The 2016 State of the Sunshine Economy
Through all the tawdry talk, accusations and innuendo during this election American voters have been consistent in saying the economy is their big issue.
The Federal Reserve Bank of Atlanta, which includes South Florida in its territory, quizzed 200 companies throughout the region. One out of three of them said the election was having an effect on their business decisions such as investing in their companies or hiring new workers.
"We took that to be a material number," said President and CEO of the Atlanta Fed Dennis Lockhart when we spoke with him earlier this month. "Business people may be holding off on certain kinds of decisions because of the uncertainty related to the election."
Interest Rate Outlook
That uncertainty may not extend to whether the Federal Reserve raises interest rates soon. While Lockhart acknowledges the U.S. economy is not "terribly strong," he believes it is "operating at an OK level." That assessment, he says, "is sufficient to justify a slight increase in the policy rate."
About every six weeks, the Federal Reserve Open Market Committee meets to discuss it's level of interest rates. It last raised the rates in December. It was the first interest rate change since the Great Recession began. It raised the Fed's so-called target interest rate from zero to .25 percent. But since then, nothing.
"If the economy remains on the path that it appears to be on," Lockhart said, "then in one of the coming meetings I think its in all likelihood going to be appropriate to raise interest rates by a quarter [of 1 percent]." The Fed's interest rate group meets next in November just before Election Day and again in December.
WLRN spoke with Lockhart and the head of the Atlanta Fed's branch in Miami, Karen Gilmore, about how higher interest rates could impact real estate and tourism in South Florida, the general state of the regional economy and its challenges.
INTEREST RATE IMPACT?
WLRN: What are local business executives telling you about the cost of cash?
Gilmore: It's exceptionally low. This has been a very good environment for [other types of businesses]. The cost of capital is cheap. The cost of borrowing is cheap. They've been able to invest accordingly. A lot of them took their floating rate debt and converted it to fixed debt. So this has been a very good environment in that respect.
WLRN: Could a small rise in interest rates hasten some of the softness in the real estate industry?
Gilmore: We have seen a slowdown, especially in the multi-family market -- condominiums -- because apartments are still very strong, probably too strong, in the rental market. So in many ways [higher interest rates] could cause for a correction that's really needed. When I talk to a lot of private equity people and bankers the valuations are a little concerning. So an increase in interest rates could move to temper some kind of location-oriented asset bubble in their minds anyway.
WLRN: The other big tent pole for Florida's economy is hospitality -- that's tourism and consumer spending. What could the impact be on consumer spending as we're about to enter into the traditional tourist season?
The tourism numbers here in South Florida have been very strong. - Karen Gilmore, regional executive of the Federal Reserve Bank Miami Branch
Gilmore: They haven't expressed that as a concern.
Lockhart: My sense is that when someone was trying to make a decision about a vacation the level of interest rates is not high on the list of considerations. The kinds of things that weigh on people's decisions to take a vacation relate to confidence in employment, confidence in personal financial security and a general feeling of economic well-being. What tends to actually swing most as the economy moves up and down in the U.S. is the spend on vacation. For example, theme park operators will tell us that the amount of spending that occurs once a family is in the park is really a variable in their revenues depending upon the economic outlook. But interest rates themselves I don't think factor greatly into this question
WLRN: Poll after poll report the economy is the No. 1 issue in this election. There seems to be a lot of economic anxiety. Is that a risk to the hospitality industry?
Gilmore: The tourism numbers here in South Florida have been very strong. It certainly doesn't seem to be permeating the psyche of the tourists coming to South Florida. Fort Lauderdale had a very, very strong season.
Lockhart: Karen and I sat in [recently] in an advisory council meeting of our travel and tourism advisory council. My take away from that meeting was that the Zika virus has had some effect on bookings, particularly bookings of large groups. But overall tourism is holding up for South Florida quite nicely in spite of the election going on, in spite of some measured economic anxiety on the part of the broad public in the United States. The other thing about that is there's been a little bit of a mix change so a little less on the international side and a good growth on the domestic [tourism] side.
WLRN:Bloomberg found that Florida is the only state in the union where two cities are in the top 10 cities with the biggest income inequality. They were Miami and Tampa. And Miami was No. 1 e with the largest income disparity of any major metropolitan area in the United States.
Gilmore: We have a community economic development group that I work with in Atlanta. We are looking at income disparities. We're looking at workforce development issues and housing affordability, all of which affect populations especially in Miami-Dade but throughout South Florida.
"Recessions have to have a cause." - Federal Reserve Bank of Atlanta Pres. Dennis Lockhart
WLRN: Is income disparity inherently a bad thing for a community to have?
Lockhart: I think it's a matter of degree. Extreme income disparity that resembles developing countries or some South American countries over time certainly cannot be good for social cohesion and a country pulling together to try to increase and improve its overall welfare. I think there are extremes of income disparity that are are quite unhealthy. They're unhealthy economically, of course, but they're also unhealthy in the political realm. Inequality in America and inequality for that matter in Miami and South Florida is a concern. It is not something that can be addressed easily using monetary policy. Monetary policy is a blunt instrument. We try to set the interest rate level generally and then the market takes care of the rest. In terms of income, the market distributes income. It's not something that the Fed can directly address. We can more directly address the general demand conditions in the economy and the general state of the economy and then hope that other policies can address inequality.
WLRN: Is the kind of disparity that the data is picking up in Miami, which has been growing, is it sustainable? At what point does it become unsustainable?
Gilmore: I know community leaders here are focused on it. They're really focused on housing affordability. I know from working with companies that to attract individuals to come to work here, housing affordability is a primary issue. It's in their best interests to address these kinds of disparities.
Lockhart: There's an expression that I've picked up on recently that I think is a good way of thinking about it and that is the essential economy worker. In every locality there are people who work in the service economy who are essential to keeping things operating. Think in terms of the hospitality industry of having maids who clean the hotel. These people are essential to keeping an economy operating particularly at a local level. When they cannot afford to live in the location that we're talking about, then you're going to have some breakdown in how that economy operates. Keeping a balance in housing and a balance in income is really important for a city or a region like Florida to operate at its optimum level.
CHANCES FOR AN ECONOMIC RECESSION
Lockhart: I often get the question, ‘Aren’t we due for a recession?’ My answer is that recessions have to have a cause. It’s not like a baseball player in a slump due for a hit. It is not a matter of a probability game over time. I don’t see the proximate causes of a recession at the moment. The most likely big effect on the national economy would be some shock to consumer confident — the kind of shock that makes consumers especially cautious. I don’t see that developing. The high levels of [consumer] confidence and the relatively employment outlook suggests that we can sustain this moderate expansion we’re in.