Understanding Florida’s economic boom

Transcription:

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Mike Scarchilli (00:06):

Hi everyone and welcome to the Bond Buyer Podcast, your essential resource for insights into all things municipal finance. I’m Mike Scarchilli, editor-in-Chief of the Bond Buyer. And this week we’re diving into the economic landscape of Florida, exploring what drives its growth, the challenges it faces, and the unique factors that set it apart from the national economy. Joining us to discuss these topics is Sean Snaith a nationally recognized economist in the field of business and economic forecasting and director of the University of Central Florida’s Institute for Economic forecasting. Sean’s expertise provides invaluable insights into Florida’s robust economy and his future trajectory. In today’s episode, Sean sits down with Bond Buyer managing editor Gary Siegel, to discuss the key drivers of Florida’s economic growth, including its booming population and strong labor market. We’ll also delve into the housing market challenges, the impact of the COVID-19 pandemic and how the state is preparing for hurricane season and managing property insurance issues. So with that, let’s get started and dive into this episode’s conversation.

Gary Siegel (01:12):

Sean, welcome and thanks for joining us.

Sean Snaith (01:15):

My pleasure.

Gary Siegel (01:16):

So let’s start with your projections for the Florida economy. What kind of expansion do you see and what’s fueling it?

Sean Snaith (01:25):

Well, we’re still forecasting for Florida to continue to outperform the national economy, and so we’re expecting about three and a half percent growth for 2024 in terms of real GDP, which is more than a point higher than what we’re forecasting for the national economy. But like the national economy, as we look further down the forecast horizon, we’re anticipating a deceleration of growth gradual, but a deceleration nonetheless. And so the kind of one line outlook here is we’re expecting a slowdown but not a downturn in Florida’s economy. And so in the post covid era in the state, and Florida was one of the states that sort of exited from the more extreme COVID-19 restrictions that were imposed in terms of locking down and closing businesses and restricting travel and keeping schools closed and things like that. And so I think that was got us out of the gate in terms of the post covid recovery faster than many other states.

(02:54):

And one of the other elements of this COVID-19 difference between state policies was we saw a lot of folks relocating to Florida. They were able to work remotely, but were living in places where the restrictions on day-to-day life were so onerous that they threw up their hands and said, why am I doing this? And so that was a bit of a catalyst, a boost to a long running feature of Florida’s economy and what drives its growth, and that is its economic growth, is population growth. And so that’s really, I think, fundamental to understand what has happened and what’s likely to continue to happen in Florida’s economy is that if you have a coin on one side, it’s population growth, the reverse side of that coin is going to be economic growth. When you have more people in a region, whether it’s a state or a metropolitan statistical area, by definition you have more economic activity.

(04:21):

And so that has been a long running driver of Florida’s economy and it continues to be the case in 2022, the state had the fastest population growth of any state in the country. And so we went from generally steady and strong to extremely strong population growth in the state. And so that continues to fuel the economy and it brings with it other challenges, growing pains, which certainly are I think more welcome than the pain of stagnation. And if you look across the northeast and places that are part of what’s come to be known as the rust belt, they tend to have a common denominator and that is stagnant or shrinking population. And it’s really hard to grow an economy in a situation where you don’t have that population growth. So as I said, it does bring with the challenges primarily in the transportation network in the state and also the housing market, that cost of living piece that is represented by shelter has increased significantly in Florida.

(05:48):

We’ve had a persistent shortage of single family housing that I would really sort of trace back as far as maybe 20 15, 20 16, this was becoming evident. But after what we experienced with the housing bubble in Florida along with Nevada, California, Arizona was one of the poster states of the excesses of the housing bubble. And I think that left developers, the ones that survived the collapse of the housing market in 2008, 2009, the form of shell shock, if you will, that they were hesitant to get out over their skis again. And so they were very conservative, even as true organic demand for housing continued to grow. And then again, on top of that, we had the covid policy induced effects on housing. I mean the Fed taking interest rates to zero again, drove down mortgage rates sub 3% for 30 year fixed at one point. And so you’ve got this kind of convergence of events that really drove housing prices significantly higher over a two year period. There were a couple of years back to back where existing home prices went up by more than 20% in each of those years. So excuse me, that is, you don’t see that kind of price appreciation. And even in the midst of the housing bubble of oh 4 0 6, it wasn’t quite that extreme, but it was just a combination of rapidly growing demand and an inventory that was already in a shortage situation.

