Regional President Speech

THE ECONOMIC OUTLOOK FOR THE UNITED STATES AND GEORGIA Remarks by Robert P. Forrestal President and Chief Executive Officer Federal Reserve Bank of Atlanta KPMG Peat Marwick Seminar Columbus, Georgia May 19, 1994 It is a pleasure to be here in Columbus today and particularly to be introduced by the CEO of Synovus Financial Corporation. Of course, I knew him back when he headed up Columbus Bank and Trust. This afternoon, I have been asked to give some context to the rather broad topic of the state of the economy, while touching on the outlook for the United States and the state of Georgia. By way of background, I believe it is worthwhile to focus on a long-term economic outlook for the nation, particularly since, as a central banker, a good deal of my time is devoted to preaching the virtues of looking at the long run. Longer-Term Outlook Update With that in mind, I would like to review a few of the strides we have made as a nation in laying the groundwork for steady, long-term growth in the United States. First, inflation is noticeably lower than it was at the beginning of this decade when it stood at 5-1/2 percent. Through a judicious use of monetary policy, the Federal Reserve has managed to engineer the lowest inflation in many, many years. I do not have to explain to this audience how important low inflation is to the world of commerce and trade. However, the need to resist inflation is as strong as ever. I will have more to say on this topic later on in my remarks. Another promising factor for continued economic growth is a more highly productive Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 2 work force. We have reached this level of high productivity not without a good deal of pain, but I am convinced that the investments businesses are making today will create greater opportunities for growth in the future. During the past several years, many consumers and businesses worked hard to successfully reduce their leverage, and this also bodes well for the future. In addition, businesses slimmed down cost structures and made significant commitments to realizing gains from automation. We are just beginning to see this process yield fruit, and we will continue to do so over many years. Not only the private sector but the public sector as well has become more mindful of debt levels. Last year, we finally saw some movement toward containing the size of the federal budget deficit, thanks to the fact that the Administration and Congress agreed on a deficit-reduction plan. Finally, in the area of international trade, the North American Free Trade Agreement (NAFTA) made it through Congress, and the compromise on the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) was finally struck. Looking even further into the future, I fervently hope that these two achievements will not be seen as final steps, but rather as steps in the right direction toward global free trade as it is being promulgated in GATT. The U.S. Economy Having explained, in my view, some of the promising steps taken toward long-term growth, I would like to turn now to the economic outlook for the United States. My discussion begins with three key measures of economic performance-output, inflation, and employment. For the nation as a whole, real gross domestic product (GDP) expanded by 3 percent on an Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 3 annual average basis in 1993.1 believe the economy could grow at a faster pace in 1994—around 3-1/2 percent for the year or maybe higher. Inflation, as measured by the consumer price index (CPI), increased by 3 percent on average in 1993. I expect prices to rise at a similar pace this year. Earlier declines in oil prices, productivity gains, and ongoing import competition are keeping prices well behaved in the near term. Unemployment, which stood at 6.5 percent in December 1993, should drift lower to a little more than 6 percent toward year end. This improvement is better than it sounds because the U.S. Labor Department changed its methodology at the start of this year, with the result that measured unemployment is about half a percentage point higher, on average, than the one obtained by using the old method. Areas of strength will change little from last year. Consumer spending will still be strong, especially on durable goods like autos and household appliances. Residential construction will again make a solid contribution to growth, leading to continuing strength in related areas, such as home furnishings. As the pent-up demand for consumer goods continues to be released, the resulting purchases should support continued growth in manufacturing. Finally, capital spending by businesses, especially on computers and industrial equipment, should remain vigorous. The lagged impacts of the relatively low interest rates of the last few years—even though rates have moved up recently—are a factor in all of these areas. Recent employment gains should also provide support for further increases in personal income and consumer spending. On another promising note, imbalances have been worked down substantially on corporate balance sheets, due largely to the earlier declines in interest rates, the lengthening of debt maturities, and equity issuance. Banks and real estate firms are also stronger. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 4 To be sure, there are also specific areas of weakness in the economy, which are essentially the same as last year: commercial construction, government spending, and international trade. Office construction still suffers from overbuilding in previous years, but I believe that we are beginning to see a modest upturn. While state and local purchases will grow, government spending overall will be weak because expenditures at the federal level are being affected by defense cutbacks and deficit reduction. Of course, I do not view this "weakness" negatively because deficit reduction is long overdue. The third negative factor is the outlook for net exports, which remains poor due mainly to the weak economic conditions of many of our largest trading partners. This situation abroad, however, has begun to show signs of reversing. (Indeed, the International Monetary Fund [IMF] has revised its forecast higher for world economic growth.) I expect the western European economies to round the corner this year. Whatever growth in exports the United States does have will come from Latin American countries, Canada-our largest trading partner-and Asia, excluding Japan. Computers, telecommunications, and other capital equipment, as well as services, should remain the leading exports. In fact, our leadership in technology bodes well for the future. At the same time, imports will continue to grow faster than exports as the increase in U.S. spending still outstrips that of many of our trading partners. Current Direction of U.S. Monetary Policy These weaknesses notwithstanding, it does not seem appropriate to be concerned about whether the U.S. economy can expand. If anything, it would be wiser to worry about the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 