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Economic Yearbook: Preparing for a Soft Landing
When the manufactured-housing company Homes of Merit decided it needed more capacity, Columbia County offered to build a new factory in Lake City and lease it to the company. This summer, the county-owned plant will commence operations in a city-owned industrial park with 70 new employees.
Over the last three years Sarasota County, long-known as a bastion of the no-growth movement, has increased its economic development budget more than six-fold to $750,000, including a marketing budget of about $600,000. Sarasota today also offers to waive impact fees for road building to employers who promise to create jobs with above-average wages and other requirements.
When Orlando tried to lure a new AT&T Microelectronics plant last year, it found that its main competition wasn't Tampa or Atlanta , but Madrid, Spain. Beating out the Spaniards required $9 million in state and Orange County incentives, or an average of $15,000 for each of the 600 new jobs created by AT&T, now known as Lucent Technologies.
When retailers find they have to use discounts and special sales incentives to move their inventory, it's an unhealthy sign for the future. The same can be said of the increasing number of incentives Florida governments must offer to attract new business. It may take more than incentives, however. Serious concerns about the quality of Florida's schools and workers emerged in a recent survey commissioned by the Florida Department of Commerce.
What will 1996 offer to Florida? Certainly the competition for new jobs and industry will continue to grow tougher, but at least the economy as a whole should perform fairly well. Among the major issues now facing Florida's economy: interest rates, defense cuts, employment growth and consumer confidence.
Interest Rates And The Housing Market
The biggest economic news of 1996 is low mortgage rates. Cheap financing means higher levels of investment, durable goods consumption and home buying. This helps all sectors of the economy (with the notable exception of retirees dependent on interest income) and is an absolute boon for housing-related businesses.
To see how the dramatic decline in mortgage rates has affected the housing industry, consider that a fall in the 30-year-fixed mortgage rate from 9.0% to 7.0% results in a savings of $140 per month for a $100,000 loan.
If Congress and the White House ever actually achieve a balanced budget over seven years, the National Association of Realtors projects a 30-year-fixed mortgage rate of 5.5% by the year 2002. That would be a savings of $237 per month on a $100,000 loan and a savings of $474 per month on a $200,000 loan, compared with the 9% level of 1994.
The decline in mortgage rates is providing a needed boost to "move-up" demand, particularly in South Florida. "Move-up" demand can refer to people selling their current home and trading up to a new home in the same area, or it can mean moving to a new home in another area. In South Florida, the latter case is common; the direction of migration has long been northward, a trend that was only accelerated by Hurricane Andrew.
Interest Rates And Retirees
But, low interest rates are a mixed blessing for Florida because of the large contingent of retirees whose disposable income has taken a direct hit. A retired couple with $250,000 in CDs has seen their annual income from that source cut almost in half (from $22,500 to $12,500) as 3-month CD rates have fallen from just over 9% in 1989 to just over 4.89% in early March. For many retirees, the income from these investments constitutes disposable income since many of the necessities of life are covered by their Social Security income. Spending on luxury items, entertainment and other non-necessities is typically scaled back sharply according to changes in income, which means a noticeable drag on Florida's economy, particularly in the regions that are heavily populated by retirees.
Mother Nature Boosts Tourism
Another current economic news item is the improving performance of the state's tourism industry. Current growth rates are nowhere near what they were in the 1970s and '80s, but compared with the hard times of the last several years, tourism is enjoying a nice expansion. While domestic tourism has been lifted by the Blizzard of '96, favorable currency exchange rates and cut-rate airfares have lured foreign travelers. Even image-battered Miami is rebounding, with a 21.3% gain in European visitors last year, a third of which were Germans.
Major hotels in Miami and the Keys are full, airlines are adding flights and convention and visitors bureaus are getting triple their normal inquiries. This flurry of activity is sure to slacken in the summer, but the other lures will still be in place, ensuring higher than normal spring, summer and fall activity as well.
The increase in tourism has helped increase retail employment, wage income and hotel profits. This will ripple through the Florida economy as a whole, boosting the state further above the nation in total economic growth.