Gary Siegel (07:50):

So you talked a little about housing, you talked about the population growth. What are the other keys to the economy for Florida?

Sean Snaith (07:59):

Well, I mean Florida’s economy, I mean obviously a lot of focus is on leisure and hospitality. We’ve got, I don’t know how many hundreds or thousands of miles of beaches generally. The weather here is pretty favorable year round in many parts of the state. In central Florida, of course, we’ve got major theme parks that attracts 70 million visitors plus every year. So that continues to be a key element of Florida’s economy and it’s one that continues to grow. We continue to see expansions. The cruise industry tourism associated with the space industry is something that continues to grow. And so there’s an industry that sort of Phoenix like in its recovery. I mean in 2010, the space shuttle program came to an end and that was right in the wake of the housing markets collapse and that space coast area of Florida was in a pretty bad state of disarray economically.

(09:24):

And then blue Origin, SpaceX come in and the private space industry has exploded. And with that tremendous amount of jobs are created both directly and with suppliers and related industries. So that’s something that I think will continue to grow going forward in terms of the volume of launches and the growth of the industry in general, healthcare is a sector in Florida that’s also been pretty strong. We see a lot of growth, a lot of construction and healthcare in part, again, this is a population driven industry. When you have more people, you need more medical care for those residents. But also we do skew a little older in terms of population. And as we all find out, you have to go into the garage for repairs more frequently. The older that you get. Florida’s long been a destination for retirees and continues to be. And we’ve seen places like the Villages, which is north and a little bit west of the Orlando area, sort of explode from nothing. I mean, that was just a very tiny rural part of the state with not a lot going on. And then this senior community has just exploded there and it’s one of the fastest growing now micropolitan areas in the country.

(11:15):

So you’ve got all these retirees pouring in. Of course, the need for services for them as well skews towards in favors continued growth in the health industry as well. So it really is sort of pan sector. I can’t look at a sector of Florida’s economy and say, well, there’s not much growth going on there that’s stagnant or that’s declining. I mean, I think manufacturing has the same fade or has felt the same fade as manufacturing nationally. Globalization has led at least for the moment to the offshoring of production, particularly of simple commodities that are easily transportable and those jobs aren’t going to come back to this country or to Florida as well. But everything, I mean, professional business services is a strong growth sector here in the state.

(12:21):

Maybe the information sector is one that’s been a little bit lagging behind. But again, that is, that’s a larger trend that’s not Florida specific is traditional media has given way to podcasts and tweets and magazines and newspapers are no longer what they used to be. And so that industry struggled. But there’s also within that sector software development, it’s about telecommunications. And so we do see some growth there. So there was a pretty bad the series, a number of years when the newspapers primarily were under significant duress and going through rounds and rounds of layoffs and struggling with readerships and advertisement dollars, et cetera. But generally speaking, I mean, Florida has seen growth in a variety of sectors. We expect that to continue. The tourism has been the 600 pound gorilla in the economy and it’s now a seven or 800 pound gorilla. They continue, the state continues to break records each year in terms of visitation.

(13:45):

The overwhelming majority of that is domestic visitation, but international has started to come back as well. That was a sector international tourism that the whole covid differing requirements between countries in terms of vaccination, proof of vaccination testing, that sector was hit quite a bit harder than domestic travel, which really bounced back very quickly. In fact, even in the holiday season 2020, the Orlando airport was the busiest in the country. People that have been locked down for several months once they were able to, they wanted to get out and try to get back to normal. But that international piece is recovering strongly right now and will continue to grow. So that is a sector that I think always will be a staple of Florida’s economy.

Gary Siegel (14:54):

Let’s talk about employment for a while. The national unemployment rate is about 4%. How’s Florida doing and where do you see it going from here?

