What We’re Hearing
The Atlanta Fed’s most recent Southeastern Insights reported an “increased level of apprehension regarding the pace of growth in the near term as a result of growing concerns over another damaging debt ceiling debate, heightened geopolitical risks, and uncertainties related to regulations and the Affordable Care Act.” The report provided a broad summary of economic intelligence gathered through our network of business contacts and other sources throughout region from August 1 to September 18.
Increasing apprehension about the economic outlook
Recently, we’ve had several opportunities to discuss the outlook with audiences in the region. Lesley McClure, the Atlanta Fed’s regional executive in the Birmingham Branch, gave a presentation to the Rotary Club of Dothan and to the National Business League in Birmingham. Lesley detected a slight increase in apprehension regarding the short-term outlook.
“I queried the audience on how many of them felt things would be the same or get better/ if business activity would increase in the next three to six months,” she said. “The vast majority expected things to stay the same and only a couple raised their hands expecting improvement.”
In Tifton, Georgia, Regional Economic Information Network (REIN) Director Laurel Graefe gave a presentation to the local Rotary Club. Much discussion took place about the federal government’s partial shutdown and what it means on a broader level. The audience wondered about the impact on employment and GDP and was uncertain about what the shutdown would mean for them and their businesses. There was some apprehension about what the current congressional impasse may mean for the bigger discussion of the debt-ceiling limit.
Galina Alexeenko, REIN director at the Nashville Branch, recently gave a presentation to Middle Tennessee State University’s Small Business Development Center and found similar concern over the impact of the government shutdown and the potential economic impact of the government shutdown and failure to raise the debt limit.
I also fielded several questions about the impact of fiscal policy uncertainty in a recent talk in Atlanta and at a presentation to the Carrollton Rotary Club. Rising uncertainty was captured in several other indicators, including the Atlanta Fed’s poll of small businesses in the Southeast, as this recent macroblog post noted.
Questions on inflation
In Dothan, Lesley discussed inflation, which has been running below the Federal Open Market Committee’s target of 2 percent. After Lesley discussed this trend, one audience member asked, “How can you say inflation is low when I see rising prices at the grocery store?”
We get this question quite a bit, and we reply by explaining that inflation cannot be measured by an increase in the cost of one product or service, or even several products or services. Rather, inflation is a general increase in the overall price level of the goods and services in the economy. To read more about how the Fed evaluates inflation and its effects on the economy, see this explanation from the Board of Governors. To follow current trends in inflation indicators, check out the Atlanta Fed’s Inflation Project.
Price developments were also on the minds of my audience in Carrollton and at the Tifton event. The Tifton area has a large concentration of agricultural activity, cotton in particular, and Laurel spent a good deal of time discussing whether and how the Fed’s current accommodative monetary policy stance was affecting agricultural commodity prices and commodity prices more generally. Like Lesley, Laurel discussed recent inflation trends and added that increases in the prices of crude oil, food, and other commodities have proven temporary and can best be explained by the fundamentals of global supply and demand rather than by the stance of U.S. monetary policy. For a deeper discussion of this issue, see this speech by Janet Yellen, the vice chair of the Federal Reserve Board of Governors.
Apprehension about the economic outlook can be attributed to the notable rise in uncertainty we have detected in recent discussion with several audiences. We’ll continue to reach out to our business contacts to determine if this results in a pullback in overall economic activity.
By Mike Chriszt, a vice president in the Atlanta Fed's public affairs department
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Regional input cost, manufacturing indicators rise in January
The Econometrics Center at Kennesaw State University released its monthly Purchasing Managers' Index (PMI) report on manufacturers across the Sixth District this week. In January, the Southeast PMI continued its upward trend as Sixth District manufacturers hinted at a slightly brighter current economic picture and expressed an improving outlook.
Rising input costs were also reflected in the Southeast PMI's Commodity Prices component, which read 82.3 in January. Yet, as the Atlanta Fed's most recent Beige Book contribution noted:
"A majority of business contacts indicated that current cost pressures remained high, citing increasing material prices and rising labor and benefits outlays. However, most firms remained reluctant to pass input cost increases through to consumers given intense competitive pressures."
Atlanta Fed President Dennis Lockhart discussed the topic in his recent speech in Anniston, Ala.:
"And because movements of commodity and other 'headline' prices seem to be creating the impression in the popular consciousness of a growing inflation problem, I would like to give particular attention today to inflation."
Speaking specifically about his view on inflation, President Lockhart noted:
"What we're searching for is the underlying inflation trend that the FOMC [Federal Open Market Committee] statement talks about and which we want to control. And since an exact fix on the state of inflation is elusive in the short run, the best policy approach, in my opinion, is to pursue a low, but positive rate of inflation over the longer term. As a policymaker, I think of the desirable level of inflation as high enough to provide a cushion of safety against the risk of tipping into deflation but low enough to be largely irrelevant—not a consideration—in long-term decision making. For me, this number is around 2 percent.
"Notwithstanding the energy-driven jump in prices in December, underlying inflation is currently below the level that I would define as price stability. My current projection shows underlying inflation gradually rising over the next few years, putting us back into a range consistent with the 2 percent target by 2013. Key to the realization of this inflation forecast is that inflation expectations of the public remain well anchored. And for this to happen, the public has to have a good appreciation of what the central bank is trying to achieve and have adequate faith that we will achieve it."
The overall Southeast PMI as measured by our friends at KSU increased 2.5 points in January, putting the index at 58.9. The national PMI gained just a little less than the regional PMI in January (rising 2.3 points) to reach 60.8.
Both the regional and national indicators have taken a relatively sharp upward turn over the last couple of months, but the Southeast PMI remains on the heels of the national PMI, in their aggregate forms and in most underlying variables.
Though it continues to lag behind the national measure, the new orders index for manufacturers in the Southeast has seen significant upticks over the last few months. As new orders are a leading indicator, this upward movement is encouraging for future production levels. Also noted in the latest report, 63 percent of survey participants across the Southeast said they had plans to increase production levels in the next three to six months, up from 54 percent reporting plans to increase near-term production in December 2010.
Several other Federal Reserve Banks produce monthly manufacturing surveys that yielded similar results as the KSU PMI survey for January. Higher aggregate indices and particularly higher levels of new orders were noticed in the New York Fed's Empire State manufacturing survey (where data is indexed to 0 instead of 50), and the Philadelphia Fed's manufacturing survey, where the new orders index jumped 13 points. Future expectations for new orders were also higher in most regional surveys. Half of respondents in the Kansas City Fed's manufacturing survey indicated they expect new orders to continue increasing over the next six months.
By Mike Chriszt, an assistant vice president in the Atlanta Fed's research department,
Mark Carter, an Atlanta Fed research analyst
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