5 possibility that too rapid and thus unsustainable growth will ultimately contribute to rising inflation—an outcome the Federal Reserve most assuredly wants to avoid. Therefore, the Fed began in February to shift away from the accommodative monetary policy stance we had had for some time. Certainly, we recognize that the globalization of the U.S. economy helps to dampen domestic price pressures. However, the economy has been growing at a rate well in excess of its long-run potential, thereby running the risk of constraints on capacity. This situation often leads to inflation. In general, as the gap between actual and potential output narrows, central banks begin to become concerned that the momentum will push an economy through its capacity constraints. Although there have not yet been any signs of accelerating inflation at the retail or output level in the United States, the pressures that can lead to it are there. With the current course of monetary policy, the Fed wants to make sure that inflation will no longer be a problem in the United States. In that light, it is critical for us to fend off inflation before it starts recurring. Before moving on to my outlook for the state of Georgia, I would like to say a few more words about inflation. It may seem to many people that the Fed spends too much time worrying about inflation, particularly since the economy is healthy now, and inflation seems to be quiescent. However, an important point to remember is that the costs of inflation are significant. One reason for having an independent central bank is that it allows us to take a longer view of the economy. This long-term vision is especially important when dealing with inflation because Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 6 price increases accelerate with a long lag. For example, inflation peaked in 1982, long after monetary policy saw it coming and moved strongly to counter it and long after the early 1980s recession began. We all recognize the importance of avoiding this situation again. At the same time, to achieve this goal, the Fed does not pursue a single-minded effort to reduce inflation without regard to transition costs and social preferences. While inflation undermines and distorts economic growth, I am not so single-minded as to believe that we must achieve zero inflation or that we necessarily have to reduce inflation at every stage of the business cycle. As I see it, there are always tradeoffs to be made when trying to bring inflation down. Businesses, labor, and consumers must be given time to adjust their financial behavior in light of changing economic policy. Too quick an adjustment can cause too much pain. I personally believe policymakers must be attuned to these social costs and at times take a slower path toward lower inflation. Outlook for Georgia and the Southeast Now, I would like to focus on the economic outlook for Georgia, which is quite bright. As background, let me point out that since the recession, the southeastern region has been outperforming the nation in terms of job growth by about 1-1/2 percentage points. In 1994, that advantage is diminishing—not because the Southeast is decelerating, but rather because the U.S. rate is accelerating. The good news is that on both the regional and national level, the pace of job growth is stepping up. Individual states will vary in performance, but even the weakest states in the region are seeing at least modest growth. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 7 Three sectors in the Southeast will continue to outshine national growth: service industries, manufacturing, and construction. For several years, the service sector has been the main source of job growth for both the region and the nation. Specifically, the Southeast should get most of its gain from business services employment. New-home construction across the nation brings special benefits to the Southeast because of its traditional manufacturing concentration—a combination of lumber, furniture, textiles, appliances, and other construction-related products. This help from the rest of the nation should allow the manufacturing sector to grow modestly or at least to hold its own as the region loses jobs in the apparel industry to international competition. Finally, construction in the Southeast itself is likely to outperform the nation this year thanks to the strength of the regional economy, although housing construction may begin to taper off as the year progresses. Comparing the economic outlooks for each state in the Southeast, the clear winner in terms of 1994 growth is Georgia. Since the end of the 1990-91 recession, Georgia has reestablished itself as a growth leader in the Southeast. A resurgence in single-family construction across the nation after catastrophes like the earthquake in California and the floods in the Midwest should spark increased demand for building-related products. Since Georgia has a relatively heavy concentration of textiles, most notably carpets, and wood products manufacturing, the state benefits economically from disasters in other states. Corporate relocations of both domestic and international companies should also continue to increase demand directly and in the construction and service sector. As in other parts of the Southeast, business services will contribute to growth. About the only negatives to be noted in the outlook for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 8 Georgia are the recent announced cutbacks by Lockheed and Delta. Turning briefly to the impact of the upcoming 1996 Olympics: The Olympic games will mainly affect the Atlanta metropolitan area. Retailers and tourist-oriented businesses that are thinking ahead are expanding into the Atlanta market to take advantage of the Games. However, you may be able to divine what I am going to point out next—that, following the Olympics, there is likely to be an economic letdown in the Atlanta area for purely technical reasons as the temporary employment burns out after the Olympic flame has been doused. The question is, how serious will this let down be and how long will it last? Conclusion In conclusion, the economic expansion in the nation promises to be quite strong in 1994 yet at a rate of growth that does not create its own problems; the southeastern region is outperforming the nation; and Georgia is doing the best of all the states in the region. From a long-term perspective, as a nation, we have taken significant strides to correct difficult problems. I believe we will be able to ensure sustainable growth by continuing to focus on solutions to long­ term problems. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Robert P. Forrestal (1994, May 18). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19940519_robert_p_forrestal

@misc{wtfs_regional_speeche_19940519_robert_p_forrestal,
  author = {Robert P. Forrestal},
  title = {Regional President Speech},
  year = {1994},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19940519_robert_p_forrestal},
  note = {Retrieved via When the Fed Speaks corpus}
}