Sean Snaith (15:04):

Yeah, I mean, Florida is almost a percentage point lower than the national unemployment rate. Job growth is about seven or eight tenths in terms of payroll job growth, seven or eight tenths of a percentage point higher than the national rate. So the labor market in Florida is particularly strong. I mean, nationally, this is a strong labor market as well. I mean, I’ve been in the economics racket for decades here. And unemployment rates in the 3% range were something that at least historically wasn’t really, I mean, it was below full employment, significantly below full employment. But a lot of things have changed with how the labor market functions and how job seekers and job openings are able to more quickly match up with one another because of technology. So maybe that natural rate of employment has gone down as a result. But I still think where we’re at now is a very tight labor market.

(16:09):

The labor shortages are not as severe as they were sort of coming out of Covid. And the lockdowns we’ve had in the state, if we go back to sort of normal pre covid times, times unemployment was low and there were shortages, but they were more occupationally specific. So we’ve got a significant shortage of nurses in the state of Florida, and that’s been in place for some time skilled tradespeople in construction. They were struggling to fill those jobs even before Covid then Covid hits and the associated policies that went along with it created more of a widespread shortage of labor. It was no longer these specific occupations where we needed more workers. It was, well, we can’t get people to work in a restaurant. We can’t get people to work in retail. We can’t get people to work in convenience stores. And so again, the causes of that really are about the policy response to COVID-19, the extra federal unemployment payments that were made on top of the state unemployment payments, the checks that were mailed out by the federal government, I think enabled a lot of people to sort of delay reentering into the labor market.

(17:43):

So a lot of that’s gone now. And so we don’t see the same critical level of labor shortages, but businesses are still having to adapt. And we’re seeing anecdotally, for the first time I’ve seen self-checkout at convenience stores where that had never been the case before. We have a large grocery chain based here in Florida, Publix, which sort of their brand was customer service. And so a lot of employees helping you find stuff, taking your groceries out to the car for you if you wanted. Now even Publix is installing self-checkout lane. So that’s a major break from the way they’ve operated their business. In the past, we’ve seen restaurants sort of pare down menus or restrict hours, again, all driven by the shortage of labor. And so wages have gone up, but businesses respond other ways. The adoption of technology, I think has accelerated the touchscreen orderings, the kiosks in lieu of cashiers are far more common in fast food establishments, and that seems to be spreading as well.

(19:19):

So when, one of the things that leads to the most larger number of mistaken predictions when it comes to the economy is forgetting that the economy is dynamic and workers, consumers, businesses, when the rules of the game change and that rule may, they could be unemployment, or I’m sorry, minimum wage laws, it could be prices of certain things, behavior changes when the rules of the game change, people play the game differently. And so we’re still seeing that kind of churn going on in the labor market here in Florida as people are adapting to this new set of rules that everybody’s playing the game under. And this also applies to the whole work from home, tug of war that has broken out. Again, post covid, the COVID-19 policies did so much damage and wreaked so much havoc on the economy, and that is still reverberating through the economy even four years after the start of that pandemic.

(20:44):

But people who never before had a taste of what I like to call the forbidden fruit, which is working from home, suddenly were able to do it full time and well guess what? They liked it. And so now there’s pushback about returning to the office. And I don’t know where ultimately we settle in that regard in terms of the in-office versus work from home mix. But I don’t think we’re ever going back to the way it was pre pandemic. So that dynamic in the labor market has implications for commercial real estate. And so office space and retail and other commercial buildup around office space is in a little more period of tumultuousness than the rest of the economy. And I think that if I had to pick one sort of sector in Florida that’s got a little more of a bumpy road ahead, it would be commercial real estate largely because of these issues that really grew out out of the pandemic.

(22:00):

So the technology that allowed people to work from home existed pre COVID-19. It wasn’t like, oh, look at this new thing. It’s Zoom. What an incredibly magical tool. Let’s all use it. It’s not a perfect substitute. If it was, we would’ve been all been working from home a long time ago. And so businesses understand that, and this is true in the private sector, it’s true in education. If you’re not physically in the same space as your classmates or your colleagues, you don’t have the same level of interactions. We talk to each other on a Zoom meeting when we click the X Box X button in the corner of the window, that’s it. The interactions stop. If we’re in a meeting room and the meeting’s over, we’re walking out and go into the restroom, going to get a cup of coffee, maybe there’s some chitter chatter still going on, Hey, let me bounce this off of you.

