated. In this sense, I see the role of the Federal Reserve as promoting stability, not just in prices but also in income and employment growth as well. This setting is a critical ingredient in the creation of sustainable growth because a stable environment will support the long-term planning horizon necessary for the investment that will create jobs and nurture high value-added firms.

Of course, the Federal Reserve must seek to create and maintain these conditions in a world of uncertainty. We all know that history does not, in fact, usually repeat itself. In addition, the Federal Reserve must bring to bear on its decisions an understanding of the social preferences of the American public. Given the uncertainty inherent in policymaking and the difficulty of assessing risks, monetary policy may sometimes have to steer the economy gradually to the desired conditions of price stability and output growth.

In most advanced economies, policy institutions were created over the past century to mitigate the transition costs of economic corrections. In the nineteenth century, business cycle fluctuations were much sharper than they are today. Imbalances were corrected by sharp implosions in financial markets, severe contractions in output and money wages, and costly dislocations of resources. Prices also tended to fall across the board, sometimes quite dramatically. Then economic growth began afresh.

Although such swift and clean adjustments have a certain theoretical attractiveness, these abrupt changes were unnecessarily costly for those adversely affected. Sometimes, in the rush of a collapse, sound businesses, banks, and households were financially ruined because their assets were not liquid and they lacked the time to find the means to liquidate them. Over time, a variety of economic policy institutions and measures were established to mitigate and attenuate this process.

This broadly ameliorative aspect of macroeconomic policy is still the Federal Reserve's mandate. I believe that the Federal Reserve, like other policy institutions that act on behalf of society, must keep public preferences in mind when pursuing social goals. As a practical matter, this social obligation means that none of the transitions should be excessively traumatic.

To make monetary policy in a context of uncertainty, complexity, and trade-offs, the Federal Open Market Committee (FOMC) seeks to reach decisions by consensus, and this consensus is based not only on economic statistics and forecasts but also on information gathered from Americans at work in the economy. As a Reserve Bank president, I am able to share with my Washington-based colleagues my interpretations of the latest economic data and models as well as the opinions and experiences of people in the Southeast. I meet regularly with business executives, bankers, farmers, labor leaders, educators, and others. These people share with me, in confidence, current and sensitive information about their firms, changes in the size of the work force, early warning signals of inflation, credit availability, and what they believe should be done about the way things are turning out. By bringing together a broad range of information and opinion, I believe the process of reaching a responsible consensus is enhanced. I know that being a part of my District has influenced my views on monetary policy.

Right now, I believe monetary policy is on target. The economic situation is by no means ideal, given the large number of unemployed. However, we must not discount the important foundation for growth that has been laid by the Federal Reserve in reducing inflation. The current degree of price stability we have achieved positions the United States to reap enormous and real, not inflationary, gains in output and incomes.

In this vein I am very heartened that the burning issue of the federal budget deficit has moved to the forefront of the social agenda. I feel it would be inappropriate to comment on specific elements of the proposal because doing so would be inconsistent with the independence of the central bank. Nonetheless, I can emphatically say that a successful resolution of this issue can ensure that we achieve conditions favorable to long-term investment and lasting growth, both in the Southeast and the United States.


In conclusion, let me reiterate the motivations for my stance on monetary policy. I bring to the FOMC the views and experiences of people from a diverse Federal Reserve District. It is one that has not only enjoyed rapid growth but also lingered in oppressive poverty. To redress the latter condition, I believe we need more investment, in both human and physical capital--better schools, factories with high-skilled jobs, and so forth.

To garner such investment regionally, we must have as a national foundation an economic environment that promises some measure of stability over time. Otherwise the Southeast will end up with more short-term and short-sighted projects that create low-wage jobs for a while until lower-cost alternatives can be found. Monetary policy thus is critical to the Southeast's major challenge because it can help create such an environment of stable prices and steady gains in employment and output. By doing so, we will achieve the ultimate goal-higher living standards for all.
COPYRIGHT 1993 Board of Governors of the Federal Reserve System
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Title Annotation:Statements to the Congress
Publication:Federal Reserve Bulletin
Article Type:Transcript
Date:May 1, 1993
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