Economic and Business Outlook - June 2011

June 1, 2011

By Douglas L. Williams, President and Chief Executive Officer  
 
We began the year optimistic about a more durable economic expansion after a strong fourth quarter finish.  While consensus forecasts for US GDP growth in 2011 still average 3.0 - 3.5%, first quarter growth was surprisingly weak at 1.8%.  Bad weather at home and persistent economic and financial shocks from abroad dampened and delayed economic activity during the quarter. 
 
The economic expansion should accelerate in the second quarter and through the year with modest growth in personal income and consumer spending, a higher level of new business investment, and increased export sales.  Continued infrastructure development and the emergence of middle class consumer demand in the developing world, particularly China and India, are driving global economic growth.
 
However, significant structural problems are weighing on economic progress.  Unemployment levels declined modestly over the last quarter to 8.8%, but the duration of unemployment lengthened to 39 weeks and workforce participation declined to 64%, the lowest point in 27 years.
 
Housing prices continued to decline in many markets.  The S&P/Case-Shiller 20-City Composite of Housing Prices was down 3.3% year over year in its February report and down 5.8% in the Atlanta MSA.  New housing starts and new and existing home sales showed similar softness. 
 
The growth of government entitlement spending is creating unsustainable budget deficits and public debt burdens in the US, the European Union, and Japan.  Left uncorrected, these deficits and related tax and debt burdens will raise the cost of capital, crowd-out private investment, and result in diminished opportunity and standards of living throughout the developed world.
 
High unemployment, a prolonged housing correction, and soaring government debt are a lethal cocktail likely to lengthen a period of subdued economic performance.  We should expect the Federal Reserve to continue to support the economy with liquidity and low short-term interest rates through this year and into the next.
 
For healthy companies, this is a good time to consider new opportunities to acquire weakened competitors, build market share, or expand to new markets, particularly abroad. Companies with strong balance sheets have the capacity to borrow at attractive rates to finance acquisitions at favorable valuations and those with lean cost structures have pricing flexibility to take market share.
 
Surging demand in emerging market countries is creating attractive opportunities for US companies to export goods and services. Growing international sales and expanded foreign business activities have been the difference in performance for many US firms through the recession and weak economic recovery.