Regional President Speech

THE ECONOMIC OUTLOOK FOR 1990 Remarks by Robert P. Forrestal, President Federal Reserve Bank of Atlanta To the Bank Administration Institute, Atlanta Chapter March 15, 1990 Good evening! It is a pleasure and an honor for me to speak to the Atlanta Chapter of the BAI. I would like to take advantage of this opportunity to give you my views on the outlook for the national and regional economy in 1990 and to make a few observations on Atlanta's economic prospects in particular. Since we are at the beginning of a new decade, I would like to look a little further ahead as well. I think the next ten years hold signs of brilliant promise. The globalizing of markets that gathered momentum in the past decade should continue to bring greater benefits to people here and around the world. I am particularly encouraged, as I know you must be, at the virtual stampede among Eastern Europeans to join the market-oriented economies. Of course, there are obstacles that must be overcome before these promises are fully realized, and I would like to talk about some of these in addition to highlighting the positive economic developments I see in the offing. Before I do that, though, let me begin by giving you my thoughts on how the nation, the region, and our city should perform in the year ahead. The National Outlook I believe that economic growth in this country will slow in 1990. Real gross national product should decelerate to about 2 percent for the year. I do not see any signs on the horizon that suggest this seven-year expansion is about to end. With slower growth than in 1989, though, the jobless rate could edge up slightly to 5 1/2 percent. But slower growth should also temper price pressures, holding inflation to around 4 1/2 percent after a spurt early in the year. Unlike recent years, when consumption or export-driven manufacturing has been a clear leader in pushing growth, I do not expect one particular sector to set the pace in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 2 - - 1990. Indeed, the kind of growth I anticipate should be largely a result of momentum from past expansion that is rather evenly distributed among the various parts of the economy. Among these, personal consumption, spurred by continued growth in employment and personal income, should be one force helping the economy along. A second, though more moderate, positive input is likely to come from business investment, especially for computers, aircraft, and industrial equipment~as opposed to investment in new factories and the like. However, capital spending for industrial equipment could well slow after the large additions to capacity made over the past few years and the squeeze we have seen in corporate profits. I feel international trade will contribute too by growing moderately in 1990. The dollar has appreciated only about 5 percent against the currencies of our major trading partners since its trough of just over a year ago. Thus, our exports are still available at competitive prices. Moreover, the economies in the industrialized countries are quite strong, enabling foreigners to buy even more U.S. goods than they could even a few years ago. Finally, I look for a good year in agriculture in most of the country, assuming the weather cooperates. Farmers should continue to rebuild agricultural inventories diminished by the 1988 drought. Foreign sales of U.S. farm commodities should be healthy also. On the other hand, I see several weaknesses in next year's economic picture— particularly auto sales, residential construction, and government spending. It seems people may be holding onto their cars longer, perhaps because of improved quality or the growing use of five-year financing. The resulting decrease in demand for new cars combined with higher prices for many new models should keep sales soft. Demographic factors are likely to hold housing demand in check as well. In the generation following the so-called baby boom, fewer families are being formed each year compared with the situation in the last decade. Government spending is also slowing—though not quickly Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 3 - - enough to suit me given the still mammoth proportion of the federal budget deficit. Nonetheless, fiscal stimulus will probably diminish. Aside from these soft spots, the dark cloud on an otherwise bright horizon is still inflation. I suspect we are in danger of congratulating ourselves too much for a modest near-term slowing in inflation. Let me remind you, however, that at a 4 1/2 percent inflation rate, which we shall probably experience this year, prices will double in about 16 years. Moreover, in addition to temporary weather-induced pressures, we will continue to experience growing labor shortages due to demographic shifts. These fundamentals suggest that no letup in price pressures is likely in the early years of this decade unless we are willing to tolerate slow growth for a sustained period. Thus while the nation enjoys respectable growth in 1990, we need to keep a watchful eye on inflation. Regional Outlook Turning to the regional outlook, I think the Southeast will perform about on par with the nation on average in 1990 after a year of lagging behind. During 1989 economic activity here slowed a bit more sharply than in the country as a whole last year. In particular, the in-migration that has been one of our chief sources of strength for many years tapered appreciably in 1988 and into 1989. One cause of the slowdown was the renewal of manufacturing in some areas of the country that had earlier lost people to booming Sunbelt states. The increased availability of factory jobs kept workers at home and encouraged others to defer retirement or return from places to which they had relocated. Southeastern industries sensitive to population growth-construction, services, and trade for example—suffered setbacks or a noticeable deceleration as the inflow diminished. This year, however, I see manufacturing slowing in the nation. Thus we may see in-migration begin to pick up slightly in the Southeast, though not at the rate we enjoyed in the mid-1980s. