Economic Outlook –
Quarterly Update
October 25, 2001
United States
The U.S. economy took a turn for the worse after the
tragic acts of terrorism on September 11th. Our last
forecast (July 2001) called for some sort of recovery by
the fourth quarter of 2001, but any chance of that now is
gone. Furthermore, the current economic slowdown
could extend well into the first half of 2002. Although the
manufacturing sector was already in a recession, there
were signs that a manufacturing recovery could have
been close. The inventory cycle was nearing an end, and
there was optimism that lower interest rates could revive
capital spending. Furthermore, the index of leading
indicators had edged up four consecutive months prior to
September. However, after the attack, everything was
different.
Uncertainty overtook both consumer and business
sentiment, causing a sharp drop in both. The University
of Michigan’s Index of Consumer Sentiment had fallen to
an eight year low even before the attack, mainly due to
continuous warnings from businesses regarding
profitability, declines in stock market valuations, and an
acceleration in layoff announcements. At the first of
September there was still a 50/50 chance that consumer
spending would keep the economy from sliding into a full
blown recession. However, after the terrorist attacks
consumer sentiment plunged and the effects could last a
long time. Housing markets, which were holding up
remarkably well through the summer, have also softened
since September 11th.
Our current forecast calls for a mild recession that
probably started at the end of the third quarter of 2001
and will last through at least the first quarter of 2002.
Gross domestic product had been expected to increase
by around 1.7 percent in 2001, but currently the forecast
for 2001 is for 1.0 percent. Prior to the attacks, the
forecast for GDP for 2002 was 2.4 percent, but now the
increase is expected to be about 1.3 percent. Most
growth in consumer spending occurred during the first
half of 2001. Consumers seem to be more reluctant to
buy durable goods than nondurable goods or services.
The 2001 increase in spending on durable goods is
expected to average around 3.4 percent, significantly
lower than the 9.5 percent increase experienced in 2000.
Softened consumer spending is taking its toll on the
overbuilt retailing sector. Consumer spending will pick
back up, albeit moderately, during the first half of 2002.
Gross Domestic Product
Annual Percent Change
Over Same Quarter Previous Year, 1996 Dollars
Source: U.S. Department of Commerce, DRI-WEFA, and Center for
Business and Economic Research, The University of Alabama.
Consumer Expenditures
Annual Percent Change
Over Same Quarter Previous Year, 1996 Dollars
Source: U.S. Department of Commerce, DRI-WEFA, and Center for
Business and Economic Research, The University of Alabama.
Manufacturing, as well as retailing, is facing a
considerable slowdown. The industrial production index
dropped almost 6.5 percent during the third quarter of
2001, and manufacturing orders are still declining. With a
lack of demand in both domestic and foreign markets,
and worldwide excess capacity, we may not see any
rebound in manufacturing until the second half of 2002.
Industrial Production Index
Annual Percent Change
Over Same Quarter Previous Year, 1992=100
However, there are still bright spots in the economy.
Home owners are benefiting from the current refinancing
boom, which is providing them with additional
discretionary income. The aggressive monetary policy
stance taken by the Fed will begin at some point to kindle
capital and investment spending. Federal government
spending is also expected to stimulate the economy. The
$40 billion fiscal stimulus in tax disbursements in 2001
and almost $70 billion tax relief scheduled for 2002
should revive the U.S. economy.
Payroll employment is not one of the bright spots. It is a
lagging indicator that does not recover from a downturn
as quickly as some other economic indicators. Payrolls
will continue to decline at least through the third quarter
of 2002.
Source: U.S. Department of Commerce, DRI-WEFA, and Center for
Business and Economic Research, The University of Alabama
Alabama Nonagricultural Employment
Change in Number of Jobs
September
1999
to
September
2000
Alabama
Employment. Alabama’s economy had already
slowed down significantly before the September 11th
attacks. Although most of the layoffs and job losses
were concentrated in the manu- facturing sector, other
sectors of the economy, particularly retailing and
services-related businesses, were also feeling the
effects. From September 2000 to September 2001, the
state lost 26,100 jobs. These losses were spread
across the board. Except for 400 jobs gained in
services and 1,300 jobs in state government, every
other sector of the economy lost jobs.
Manufacturing, which accounts for almost 18 percent of
the nonagricultural jobs in the state, lost 17,200 jobs.
Although Alabama’s manufacturing sector has been in
a recession for over a year now, layoffs and job losses
have increased significantly in recent months. Besides
a significant slowdown in the U.S. domestic economy, a
slump in the world economy is making matters worse
for manufacturers who rely on international sales.
During the last twelve-month period, the textiles and
apparel industry lost approximately 5,000 jobs. But
every manufacturing sector in the state has also lost
employment. Almost 9,000 jobs were eliminated in
durable goods industries, including 2,900 jobs at
electrical and non- electrical machinery and equipment
manufacturers. Alabama’s steel industry, like the rest
of the nation’s steel industries, has been overwhelmed
by cheaper imports in recent years. During the last
year Alabama’s steel manufacturers lost 2,600 jobs.