(23:04):

And so I don’t know where we’re at, but I think there’s going to be more pressure, especially if the labor market softens and employers have a little more leverage in saying, Hey, you need to come into the office X days a week. And that’s just the way it’s going to be. So we’re starting to see that. But generally speaking, I think if you want a job right now in Florida’s economy, you can get one. And this adjustment process post covid is ongoing, but it’s a tight labor market. Wages were significantly increased because of that. You see starting jobs in a fast food establishment at $13 an hour, which is above the state, pass a minimum wage amendment that over the years was raising the minimum wage to $15 gradually. But markets ultimately really determine what these outcomes are going to be. And so this minimum wage law has become moot just because of the conditions in the labor market.

Gary Siegel (24:23):

So no conversation about Florida would be complete without discussing hurricanes. The National Weather Service is above normal hurricane activity for the 24 Atlantic season, and they’re predicting an 85% chance of above normal season. How prepared is Florida for a big hurricane season?

Sean Snaith (24:46):

Well, I mean, a couple of things I think revolve around this issue. I would say, lemme go to your second question first. How prepared is Florida for hurricanes? Well, it’s like saying, well, how prepared is Buffalo New York for snowfall? It’s a feature of the economy here. It’s a feature of the state. We’re in the hurricane area now, these forecasts, what do they mean? Well, I’ve been in the forecasting business here for 25 years in the private and academic sectors and these models and they’re models. These are mathematical statistical tools that are used to make these predictions. And late British statistician George Box famously equipped that all models are wrong, some models are useful. So the prediction of above average number of hurricanes, maybe that’ll come true, maybe that will not come true. Does that mean that they’re all going to make landfall or any of them will make landfall in Florida and there’s no way to answer that.

(26:08):

So I think every hurricane season people are prepared and no one’s surprised if there’s a hurricane in August or September or July that impacts Florida. It’s not like the unprecedented event. So the state has done, I think the last major hurricane that hit Southwest Florida was pretty devastating, and the response was pretty phenomenal by the state in terms of getting critical and destroyed infrastructure back up and running. I mean, there was a bridge that was repaired in a matter of weeks. So like I said, it’s not our first rodeo in Florida. That being said, of course, we love to go into another, the US I think had a 10 year span where no major hurricane made landfall in the US anywhere. That would be more than welcome. I don’t think anyone would complain about that. So it’s just sort of part of living in Florida. It’s going to be hot, humid in the summer and you might have hurricanes. So in terms of readiness, I think we’ll be prepared. I mean, Florida’s been hit in some years, I think 2004 by multiple major hurricanes and still able to rebound from that. And it’s not, like I said, it’s not a shock that this might happen and you hope that it doesn’t, but you also recognize it’s a possibility every time hurricane season rolls around that one of those just might cross the state.

Gary Siegel (28:09):

So connected to hurricanes last July, the Florida Insurance Guarantee Association sold almost 600 million of tech exempt bonds and payroll bill rate bonds to help fund claims from insolvent insurance companies in the state. Do you know what the status is of property insurance challenges the state faces? Are they close to a resolution? I know there was a special legislative session, but I didn’t hear anything about a resolution.

Sean Snaith (28:45):

Yeah, so that has been an issue As of late, insurance premiums in the previous past couple of years have gone up significantly. There was a period number of companies, major companies stopped underwriting policies in the state of Florida. And so is it just because hurricanes hit Florida? I think it’s more complex than that. I mean, obviously you can’t legislate weather away, so that’s a risk that’s always going to be there. But what was done in that special session really was about tort reform when it comes to lawsuits and homeowners, insurance companies being sued. There was a figure when this session was happening and these laws were being crafted and ultimately passed from a national insurance agency, Florida had 10%, I forget which year this was a couple of years ago, 10% of all homeowner claims in the country, big state, big population. We’ve got weather issues. It doesn’t sound too outrageous, but 80% of the lawsuits against homeowner insurance companies were filed in Florida, 80% of the total nationwide. So that’s out of whack. And what was happening is because of the laws surrounding homeowners being able to file lawsuits against the homeowners insurance companies, it really created a cottage industry of sorts where we had entire legal practices that their entire focus was roofs suing to get roofs repaired.

