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The mid-south economic outlook.

I will concentrate my comments on the outlook for a few of the region's key industries and then discuss a few of the issues that will determine the economy's direction for the next year.

Let's begin by looking at the performance of a few key regional industries and the outlook for 1991:

Manufacturing: Many of the employment gains and losses experienced by rural communities throughout the Mid-South have been associated with manufacturing industries. Many of the gains have been in durable goods such as automobiles, electronics, and computer industries, while the losses have been associated with nondurable goods industries such as textiles, leathers, and low-technology production facilities that have fled to low-cost/offshore plants. Consequently, our increasing dependence upon durable goods manufacturing makes many MidSouth states and communities very sensitive to the business downturns forecast for 1991.

According to recent information from the Commercial Appeal ("Creating a Service Area Economy" and "Congress Considers Primary farm Subsidies," Ted Evanoff), manufacturing firms provided more employment payroll opportunities than any other sector. Only the service sector, with its strong growth in urban areas, will surpass manufacturing as a source of payroll income in the foreseeable future.

Manufacturing will continue to provide 20% to 30% of all Mid-South jobs and as many as one of every two non-government jobs in rural areas throughout this region. Clearly, differential growth rates and cyclical sensitivity variations will create uncertainty for many Mid-South communities in 1991. The most sensitive firms will be those dependent upon autos and construction and low profit/low wage/marginal firms sensitive to minor pressures on profits.

Agriculture: The depression in agriculture throughout the early and mid 1980s created tremendous turmoil in many farm-dependent communities. Many agri-businesses, a key industry for both urban and rural MidSouth communities, struggled throughout the early 1980s and were looking forward to a stronger agricultural environment in the 90s.

For the last few years, income figures were also allowing farmers and rural communities to look positively toward the future. New export opportunities, higher prices, and stable costs were making the long-awaited recovery in agriculture a reality. Unfortunately, the production cost increases associated with energy-oil and fertilizer cost increases may stifle the gains analysts expected in 1990 and 1991 and may create two sets of losers in agriculture.

First, firms that benefitted from the low farm prices in the early 1980s will suffer in 1991 because of higher prices; and second, firms dependent upon higher prices will also suffer because rising costs will offset the higher prices, and only minor improvements in net farm income will occur over the next year. Energy providers will benefit by capturing many of the gains otherwise expected by farmers and the farm community. Throughout 1991, the prices paid byfarmerswill continue to rise as fast or faster than the prices they receive for crops and livestock.

Services and Retail Trade: Most of the employment gains in the Mid-south in the 80s were service and retail trade industries, and these industries will continue to provide many of the new jobs in the region. The service and trade sectors provide nearly as much payroll income to the region as manufacturing and farming combined ($627.9 million vs. $632.7 million), and Mid-south wholesale trade, retail trade, and service firms employ over one and one-half times as many people as work in manufacturing.

Clearly, new employment growth in the service and trade industries will increase their importance to the MidSouth and will increasingly concentrate much of the region's economic activity in urban and rural commerce centers. Since many service and retail trade opportunities are in urban areas,however, I will not spend much time discussing them except to say that because of the recessionary economy expected in 1991, it is difficult to anticipate a strong growth year for these industries. While not as cylically-sensitive as manufacturing, these industries will find it difficult to prosper in the weak economic environment-anticipated for 1991 Finance: The tremendous structural changes and difficulties experienced by banks, savings and loans, and other financial institutions in the 1980s make me look forward to a new decade. Industry deregulation, interstate banking, international loan losses, domestic loan losses, bank and saving and loan failures, new service delivery systems, and new rounds of regulations made the 1980s a decade of change and turmoil for this industry.

Now, the savings and loan and banking disasters and their impact. You know the issues and the magnitude of the problem S&l's and banking face, so I don't have to repeat the stories.

Earnings for the banking industry fared early in 1989 with earnings totalling $15.86 billion, down 34.5 percent from 1988 earnings of $24.56 billion.

Nationally, 11.3 percent of commercial banks with assets of less than $10 billion-banks comparable in size to Eighth District banks-reported losses in 1989, down from 14.4 percent in 1988 and 18.5 percent in 1987; slightly more than 25.0 percent of banks with assets greater than $10 billion reported net losses in 1989, up dramatically from 5.1 percent in 1988.

Just let me say, it is a disaster that is small in comparison to what it might have been in the presence of a normal business cycle. Without eight years of economic growth with no recessions, the magnitude of the disaster and its impact might have been much worse. Fueled by ten years of tremendous federal budget deficits,the economy has managed to avoid any major downturns that could have magnified the impact of these events. We can only hope this trend will continue. It seems only likely that 1991 will bring greater stability for the finance industry.

I for one certainly hope this is the case and look forward to the challenges and the opportunities for the upcoming year.

Now, I would like to conclude by discussing a few key factors that will influence the Mid-South's economic performance in 1991.

First, the outlook for the nation's economy is bleak for the first half of 1991, and the nation's poor performance may well extend throughout the year. The Mid-South economic outlook is heavily dependent upon the length and depth of the nation's recession.

Since many of the existing manufacturing industries in rural areas of the region are producing cyclically-sensitive durable goods,a prolonged or severe national recession will have a potentially devastating impact on the economic vitality of Tennessee, Arkansas, and Mississippi communities. The ability of this region to sustain its economic growth and vitality will be seriously impaired by a weak manufacturing sector. Clearly, marginal plants and marginal products will be at risk, and communities seeking either new plants or expanding firms will find 1991 a difficult year at best.

Second, the strength of the economic recovery in agriculture will depend upon the magnitude of the cost increases that will be associated with rising energy expense. Clearly, the oil crisis and associated increases in energy costs will erode the long-awaited profits that were anticipated by area farmers and many farm communities.

To the extent that oil prices do not experience a second round of shocks associated with the Middle East crisis, it seems likely that the worst of the 1990 oil crisis is over and that our energy-dependent industries can at least anticipate their production costs.

Finally, the changes taking place in Eastern Europe and the destabilization of international economic relationships make it difficult to anticipate the demand for international capital, interest rates, the strength of the dollar, or the level of exports we might expect next year.

While investments in Eastern Europe are, at best, risky and long-run in nature, the tremendous need for infrastructure and the associated capital requirements may cause increases in interest rates, weaken the dollar, and increase export markets for Mid-Southfirms prepared to export to European markets. Unfortunately, many of our firms are oriented toward domestic markets and may find it difficult to expand into international opportunities that may open up and close with equal speed in 1991.
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Author:Rawlins, Benjamin W.
Publication:Business Perspectives
Date:Dec 22, 1990
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