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,” Atlanta Fed President and CEO Dennis Lockhart said 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.”
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.”
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About every six weeks, the Federal Reserve Open Market Committee meets to discuss its level of interest rates. It last raised it 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 it’s in all likelihood going to be appropriate to raise interest rates by a quarter [of 1 percent].” The Fed’s interest rate group meets in November just before Election Day and again in December.
Lockhart says he is often asked if the U.S. is due for a recession, but he dismisses the notion that economic pullbacks happen on a schedule: “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.”
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.
Q: 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. Now if you talk about the bankers, they’re very eager to have a rate increase because it has put a lot of margin pressure on them.
Q: 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 multifamily 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.
Q: What about the impact on the construction job growth that we’ve seen? Is there a potential for a ripple effect?
Gilmore: That’s a good question. It’ll depend on the overall economics of the project itself. Potentially, I guess it could slow down certain product types. But right now, I think [the construction job market] is [dealing with] more of an issue of quantity of labor.
Q: The other big tent pole for Florida’s economy is hospitality — that’s tourism and consumer spending. I don’t want to make too much of the potential for higher interest rates, but what could the impact be on consumer spending as we’re about to enter into the traditional tourist season?
Gilmore: I don’t hear that from the industry. 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 [alone] I don’t think factor greatly into this question.
Q: Poll after poll report the economy is the No. 1 issue 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. A lot of hotel development to support all this increased activity also.
Lockhart: Karen and I sat in [recently] in an advisory council meeting of our travel and tourism advisory council. Of the seven people attending, four were from Florida, so we got quite a bit of information on Florida including South Florida. 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.
Q: The Census Bureau recently reported the average national household income was up 3.8 percent in 2015. Incomes in Florida and South Florida went up at a faster rate. However, the median wage here remains below the national average. Miami ranks 24th among the biggest 25 metro areas in the U.S. for income. What is continuing to feed that?
Gilmore: A lot of it is driven by the service sector low-paying jobs. Also it’s a very unusual community. You have this incredible wealth and then you have just the average worker. I think that it gets distorted quite a bit. It makes Miami one of the most expensive cities for housing in the country for the average worker.
Q: Bloomberg found that Florida is the only state in the union where two cities are top 10 cities with the biggest income inequality. They were Miami and Tampa. And Miami was No. 1 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.
Q: 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 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.
Q: Is the kind of disparity that the data are picking up in Miami — which has been growing — 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. So right there, I think that’s good evidence that it’s an issue that community leaders are engaged in addressing. 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 and 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.
Tom Hudson conducted this interview as part of a series of reports on “The 2016 State of the Sunshine Economy.” To hear the WLRN interview, go to http://wlrn.org/post/2016-state-sunshine-economy
Job: Vice president and regional executive, Federal Reserve Bank of Atlanta, Miami branch, since January 2014.
Experience: Executive vice president and senior lending executive at City National Bank of Florida in Miami from August 1998 to January 2009. She also was senior vice president and private banking group manager at Bank of America and senior vice president at Intercontinental Bank.
Also: Director and chair emeritus of Health Foundation of South Florida. She formerly was on the YWCA-USA’s board of directors. Gilmore is also a former president, vice president and treasurer for the YWCA of Greater Miami. She is on the board of directors for the Florida Council of Economic Education and is a board member of the Center for Financial Training. She is also a former trustee for the Miami Chamber of Commerce.
Education: Bachelor’s from the University of Central Florida.
Job: President and chief executive officer of the Federal Reserve Bank of Atlanta. He took office March 1, 2007.
Experience: Was on the faculty of Georgetown University’s School of Foreign service for four years. Before that, he was chairman of the Small Enterprise Assistance Funds, a sponsor and operator of emerging markets venture capital and private equity funds. From 2001 to 2003, Lockhart was managing partner at the private equity firm Zephyr Management LP, based in New York with activity in Africa and Latin America. He also was president of Heller International Group.
Also: In the 1980s, he oversaw the Miami office of Citicorp and was responsible for trade finance and corporate banking business.
Education: Bachelor’s in political science and economics from Stanford, 1968; a master’s in international economics and American foreign policy, Johns Hopkins University School of Advanced International Studies, 1971. In 2012, he received an honorary doctoral degree from Georgia State University. He was an officer in the U.S. Marine Corps Reserve from 1968 to 1974.
About the Federal Reserve Bank of Atlanta
The Atlanta Fed, as it’s informally called, is part of the central bank of the United States. The Federal Reserve System —the Fed, as it is often called — consists of 12 Reserve Banks around the country and the Board of Governors in Washington, D.C.
The Atlanta Fed territory covers the Sixth Federal Reserve District, which includes Florida, Alabama, Georgia, and portions of Louisiana, Mississippi and Tennessee.