U.S. Southeast Will Continue to Outperform Overall Economy
Interview conducted by Rachel Duran
Editor’s Note: This interview was conducted on October 18, 2013. For the latest economic news and the results of the Leading Economic Index, visit www.conference-board.org.
A funny thing happened on the way to the United States reaching 2 percent to 2.5 percent economic growth in 2013; it was interrupted by the partial federal government shutdown in October.
While the unknowns, such as how much consumers and businesses pulled back during those 16 days remain to be factored in, a projection issued by Standard & Poor’s found the shutdown cost the economy $24 billion.
The Conference Board’s Ken Goldstein discusses what the interruption could mean to GDP growth, how businesses might approach planning, and what 2014 holds for the economy.
Global Corporate Xpansion:How did the partisan politics of the past few weeks in Washington, D.C., affect the economy?
Ken Goldstein: It clearly hasn’t helped. The question is: how much has it hurt? The early guesstimates are that the combined shutdown, as well as the prolonged debate over the debt ceiling, took as much as 0.3 percent off of GDP.
That is the estimate of the direct impact. The real unknown is how much ancillary damage was done. For those who were not sure we wouldn’t go over the fiscal cliff — how much did consumers pull back and how much did business pull back? That is the unknown.
Without the political standoff, leading economic indicators for the purchasing manager surveys, and other forward indicators of economic activity, not forecasts, but indicators, were suggesting that by this time this year we might finally be up to a 2 percent or 2.5 percent growth range in terms of GDP.
Shaving points off of this as a result of the debate/debacle has taken at least 0.3 percent, possibly twice that, if you add in the negative impact on consumer and business plans.
We are probably down to a 2 percent underperforming economy. What’s more, and this remains to be seen since the holiday season doesn’t start for another month, but this may contribute to a mediocre holiday season. However, that is not the question. The big question is, assuming we have a negative fallout, how much and how fast do we recover?
Do we arrive at a 2 percent or 2.5 percent growth path by the first quarter, or by the second quarter? This is entirely possible, unless the other shoe hits the floor and we do this again in January, or something else happens.
Taking an optimistic outlook, the assumption is that we won’t go back into another debacle. There are really only two options: (1.) we reach a grand bargain, or (2.) we kick the can down the road until we get past the next election.
GCX:What does this do to business planning?
Goldstein: Business planning has been on the slow burner for quite some time, certainly throughout 2013. So if you have to go through this [shutdown], having it happen at a time when business planning is already modest works out well.
It also reinforces the caution we have seen in 2013 in regard to business planning. A question facing businesses, certainly through the fourth quarter, is whether they should make the decision to expand.
GCX: What has the interruption done to the country’s economic regions?
Goldstein: In some sense the political debate was about the degree of austerity. There is no question that at the federal level we are in and will continue in 2014 with a fiscal policy that is an austerity regime.
In the United States, we spend more money out of the statehouses and city halls than we spend out of Washington, D.C. And in 2013, many states and cities, with Detroit as an exception, for example, are coming out of austerity.
In terms of the economic impact there is a bit of balancing between the positive impacts coming out of austerity at the state and local levels, and intensifying the degree of austerity at the federal level. To the extent that it matters for business, it has been difficult to sort through these conflicting cross wounds.
Clearly, anyone with a contract at the federal level has been most impacted by the shutdown.
GCX: How will what’s happening in the overall economy directly affect the Southeast region.
Goldstein: We were building momentum through 2013, and I don’t think it has been fundamentally altered, but it has been interrupted. We still have that momentum, which is being driven in some sense by what is happening in the housing market and the labor market.
We are still on target to reach 2.5 percent growth, certainly by mid-2014. Again, depending on what happens during the holiday season, and therefore, what happens in the post-holiday period, we could easily hit 3 percent before this time next year, in particular with the influences of the housing and labor markets.
The point to emphasize is we are going to get there in 2014. We would have been there in 2013, but for the fiscal cliff a year ago; the sequestration earlier this year, and the big debate we just finished.
One of the biggest dangers for next year is to get back into these squabbles and interrupt the improvements in the overall economy. The big danger is that if you keep interrupting it, eventually you kill it.
Turning to the Southeast, if specific drivers are labor and housing, one of the benefits for the Southeast is this region is still where we do a lot of furniture building.
That is strong enough going into 2014 to offset whatever negative affect the sequestration and continued austerity in terms of defense spending might have. The Southeast has a lot of military installations, as well as defense contracting.
One of the big influences in the Southeast has been the BP oil spill in the Gulf of Mexico. For some parts of the Southeast, fishing and tourism are being affected by the continued degradation in the ocean.
Even though we are still in recovery from the spill, the longer term issues include the lack of oxygen in the water, and the increase in the acidity of the water, limiting fishing populations. Which in turn limits tourist opportunities.
GCX: Where are the hotspots in the Southeast economy?
Goldstein: The hotspots have been for some time the Carolinas and Georgia. I think Virginia and Florida may be impacted by the military cuts, in regard to facilities and contracting.
I think that Alabama, Mississippi, Kentucky and Tennessee have benefitted from the transplant auto assemblers. However, I do not see large plans for more of those transplants.
The Southeast has been a region performing better than the overall country, and that is likely to continue into 2014.
Ken Goldstein is an economist with The Conference Board, and can be reached by emailing firstname.lastname@example.org. The Conference Board is a global, independent business membership and research association working in the public interest. The board’s unique mission is to provide the world’s leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy, not-for-profit entity holding 501(c)(3) tax-exempt status in the United States. Among its services, the organization publishes information and analysis, makes economics-based forecasts and assesses trends. To learn more, visit www.conference-board.org.
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