Total Nonagricultural
Mining
Construction
Manufacturing
Durable Goods
Lumber Products
Primary Metals
Fabricated Metal
Industrial Machinery
Electrical Machinery
Transportation Equipment
Stone, Clay & Glass
Nondurable Goods
Food Products
Textile Mill Products
Apparel
Paper & Pulp Products
Printing & Publishing
Chemicals
Rubber and Plasticx
TCPU
Wholesale & Retail Trade
FIRE
Services
Total Government
Federal Government
State Government
State Education
Local Government
Local Education
14,400
-600
3,800
-5,900
-3,700
-1,700
-2,000
300
-1,700
300
600
-100
-2,200
-100
1,200
-3,000
-300
500
-700
200
600
5,900
500
7,700
2,400
-1,300
600
900
3,100
2,000
Source: Alabama Department of Industrial Relations.
September
2000
to
September
2001
-26,100
0
-300
-17,200
-9,000
-1,600
-1,600
-1,000
-1,600
-1,300
-200
-300
-8,200
500
-2,900
-2,100
-900
-300
-1,000
-1,400
-1,800
-6,900
-300
400
0
-200
1,300
700
-1,100
-2,500
The services sector in recent years had added as many
as 10,000 to 11,000 jobs a year, but now this sector is
also showing considerable weakness. During the most
recent twelve-month period, services-related businesses
added 400 new jobs, compared to 7,700 jobs added
during the same period last year. Hotels and lodging
places, which mainly depend on tourism and convention
business, lost 400 jobs, while health care-related
concerns lost 300 net jobs during the last 12 months.
Retailing, together with services, had been one of the
fastest growing segments of the state’s economy. But
the last year has not been kind to retailing. Retailers lost
6,200 jobs during this time. Wholesalers haven’t fared
well either. They lost 700 jobs over the last year. During
the same period the year before (September 1999 to
September 2000), the trade sector in the state had added
almost 6,000 jobs. These recent job losses can be
attributed to the significant slowdown in consumer
spending, an increase in manufacturing layoffs, and the
lack of growth in consumer incomes. In the last decade,
the growth in retail and wholesale trade had mostly been
concentrated in metropolitan areas of the state. Not
surprisingly, most of this year’s job losses have also been
in these areas. For example, the Birmingham
metropolitan area, the largest retailing center in the state,
lost 3,700 trade jobs between September of 2000 and
September of 2001.
Alabama Total Wholesale and
Retail Trade Employment
Annual Percent Change
Over Same Quarter Previous Year
Source: Estimates based on Alabama Department of Industrial
Relations data.
Alabama Total Nonagreicultural Employment
Annual Percent Change
Over Same Quarter Previous Year
These job losses in metro areas run counter to our
expectations. Alabama had been accustomed in recent
years to a trend where most job losses occurred in nonmetro counties of the state. The metro areas grew; the
non-metro areas did not. However, during last 12
months, 60 percent of the jobs lost in this state were jobs
inside our metro areas. Of the 26,100 total jobs lost,
15,700 were in metropolitan counties.
Tax Revenues. The slowing economy that has been the
focus of this essay is also causing a shortfall in tax
revenues. During FY2000-2001, ending in September,
state tax receipts dropped by 0.73 percent over the
previous fiscal year, a decline of $43.9 million. In the last
fiscal year total receipts were up by almost $490 million.
While individual income tax revenues increased 1.2
percent, sales tax receipts fell 1.1 percent and corporate
income tax fell 30.2 percent. Total individual income tax
revenues were up $28 million, while corporate income tax
receipts dropped by almost $78 million. Sales tax
receipts, which are heavily dependent on economic
conditions, declined by almost $17 million. With the
state’s economy expected to remain weak at least
through the first three quarters of the current fiscal year,
the forecast for tax revenues is not optimistic.
Appropriations made to the Alabama Education Trust
Fund totaled $4,113 million, a shortfall of $110.8 million
dollars in FY00-01 over the previous fiscal year.
Source: Estimates based on Alabama Department of Industrial
Relations data.
Appropriations to the state’s General Fund were up by
$32.9 million, for a total of $1,136 million.
Outlook. The state’s economy is expected to remain
weak at least through the first half of 2002. Gross state
product is expected to increase only 0.6 percent this year
and about 1.1 percent in 2002. Employment conditions
are not expected to improve significantly until the second
half of 2002. Total state nonagricultural employment is
expected to decline by 1.4 percent. At the end of this
year, 28,000 jobs throughout the state will have been
lost. For 2002, job growth will rebound a bit; the state
could add approximately 21,000 jobs.
Employment in the manufacturing sector is expected to
remain weak throughout the forecast period. Unless
there is a major turnaround in both domestic and
international economies, we do not expect any net new
jobs in manufacturing industries in the state. Although
the construction sector is expected to add some jobs in
2002, most job growth in 2002 is expected to be in
services-related businesses, and even this growth will be
modest.
Barring any other major shocks to the economy, the
aggressive monetary and fiscal policy stimulus currently
underway will help pull the economy out of its current
state. We could see a clear turnaround in the economy
by the second half of 2002.
Alabama Total Manufacturing Employment
Annual Percent Change
Over Same Quarter Previous Year
Source: Estimates based on Alabama Department of Industrial
Relations data.
Alabama Total Services Employment
Annual Percent Change
Over Same Quarter Previous Year, 1996 Dollars
Ahmad Ijaz
Source: Estimates based on Alabama Department of Industrial
Relations data.