(30:58):

And the way it was structured, I’m no lawyer, but there was a big incentive for insurance companies to just settle these lawsuits pay for a new roof. It’s a 25-year-old roof and two shingles blew off because of a tropical storm or hurricane. I want a new roof. And so what was able to happen was these roofing companies would come around, they would get the homeowner to sign off on their rights to pursue a lawsuit, and then in turn, these roofing companies in conjunction with lawyers would file a lawsuit against the insurance company. And the risks were really skewed towards the insurers that if they went to court and a 25-year-old roof that lost two shingles really is not a legitimate claim. But if they went to court and happened to lose the penalties that stacked up on top of ultimately having to pay to repair that roof, there was double bonus fees for the lawyers.

(32:10):

And so these insurance companies ultimately would just replace a roof they shouldn’t have been liable to replace to avoid the risk of this even bigger loss. So what the Florida legislature did, I think was try to redress some of those abuses. You want to have the ability of a homeowner that’s not being treated fairly by their insurance company to seek legal redress of the, but it had gone far to the other side. So has that solved the problem? Well, it’s not a miracle cure. We have seen reentry of insurance companies into Florida this year. I think it was 10 or 12 companies actually filed with a state insurance regulator to lower premiums. And fortunately it wasn’t my insurer, but wasn’t one of those twelves and another 10 or 12 filed to have zero increase in premiums. So we are seeing some impact there, I think, from this legislation because there were some pretty significant premium hikes going on here as these companies were leaving and we had these couple of big events that had to be settled. So I think there’s some stability starting to return to that industry, and certainly avoiding direct hits from hurricanes for a few years would I think speed up that process.

Gary Siegel (33:49):

We’re running out of time. So one last question, Sean. Sure. Space, Florida released a 67 page feasibility study for a potential 2.1 billion expansion in the airport canal. Do you know if there are any bonds expected in that?

Sean Snaith (34:07):

Well, I did see that report, and this is a project that has a pretty long time horizon. I mean, I think it was stretching out to 2075. And so the financing piece of that study, that feasibility study was pretty embryonic, and I don’t think they’re at that point of knowing what sort of mix of financing is even going to be possible. They listed out a number of federal programs that they could get loans from or grants, and then, yeah, it’s just going to depend how the mix is. I mean, the state’s not going to have a billion dollars just to hand over for the port. So I mean, ultimately, if this moves forward, and I think it will. Again, we talked earlier about the growth in the private space industry and the tremendous number of launches and growth in launches that have gone along side of that. I mean, I would think ultimately there would be some bond issuances to finance a portion of this expansion. And so we’ve seen things like the Bright Line railways access programs, allowing them to get tax exempt status and issuing the bonds themselves. Maybe it would look something like that. I don’t know. That report, as I said, was fairly vague, and I don’t think they’re there yet in terms of knowing exactly how that, I think 2.1 billion expansion of for Canaveral will ultimately be financed.

Gary Siegel (35:52):

Well, Sean, thanks for joining us and thanks for sharing your opinions.

Sean Snaith (35:56):

Oh, my pleasure.

Mike Scarchilli (35:58):

We hope you enjoyed this episode. A big thank you to Sean SNA for joining us and to our own Gary Siegel for conducting the interview. Let’s review some key takeaways from this conversation. One, Florida’s economic strength is highlighted by its projected growth rate of 3.5% for 2024, outpacing the national average. This growth is primarily fueled by rapid population increases, particularly as remote work during the pandemic encouraged many to relocate to the state.

(36:30):

Two, the state’s housing market faces significant strain due to a persistent shortage of single family homes. This shortage combined with pandemic driven demand and mortgage rates that remain historically low despite being higher than when the Fed began raising rates in 2022, has led to substantial increases in housing prices over the past few years. And three, Florida’s labor market remains robust with an employment rate significantly lower than the national average. However, specific occupational shortages, especially in healthcare and skilled trades continue to present challenges despite overall job growth. Thanks again for listening to this Bond Buyer Podcast. This episode was produced by the Bond Buyer. If you enjoyed this episode, please hit like and subscribe on your favorite podcast player, and please rate us, review us and subscribe to our content at www.bondbuyer.com/subscribe. Until next time, I’m Mike Scarchilli signing off.