The Outlook for the South Florida Economy

By Russell P. Chuderewicz
Published in Spanish in Tiempos del Mundo (11/29/2001)

Due to the weak US economy and the events of September 11, the state of the South Florida economy is of great concern. Prior to September 11, the outlook for the region was not good, given the sluggish US economy. The effects of September 11 and the corresponding shock to the airline industry have put the entire region on alert.

Current State of Affairs

Economic Statistics are beginning to reflect to negative influence of recent events as well as Miami –Dade County’s reliance on tourism. For example, the unemployment rate for Miami – Dade County has risen to 7.3% (October) from 6.4% (September) where the statewide rate stands at 5% from 4.6%. The disproportional influence on Miami –Dade is clear when one considers that statewide, the number of people unemployed, between September and October, rose by 27,000 with 38% of those losing jobs in Miami – Dade County. Put differently, for every additional 100 people that became unemployed statewide, 38 were from Miami – Dade County. Air travel at Miami International Airport, according to Visit Florida, has fallen by roughly 283,000 or 24.5% when comparing September of 2001 with September of 2000.

As a result of the weakness in economic activity, many businesses are lowering prices in an attempt to stimulate demand. For example, the cruise industry has lowered prices dramatically with three-day cruises priced as low as $149 from nearly $300 a year ago. Auto dealers have also slashed prices and are offering zero percent financing. Area malls are having massive sales to stimulate buying and area hotels are offering special packages.

So in the immediate run, we are seeing significant layoffs coupled with lower prices for many goods and services, including oil, which will benefit those fortunate enough to be employed since each dollar goes a little further in terms of purchasing power.

The Outlook

The future of South Florida’s economy depends critically on the strength of the US economy. Tourism is a pro-cyclical industry, rising when the US economy is strong, and falling when the US economy is weak. The nearby graph shows the close connection between the unemployment rates in the US and Miami – Dade county. Note that during the most previous US recession (early 1990s), the unemployment rate in Miami – Dade county shot up into the double digits, reflecting the disproportionate influence of a weak US economy on local economic activity.

Although not official yet, the US economy is currently in recession. Policymakers are very active trying to fight the recession, with the Federal Reserve lowering interest rates aggressively all year and US government officials increasing spending and cutting taxes. As such, most forecasters believe that these policies will result in this being a short recession, with economic growth returning in the second quarter of 2002, with the return of strong economic growth by the fourth quarter of next year. There are already positive signs surfacing consistent with these forecasts. First, US stock prices have been rising, significant given that historically, stock prices rise immediately before the official recovery begins. A second positive sign is that interest rates are beginning to rise reflecting brighter expectations about economic activity in the future. A third positive factor is low oil prices. Not only do low oil prices free up more money to spend on other goods and services, but also should result in lower airfares given that airlines’ primary input costs are in jet fuel. Most recently, new claims for unemployment in the US are declining, and consumer confidence is rising. Richard Curtin, director of consumer surveys at the University of Michigan was quoted in the WSJ (11/23/01) as stating “The big surprise was that the fears generated by the terrorist attacks and the spread of anthrax have had so little lasting impact on the economic expectations of consumers.” The graph below considers two scenarios and compares my economic forecasts to a model assuming that September 11 never occurred.

The short-lived forecast assumes that the shocks of September 11 wear off at the end of the first quarter of 2002. The long-lived forecast assumes the shocks of September 11 persist throughout all of 2002. The short-lived forecast is inline with the consensus forecast in that the recovery will begin in the second quarter of 2002. If the shocks persist, as they would if we had another negative shock, then the recovery will be stronger, but only after a weak holiday and tourist season next year. Overall, I believe the US economy, barring any unforeseen major events, will be quite healthy by next year at this time and combined with better airport security, will result in a robust tourism season a year from now.

The Longer Term

The long - term outlook is most favorable of all. Before the slowdown in the US economy, many were talking about the ‘new economy,’ a phenomenon associated with faster economic growth without inflation. The source of the new economy lies in the productivity of the US worker: the ability to turn gains in information technology into more productive workers. The events in the past year has not effected this phenomenon, and the Federal Reserve is quite confident that the long-run trend in productivity growth remains, and thus is quite confident that the US economy will return to its previous combination of strong growth, low rates of unemployment and inflation, in the not to distant future.

Concerns

Given the uncertain environment that prevails, many surprises may be in store. One concern would be an increase in oil prices that are typically associated with tensions in the Middle East. One reason the Federal Reserve has been so aggressive in lowering interest rates is due to low inflationary expectations. Oil shocks have historically resulted in higher inflation and along with it, higher expected inflation. If oil prices increase significantly, we could easily see the economic recovery delayed, and with it, more pain and suffering by firms and workers alike. Another concern is another significant terrorist attack. Confidence for both consumers and investors has been shaken and will eventually return to their pre-crisis levels. Naturally, a significant terrorist threat would delay, and perhaps, lower confidence to levels that would result in a long, drawn out recession.

In summary, I am positive that the US economy will recover sometime in 2002 and along with it, the South Florida economy. Policy makers are very active stimulating the economy, the war effort seems to be making significant progress, and the President has recently signed an airline security bill that should ease fears associated with flying. In the short-term however, we will see unemployment rates rise, more layoff announcements, and generally bad news as we work our way through the first recession in 10 years. In the meantime, take advantage, if possible of the low prices available in the local economy, spending locally is critical in keeping this economy afloat until the US economy recovers.