Poised for More Growth, the Southeastern Economy Outperforming US

The Southeast's economy outperformed the rest of the country during the pandemic, new research from the Federal Reserve Bank of Atlanta shows. Although the southeastern economy has long experienced faster growth than the national average, the region's lead has significantly widened since 2019.

Research conducted by Laura Kuehl, Emily Mitchell, and Jon Willis of the Atlanta Fed combines analysis of economic data with business insights from interviews and roundtables the Atlanta Fed's Regional Economic Information Network (REIN) team conducted with business leaders. (In the Atlanta Fed's Research Department, Kuehl is an economic research analyst, Mitchell is a REIN director, and Willis is a senior economist.)

Regional economy a microcosm of US economy

For some time, the Southeast's economy has represented an instructive bellwether for the broader national economy when it comes to assessing overall economic conditions. The diverse mix of firms across the region is broadly representative of the overall composition of GDP by industry for the US economy.

Although the Southeast's firm composition generally reflects that of the country as a whole, the region has seen notable economic growth compared to the rest of the nation. A key contributor to the strength of the Southeast has been rising population growth. Regional population growth during the past 50 years has been 0.5 percentage points per year faster than that of the nation overall, according to the analysis the Atlanta Fed conducted in Alabama, Florida, Georgia, Louisiana, Mississippi, and Tennessee (the states that, in whole or in part, make up the Sixth District).

More recently, in the decade prior to the pandemic, the Southeast grew around 0.2 percentage points per year faster than the United States in most major metrics of economic performance, including population, labor force, employment, and real personal consumption expenditures (see the blue bars in the figure).

However, since the start of the pandemic, this growth differential has widened significantly. Between 2019 and 2022, the Southeast more than doubled the differential in growth rates of population between the Southeast and the nation overall, likely reflecting an acceleration of migration to the region during the pandemic (see the orange bars in the figure). During the same time, the growth differential for consumption demand (real personal consumption expenditures) more than quadrupled to a nearly 0.9 percentage point growth differential per year.

The excess demand grants firms more pricing power in the region. Several firms noted during interviews that although pricing is very localized and regionalized, southeastern firms have more pricing power compared to those in other regions.

The labor force undergoes changes

This rapid growth exerted pressure on southeastern firms to meet increased demand for their products and services, but one area of constraint was the number of workers available. Though the labor force growth differential between the Southeast and the United States was the same as that of population growth, that amount of labor force growth was insufficient to meet the demand for workers by firms in the Southeast. Consequently, many businesses struggled to meet the surge in demand for their goods and services.

Regarding the composition of their workforces, business contacts have noted several trends. First, several firms have observed a significant number of retirees knocking on their doors once again, a development that firms appreciate as retirees are much more experienced and don't demand salaries as high as younger workers. Second, one firm speculates that prime-age workers (those 25-54 years of age) are increasingly attracted to the gig economy because these jobs offer greater flexibility than traditional jobs.

Firms expanded their workforces at a faster pace in recent years, illustrated by the employment growth differential between the national and southeastern economies. exceeding the growth differential in population and the labor force. As a result of the rapid employment growth, the unemployment rate in the Southeast is now lower than the prepandemic level, while national unemployment basically didn't change during the same time period.

These dynamics have created a very tight labor market in the region, posing a challenge for firms as they attempt to deliver on demand. During interviews, a large insurance brokerage noted that workers have been extremely sensitive to wage changes, arguing that the heightened demand for labor-especially at the blue-collar level-has exacerbated wage sensitivity.

Continued growth in the region will depend in part on the Southeast's ability to combat production constraints brought on by the labor supply's anemic growth. Additionally, some firms point to a spillover effect in which this growth could hamper the region's public service infrastructure.

Several firms with a national footprint reported experiencing some geographic bifurcation in their firms' sales growth, with growth in the Southeast outpacing that of other regions. Mike Honious, president and chief executive officer of GEODIS in Americas, said "When comparing the Southeast region to other regions in the US during the pandemic recovery period on shipment volumes, the Southeast region shows a very stable and consistent recovery as compared to other regions. Most importantly, the volume shifts were less volatile in year over year comparisons and consistently in the 'middle of the pack' each year when compared to the rest of the United States."

Because of such strong demand in the Southeast, contacts at other firms in the region noted that companies are accelerating investment here, expecting that these trends will continue. For example, a large national retailer described plans to speed up investment specifically in the Southeast. The company views the region as a safe bet as it caters to residents who continue to move to the Southeast for reasons including quality of life (such as pleasant weather) and the cost of living (such as states with low or nonexistent state tax rates).

Although residents in the Southeast are facing rising costs along with the rest of the nation, five out of the six states in the Atlanta Fed's district were below the national average cost of living in 2023.

Maintaining the momentum

National fiscal policy is contributing to a surge in public and private investment. The Infrastructure Investment and Jobs Act, a bipartisan deal targeting transportation and other infrastructural improvements, and the Inflation Reduction Act, set to stimulate domestic clean energy production, have significantly stimulated investment in infrastructure and the supply chain, including in electric vehicle manufacturing and clean energy production.

According to Rebekah Durham, an Atlanta Fed REIN director, "Our energy sector contacts describe billions of dollars in investment across the Southeast fueled by the Inflation Reduction Act, from facilities that produce clean energy feedstocks to technology that traps hydrocarbons produced by petrochemical production and stores them underground, a process called 'carbon sequestration.'"

Several firms noted that the region's inability to compete in certain areas of public services (namely, public education and transportation infrastructure) has and will continue to pose challenges in recruiting new businesses and households, especially those relocating from regions with strong public investments in those areas.

The analysis concludes that the Southeast has been on a steady path of growth, outpacing the nation according to a range of major economic indicators. The region is poised to grow if it can rise to the challenge associated with labor supply constraints and infrastructure limitations.

By Laura Kuehl, an economic research analyst; Emily Mitchell, a REIN director; and Jon Willis, a vice president and senior economist, all in the Atlanta Fed's Research Department

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