When he delivered a national and regional economic report card this week, Federal Reserve Bank of Atlanta President Dennis Lockhart came armed with data to support his conclusion the economic recovery is “demonstrating clear evidence of improving quality” despite residential and commercial real estate that continue to lag gains evident in other sectors.
Then after his presentation Lockhart spoke during an interview about an indicator that is harder to measure: the emotional well-being of consumers who feel battered by inflation on everyday family staples, especially prices at the pump and groceries.
“Gasoline prices influence consumer attitude and sentiment because of the direct, highly visible nature of filling up your tank and seeing your money click away, and then being startled by the cost of the full tank,” the Federal Reserve Bank president said. “It has a big effect on people and we have to watch expectations closely to make sure they don’t get away from us.”
On Friday, the U.S. Labor Department said the Consumer Price Index rose 0.4 percent in April, and year-on-year inflation rose to 3.2 percent, the highest level since October 2008. Gasoline was up 3.3 percent nationally in April and 33 percent in the past twelve months. One gallon of regular unleaded routinely sells for $4 and sometimes more in the Atlanta metropolitan region.
During his economic report card Lockhart predicted “relatively modest” 3-to-4 percent annual gross domestic product growth in 2011 and going forward, adding, “Economic history shows that recoveries after a financial crisis tend to be quite slow.”
Strong growth during the second half of 2009 was softer through much of 2010 until a fourth quarter bounce back. “Ups and downs in quarterly growth are in fact normal,” Lockhart told the Council for Quality Growth, which promotes economic development in Atlanta and collar counties.
Long term economic growth and stability will no doubt be impacted by how Washington resolves fiscal issues. On Thursday, Republican leaders in Washington told President Barack Obama that there will be no increase in the national debt limit ceiling without linking it to entitlement reform.
“The important thing is to get a meaningful long-term plan in place that first, attacks the deficit which is a pre-requisite to being able to repay debt, and then works that debt down,” Lockhart said on Wednesday. “I have emphasized in previous remarks, and I know most of the people in political circles understand this, you cannot count on growth to take us out of this debt.”
Lockhart said he could not discuss whether the debt limit ceiling should be tied to other issues such as entitlement reform, as national Republicans insist. “It’s too close to being active legislation, active deliberations on (Capitol) Hill, for someone like me to weigh in from the outside. It’s important that we come to grips with this and produce a credible plan.”
The U.S. domestic economy has battled uphill to recover from other impacts that include last year’s European sovereign debt crisis and earlier shocks created by hurricane Katrina, the Gulf of Mexico Oil spill and this spring, the Japanese tsunami, U.S. tornadoes and Mississippi River flooding.
Yet, it is resilient. Lockhart said first quarter business and software investment grew 12 percent compared to last year’s fourth quarter, and personal consumption expenditures were up 2.7 percent. He said anecdotal evidence suggests the Southeast outperformed the national economy.
Residential and commercial real estate nationally and also in Georgia continue to lag during the 22-month recovery. Citing several economic reports, Lockhart said home sales prices are down 30% from their peak five years ago and 23% of residential mortgages are underwater, meaning the property is worth less than the outstanding mortgage balance.
Lockhart said 3.7 percent of mortgages were in foreclosure and 7 percent of homeowners were delinquent on payments in March. Existing home sales are down 50 percent and near 1998 levels. New home sales are down 80 percent and now are at levels not seen since the early 1960s.
“Defaults and foreclosures are likely to remain elevated for some time,” Lockhart said. “My forecast for residential construction puts me among the less optimistic.” The national inventory of new homes is near historical lows, he added and, “This is clearly evident in Atlanta.”
Prices for commercial real estate – defined as the office, retail, hotel, warehouse and multi-family residential sectors – peaked in 2008 before a 45 percent decline that continues today. Atlanta office vacancy rates remained above 20 percent in the first quarter this year, fueled by weak job creation.
The U.S. Department of Labor’s jobs creation and unemployment report issued one week ago said non-public sector employers added more than a quarter-million jobs in April. “Employment growth of the magnitude we have seen so far this year is encouraging but will still only slowly bring down unemployment in the near term,” Lockhart said.
Georgia unemployment is 10%, well above the 8.8% national rate. The Federal Reserve Bank president predicted a “continuing decline of unemployment to a base level that is higher than pre-recession levels. At the gradual pace I am expecting, it could take up to three years to get employment back to pre-recession levels.”
Lockhart predicted overall inflation of 2% or less over the next two years, but he said further spikes in oil prices, intensified fiscal pressures here and in Europe, and continued deterioration of the U.S. residential and commercial real estate sectors could negatively impact inflation.
In summary, the Federal Reserve Bank president said, “Overall, I think the case can be made that the recovery underway is meeting some of the tests of quality. I understand, however, that it doesn’t feel that way to all of us. The recovery is clearly a work in process.”
(Mike Klein is Editor at the Georgia Public Policy Foundation)
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