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 4 - - As usual, services and trade will lead the region's employment growth. Tourism should continue to draw numerous visitors from this country and abroad to the expanding number of regional attractions in 1990 and lend sustained strength to business activity. Increased in-migration could provide some impetus to the construction industry this year as well. Still, housing, commercial office, and retail construction will be sluggish at best because of past overbuilding. I expect manufacturing here to perform at a rather subdued level. Slowing domestic demand makes the outlook for the region's important chemical and paper industries less bright than it has been. The apparel industry also remains battered by foreign competition. However, the Southeast's machinery-production industries, along with its aerospace and certain other types of transportation equipment makers—auto parts destined for export, for example—should help offset some of the weakness that is likely in the region's auto plants. Even more than construction and manufacturing, agriculture should be a source of strength to the Southeast after a positive year in 1989. Farm debt is down, and foreign as well as domestic demand promises to remain strong enough to allow for profitable expansions of output in the year ahead. I look for Georgia to grow above the national average. Construction and manufacturing have been particularly weak, though, and I cannot say that any dramatic improvement is on the horizon. After a difficult year in 1989, residential building may improve marginally in 1990. Manufacturing of aircraft and cars, which also experienced setbacks last year, have suffered additional declines in 1990 but probably now have stabilized. The anticipated softness in consumer spending on durables like cars, but especially the weakness in construction suggest that the state's textile mills will probably be unable to sustain 1989's strong rate of growth since much of their output goes into carpets, home furnishings, and auto upholstery. I already mentioned the dim prospects Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 5 - - for apparel in the Southeast, and Georgia is not likely to be an exception. Nonetheless, strength in services and the good performance I expect from the state's farmers should offset these weaknesses sufficiently to give us a somewhat better level of economic performance than we experienced last year. Since Georgia's performance depends heavily on Atlanta's economy, the overall picture for the metro area can be inferred from what I have just said about the state as a whole. In 1989, average annual employment in Atlanta grew by 2.2 percent, a little less than I expect for this year. Atlanta's construction activity should increase this year, but construction employment will probably increase only marginally after falling by around 5,000 jobs over the past two years. Homebuilding will probably remain weak, but some impetus for construction should come from public spending on 1-20 improvements, MARTA expansion, and the Georgia Dome. I am, however, concerned that we are experiencing a continuing surge of downtown office construction that is difficult to explain in terms of anticipated demand. Eight buildings of 650,000 square feet or more are slated for completion in the next three years, and pre-leasing figures for several of these are lower than for similar projects in the past. Thus, we may be creating an additional future oversupply in a city that already suffers a 20 percent vacancy rate. Issues for the 1990s Summing up the outlook for the first year of the 1990s, it seems likely to turn out as a reasonably good one for the nation as well as for Atlanta and the Southeast. Looking further down the road, I anticipate developments that can keep the United States and much of the world on a path toward further growth. In particular, I believe the globalizing marketplace offers future opportunities we can barely perceive at present. The dramatic changes taking place in Eastern Europe could carry market integration in new directions, for example. And more restrained but no less stimulating developments in the European Community and elsewhere indicate to me that the pace of globalization Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 6 - - may be accelerating. Still, there are obstacles to overcome before we can reap the full benefits of these economic changes. Foremost among these is the federal budget deficit, which will remain far too high for yet another year in 1990. A second is related to the first: our need to finance excess government spending with imported capital has led to continuing imbalances in trade between the United States and our major trading partners. Another detriment to market expansion is the debt of the less developed countries (LDCs). Early last year Treasury Secretary Brady took a step in the right direction by raising the possibility of debt reduction for these countries. Aside from a reduced debt burden, though, what the LDCs need is an influx of capital to get their economies rolling once more. Ideally, we would be making loans to these countries to help them import the capital equipment and other goods they need. However, our federal budget deficit has helped make us a net debtor nation—indeed the world's largest—when we should be acting as a creditor not only for third world countries but also for Eastern Europe. Having noted these problems areas in the process of globalization, let me turn to the reasons I am optimistic about the world's economic future. Some of the past year's most exciting news came from two fronts in Europe. These were the sudden turn of events in Eastern Europe and the great strides made toward the European Community's market unification scheduled for 1992. In 1989, we marvelled as Marxism-Leninism seemed to be withering away before our eyes. Daily we read in our newspapers of some astonishing development in Eastern Europe: Solidarity won the national election in Poland, Hungary abolished one-party