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Beige Book Report: Atlanta

March 23, 1982

Business conditions remain weak throughout the Sixth District, with no significant evidence of recovery. However, there is a general feeling of optimism that business conditions will improve around mid-year. Retail and home sales are sluggish. Unemployment is a major problem and additional layoffs are occurring in many southeastern industries. Tourism is behind last year's level in the region's major tourist areas.

Consumer Spending
Retail sales have exceeded expectations in many parts of the District. Sales of high-quality merchandise showed relative strength, with home appliances and home improvement products showing increases over last year. However, retailers expect nondurable goods sales to remain soft until about mid-year, when economic recovery is expected. In the meantime, merchants are holding a tight rein on inventories.

Auto sales continue to be poor in the District. Reports of weakness have surfaced even in Florida, where sales, income and employment have held up well compared to other parts of the region. Large cars are selling more briskly, due in part to falling gasoline prices; however, high interest rates continue to limit sales and squeeze profit margins. Unless rates stabilize at lower levels soon, more dealer closings can be expected. Even so, auto dealers are cautiously optimistic for a mid-year turnaround.

Financial and Construction
Throughout the region, residential home sales continue to be weak. The value of single and multi-family permits has been running 50 percent below last year's level. Construction is most depressed in northern areas of Alabama and Mississippi. The halting of construction on three of TVA's nuclear power plants will compound this area's employment and income problems.

Lending activity at savings and loan associations continues to decline. However, net deposit flow has improved slightly since year-end.

Employment and Industry
Unemployment continues to spread across the region. Four of the six states in our District now have jobless rates above the national average. Conditions are most serious in Alabama, where the statewide unemployment rate is nearly 14 percent. There are also reports of unemployment rates as high as 22 percent in some rural counties in the region. Although Georgia's rate remained below that of the U.S., an 8.2 percent rate in January marks a six-year high.

Textile employment has perhaps been affected most severely. A large North Georgia carpet manufacturer recently went bankrupt, eliminating 1,200 jobs. More plant closings are predicted due to the industry's linkages to the stagnant new housing market.

Energy and related industries have been the primary sources of strength to the Mississippi and Louisiana economies over the past year. However, declining oil prices and reduced exploration are now affecting these areas adversely. Oil refineries and offshore drilling rigs are operating at rates well below those of last year, forcing temporary layoffs. Drilling permits in Louisiana are down 6 percent from a year ago. There are as many as 2,000 workers on temporary layoffs in the petro-chemical industry around Baton Rouge. Industry experts predict that this number will more than double in the next month.

Repercussions of the recession on the region's important tourism industry vary widely among major resort areas. Although activity is slow in South Florida, there are signs of improvement in Central Florida. Attendance at Disney World has been affected little by the recession. So far in 1982, occupancy rates at lodging places have been up as compared to last year.

By contrast, Atlanta and New Orleans are experiencing lower hotel occupancy rates, declining convention business activity, and lower visitors' expenditures. While tourist activity in South Florida is expected to improve by mid-year, industry analysts in Atlanta and New Orleans are concerned that recovery may take longer than previously expected.

Agriculture
Low farm product prices and high costs continue to weaken farm financial conditions in the region. Indebtedness exceeds assets for many farmers in the Southeast, but few lenders are foreclosing. Land prices are soft and lenders feel that a rash of foreclosure sales would probably drop prices to the extent that they would have to buy farms to protect their interests. In most cases, lenders feel that their chances of recovering on loans are much better if the property remains in the hands of current owners.

Views of Outside Experts
Several widely respected economists addressed a conference in Atlanta last week. Remarks by Milton Friedman, Lawrence R. Klein, and Martin Feldstein are of particular interest.

Friedman warned of 25 percent inflation in three years if the Administration yields to growing pressure to support an increase in federal taxes or delay scheduled reductions in personal income tax rates. On the other hand, he predicted that inflation could drop as low as 3-5 percent within three years if President Reagan sticks by his supply-side policies of lower taxes and reduced spending. He warned that reducing the size of government is absolutely essential if the economy's ills are to be cured. This, Friedman emphasized, is even more important than reducing the budget deficit.

Klein favors incomes-based policies if the fight against inflation is not successful and labeled Friedman and others "a lot of sob sisters blaming the Federal Reserve" for the nation's economic distress. He argued that economic events of 1981 provide extraordinary evidence that certain popular renditions of supply-side economics are false.

Martin Feldstein warned that the hardships of the current recession, particularly rising unemployment, could scuttle the administration's effort to achieve fundamental economic reform. He also said that "if Congress focuses on rising unemployment and falling profits, it could revert to its old ways and call for a Keynesian stimulus to demand." In Feldstein's view, this would mean increases in government spending and would pressure the Federal Reserve to expand the growth of credit. The result would be a return to higher inflation rates and an even harder time controlling inflation in the future.

A panel of bank and business economists within the region is in general agreement that monetary policy is correct provided the Fed adheres to its announced monetary growth targets. The consensus view concerning the prospective 1982 deficit is that it will limit, but not abort, economic growth after mid-year; however, some "crowding out" of housing and business investment will occur.

Early signs of economic recovery in the region are not yet visible to any of the respondents on the panel, but most expect recovery to begin sometime this summer.