Base Closures
Another major issue facing Florida during this slow growth period is military base closures. Although the State of Florida is not a defense economy, there are geographic regions in the state that are economically linked to defense spending. The University of Florida's Bureau of Economic and Business Research (BEBR) estimates that the Department of Defense will reduce its presence in Florida by 19% (not as high as the 34% scale-back expected nationally, but still significant). This will mean the elimination of 16,000 military jobs and 4,000 civilian jobs statewide. That is the direct impact; the multiplier effect will more than double the civilian job losses. This impact is not large compared with the state's job base, but it is a punishing loss for certain submarkets.
Not all the news from the Pentagon is bad, though. Pensacola, for example, will add enough military personnel at the Naval Air Station to partially offset the reductions at the Naval Aviation Depot. There will still be a net loss of civilian jobs, however, estimated by the Department of Defense at 3,151. A final salvation for Pensacola is its ability to attract military retirees. The number of military personnel retiring has increased noticeably since the disarmament began; this influx of retirees will stimulate economic activity in the area, creating jobs and income.
The Trend In Jobs
From December 1994 to December 1995, the state labor department says that total employment is growing statewide at a moderately strong pace, just over 3%, but this moderate pace masks a diversity of trends in individual industries. As usual, services accounted for most of the new jobs, posting a large numeric and percentage increase. Retail trade recorded a respectable increase, though the recent Christmas season left a lot to be desired. Employment in the manufacturing sector as a whole increased slightly, by 1,700 jobs. The largest employment increase within the durable goods sector was in electronic equipment, which was up by 2,800 jobs. Certain small industries, such as textile products and apparel, lost 1,700 jobs. Finance, insurance and real estate employment rose 1.7%.
The Primary Economic Risks
If all goes according to plan, the economy has several years of moderate growth left in it. There are, of course, some possible glitches and mishaps that one should watch out for.
Risk #1: Consumer Confidence
The most important wild-card is consumer confidence, a critical determinant of consumer spending. Confidence is getting shaky, despite steady job growth. This is shown by surveys at the state and national levels.
The Florida Consumer Confidence index, produced by BEBR, has been increasing since the last recession, but faltered in 1995, falling two percentage points to 87 in December (down from a peak of 94 a year prior). A drop in confidence may motivate consumers to pay off debt in preparation for hard times. This paydown would, despite its prudence, cause a slowdown in economic activity. This is the classic self-fulfilling prophecy.
But for now, personal debt continues to rise, especially the credit card variety. Debt levels are not high enough to cause a sudden decline in spending, but debt is high enough to make consumers sensitive to changes in confidence. If consumers feel that their jobs are less secure, the result is likely to be an exaggerated negative effect on spending as a result of high credit card balances.
The January 1996 reading of the Florida Consumer Confidence Index was positive, rising from 87 to 88, says BEBR. The regional disparities in confidence were noteworthy -- Tampa's consumers were feeling very positive, while South Florida residents were feeling skittish in January.
Risk #2: Interest Rates
Almost every indicator points toward stable, and possibly declining, interest rates this year. There is a risk, however, that rates will rise for one of the following reasons: (1) the markets will be skeptical about the federal budget outlook, or (2) rising inflation.
The bond market has been operating on the assumption that the economy is slowing but not moving toward recession and that the budget is moving toward balance. This outlook among bond investors allowed long-term bond rates to fall nicely last year. The bond's yield climbed to a six-month high of 6.69% after a report that U.S. businesses hired twice as many new employees as expected in February.
Risk #3: Recovery Dies Of Old Age
If neither of the first two risks comes about, why should we worry? In the absence of rising inflation or faltering confidence, can't the economy keep growing without contracting again? The answer is that the odds are stacked so far against that dream scenario that it is not worth considering.
Even in the absence of these negative factors, the business cycle will perpetuate itself. Think of it this way: When the economy is growing, factories add capacity, which means positive investment in factories and machines; if demand for goods were to stop growing, even if it did not decline, the level of investment would fall almost to zero. Since investment is a major portion of Gross Domestic Product, the economy would decline. Another recession is inevitable -- the question is when. The good news is that it looks like it will not be in 1996.
Risk #4: The Budget Hangover
Congress and the President have a noble goal in common: balancing the budget (the common goal is actually to get re-elected, but they view this political act as a means to that end). This is an admirable goal and is going to result in good things for the economy. But in the shorter term, dramatic budget cuts could create a noticeable drag on economic growth. Combine that with the fact that Medicare cuts would disproportionately affect Florida's economy, and this turns out to be a significant risk.