rule, the Berlin Wall was dismantled. These countries want and, I believe, will move toward the political and economic self­ determination their European neighbors enjoy. As they do, they could provide fertile markets for outside goods and services as well as sources for labor, materials, and technical innovations. Equally important, their emergence from isolation may mean that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 7 - - the world can begin spending less of its energy and resources arming for war and more on raising living standards. Of course, the process of change in the communist bloc may not be smooth in either an economic or a political sense over the next few years. For one thing, these countries have no experience with market mechanisms and also lack the financial infrastructure to interact effectively with outside countries. They also need an infusion of capital to get started, and, as I said earlier, we are not in a position to help out. Additionally, let us not forget that our hopes outstripped reality in the case of China in May and June of last year. Still, I feel the move toward market and political liberalization is inevitable in the long run in China as well as the rest of the nonmarket economies. There is simply no way to eliminate the weaknesses from their systems of production without fundamental reforms. A second important European story has been the EC's progress toward market integration at a rate that would have seemed impossible even two years ago. It seems more certain than ever that in the first few years of this decade Europeans will draw together into a market with more consumers than the United States. This will have a major impact on the future course of business in Europe and among the EC's trading partners, including the United States. Most immediately, the dismantling of barriers to shipping and selling goods should open this large market for the kind of retailing to which we are accustomed here. Our industries are geared toward large manufacturing runs that supply products to nationwide retail outlets and distributors with numerous local accounts. It seems likely that post-1992 Europe will tend toward a similar market structure, and this should prove advantageous to U.S. producers. Also, freer flows of capital within the EC will probably hasten the consolidation of industries there. We should see large new firms join the ranks of the multinationals. Such pan-European giants promise to raise the level of competition in Europe and eventually in this country Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 8 - - as well. Unfortunately, the industry with which I am most familiar and which plays a keystone role in our economy~the financial services industry~is being kept from gearing up for the global market by certain antiquated regulations. At present the world's largest financial instititutions are overwhelmingly European and Japanese. Further deregulation built into plans for Europe '92 could lead to the formation of more large banks there, and such a development could have important implications for the competitiveness of American institutions. Multinational corporations look for banks that can offer "one-stop” convenience in meeting their requirements. As international trade grows, this demand requires financial institutions to maintain a presence in all the important economic centers and the capacity to handle sizable transactions. U.S. banks are currently underrepresented among the world's top banking institutions in part because of interstate banking restrictions and limitations on the types of businesses in which they can engage. If size is in fact a competitive advantage in the global market, the partially completed state of deregulation in this country acts to the detriment of our banks. It is important that Congress remove this impediment by repealing Glass-Steagall prohibitions on activities in which banks can engage. I would also like to see legislation in favor of nationwide interstate banking. By 1992, the individual states will have achieved de facto interstate banking on their own. However, we will still have a hodgepodge of laws that could retain some of the inefficiencies of the present system. In the latter regard, by the way, the states in the Southeast, which were among the first to opt for a regional intersate arrangement, are now falling behind in taking the next step by allowing full access to all outside banks. The longer we resist, the more we limit the horizons of our own banks. Thus, until Congress begins to move on this issue, I think we need to act swiftly in Georgia and other states in the region to join the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 9 - - nationwide interstate movement. Conclusion In conclusion, I think the year ahead will be a good one for the United States and the Southeast. By "good" I mean I expect reasonable growth with diminishing price pressures, though we cannot afford to become complacent about inflation. Meanwhile, the 1990s are beginning with encouraging signs that the global market may be expanding in scale and scope. The consolidation of the EC and the possible inclusion of Eastern Europe and other communist bloc nations holds great potential for economic betterment around the world. I would hope that in the midst of this promise we can find ways to balance our federal budget and free up more of our savings for investment at home and abroad. If we can get our fiscal house in order we will be better able to take up the great challenge of the 1990s: extending the reach of globalization by opening new markets and making existing markets more open. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Robert P. Forrestal (1990, March 14). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19900315_robert_p_forrestal

@misc{wtfs_regional_speeche_19900315_robert_p_forrestal,
  author = {Robert P. Forrestal},
  title = {Regional President Speech},
  year = {1990},
  month = {Mar},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19900315_robert_p_forrestal},
  note = {Retrieved via When the Fed Speaks corpus}
}