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The Atlanta Fed's SouthPoint offers commentary and observations on various aspects of the region's economy.

The blog's authors include staff from the Atlanta Fed’s Regional Economic Information Network and Public Affairs Department.

Postings are weekly.


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12/02/2010


Thoughts on Georgia's economic outlook and energy demands

On December 1, I participated in the program on "Promoting Sustainable Energy Resources," which was organized under the aegis of the Consulate General of France for the Southeastern USA and an array of French and American partner institutions and organizations. I'd like to outline my comments on that issue and related economic matters:

The national and state economies are recovering, but slowly.

Recent data and reports from business contacts indicated that economic activity rose modestly in October through mid-November.

Nationally, estimates indicate that real gross domestic product (GDP) grew 2.5 percent in the third quarter, similar to the modest growth rate posted in the second quarter.

The consensus real GDP forecast of economists is for positive but slow growth through 2011.

In Georgia, the recession was steeper and the recovery to date has been more muted than what we have seen in other areas of the nation. Nonetheless, the narrative of a slow, steady recovery holds for our state as well.

According to the U.S. Department of Energy, Georgia ranks ninth among all states in terms of total energy consumption. As the state's economy recovers, energy demand is expected to increase.

In manufacturing, recent data showed an increase in industrial activity in October, although the pace of growth appeared to decelerate in Georgia.

A notable share of Georgia's industrial output is tied to the construction sector, which we'll talk about in a minute. Because of the deep downturn in development, our manufacturing recovery may be a bit more tepid than what we're seeing at the national level.

Kennesaw State University's Econometric Center publishes a purchasing managers index (PMI) for Georgia. It reflects manufacturing activity at the state level. The survey asks plant managers about current production and orders, among other things, that feed into an overall index. Anytime that reading is above 50, it represents an expansion in manufacturing activity, and when it's below 50, it represents a contraction.

After spending nearly two years below 50, Georgia's PMI entered expansion territory early this year—rising steadily before decelerating in August, September, and October to a reading just above 50. Manufacturing is expected to continue to expand modestly going forward. As the state's industrial activity improves, its energy demands likely will rise.

I noted a moment ago that the state's construction sector is largely dormant. Census data show that after averaging roughly 8,000 new housing units through 2005, permits for new residential construction declined to below 1,000 in 2010. It's unlikely that this number will be picking up soon because of the large inventory of unsold homes on the market and the difficulties that remain in obtaining housing finance.

Energy demand for construction will therefore likely not be increasing at the pace seen earlier in the decade.

Transportation is another area of the economy that requires a lot of energy. Personal transportation is likely off where it was a few years ago because of the state's high unemployment rate; fewer people are driving to work.

That said, as personal spending increases as the economy recovers, the shipment of goods around the state will likely rebound. Georgia is a national logistics hub with the port of Savannah and transportation hubs like Atlanta. The state's energy consumption from freight transportation will therefore likely rise faster as the economy rebounds.

In short, Georgia's energy demands look like they are likely to rise in the short term as the economy recovers, and in the long term as the state returns to more normal growth patterns. Georgia has traditionally outpaced the national average in terms of the pace of economic growth, and there's every reason to believe that this pace will return once the remaining economic imbalances are worked out.

Providing the energy for this accelerated pace of economic activity is a central part of the story. During the recession, a number of developments have occurred that allow me to be optimistic when it comes to employing our energy resources more efficiently in the future.

First, many businesses—large and small, industrial and service-oriented—have undertaken serious programs to increase their energy efficiency. Doing more with less was a theme we heard over and over again from our business contacts in Georgia. This effort includes reducing their energy bills through investment in cost-saving equipment and installation of energy-reducing policies. We have initiated several energy-savings programs at the Atlanta Fed just in the last few years.

Doing more with less may also be reflected in the kind of homes that are built in Georgia, once we start building them again. Smaller, more energy-efficient homes may be the norm, and this type of home will help us contain energy demand from the residential sector.

For many car buyers in the last few years, fuel efficiency has been a major factor in the decision about what model to acquire. Fuel efficiency in cars and trucks is improving, and as long as consumers demand better and better results, manufacturers will have no choice but to make them.

Doing more with less, energy savings as a means to achieve greater cost savings (both in our businesses and in our homes), and increased fuel efficiency are ideas that have accelerated during the recession. These improvements will allow us to meet future energy demand, but they do not truly get to the question of sustainability.

I'd like to quote from an energy study done at the Atlanta Fed published in 2009 by my colleague Laurel Graefe. She writes:

"The supply of energy as we have known it is in the process of transition. Today's 'easy' conventional oil that the world relies upon as a primary energy source is being depleted, and, regardless of the exact timing of peak oil production—be it this year or fifty years down the road—the world faces the challenge of adapting to a new model of energy supply.

"The underlying issue in the debate regarding energy resource depletion is the fear that the transition from conventional oil to substitutes will be expensive and chaotic, leaving insufficient time for supply substitution and adaptation."

Finding substitutes for our current stock of energy resources is a question for today, not tomorrow. We are taking small steps to meet future demands more efficiently and with less pollution. That progress is all good. But we need to take bigger steps to really address the question of sustainability. More and more people will come to Georgia, and their demand for energy resources will continue to increase. Meeting that demand in a framework of sustainability is the issue of the 21st century.

By Michael Chriszt, an assistant vice president in the Atlanta Fed's research department

December 2, 2010 in Construction, Employment, Energy, Housing, Manufacturing, Transportation | Permalink

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