Economic Outlook
Summer 2002
United States
Overview. Economic statistics released in recent
months show the economy gradually recovering
from the mild recession of the second quarter of
2001. However, continuing layoffs and the lack of
business investments may seem to suggest the recovery is derailing. Positive news is that the U.S. economy grew at the fastest rate seen in over two years during the first quarter of 2002. Major contributors to
the increase in real GDP were private inventory
investment, consumer and government spending, residential investment, and exports.
However, the surprisingly high rate of growth in the
first quarter will probably not be seen again this year.
Payroll layoffs in manufacturing and retailing continue, while a substantial decline in stock market
valuations could have a psychological effect on consumers. And business spending is still on hold.
With overcapacity in most industries, businesses do
not have the option to increase prices or hiring.
Manufacturing. Although manufacturing orders,
shipments, and production are all showing improvement, these have yet to translate into increases in hiring and capital spending. Even the industries that
seem to be doing well are still constrained by overcapacity and an inability to increase prices. Many
must cut payrolls in order to be profitable. This year
alone, manufacturing payrolls have been reduced by
200,000, including 23,000 jobs cut in June.
In recent months, manufacturers have seen the value
of the U.S. dollar fall against other major currencies.
This fall should help exporting firms, although it
takes almost six months before any effects of currency devaluation can be observed. Both capital
goods and export-related production are now and
will continue to be weak for the remainder of the
year. However, consumer goods and automobile
production are running at a much higher pace than
last year. Business equipment output continues to
lag, reflecting the reluctance of the corporate sector
to increase capital spending.
Employment. Even though almost 1.8 million
workers lost their jobs during the recent economic
downturn, this was the smallest number of job losses
in any recession. Payroll employment has stabilized
in some sectors of the economy and payrolls are
actually increasing in the services sector. But both
manufacturing and retailing continue to lose jobs.
Manufacturing job losses were primarily in the
durable goods sector, particularly in electronic and
electrical equipment manufacturing; primary metals;
lumber and wood products; and aircraft and parts
manufacturing. Retailing lost 18,000 jobs in June,
2002. The retailing industry has lost 186,000 jobs
since its peak in July 2001. Construction, on the
other hand, has experienced one of the smallest
employment declines of any recession, losing only
243,000 jobs between March 2001 and May 2002,
mainly due to a strong housing market.
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increased approximately 8 percent. Applications for
mortgages and refinancings are running at record
high levels. After increasing 14.6 percent in first
quarter 2002, residential investment increased
approximately 4.5 percent in the second quarter.
Interest rates are expected to remain low, at least in
the near term, thus fueling both consumer borrowing
and housing sales. Despite these positives, housing
starts are now slowing down. Nevertheless, housing
remains one of the strongest sectors of the economy
and will continue so as long as interest rates remain
low.
Over the last 12-month period from June 2001 to
June 2002, total payrolls have been reduced by
almost 1.9 million. Although the employment situation is not expected to improve in the near future,
we expect payrolls to stabilize in the coming months.
With overtime hours in manufacturing picking up, it
will probably be just a matter of time before manufacturers stop cutting jobs.
Consumer Spending. Consumer spending increased
3.3 percent in the first quarter of 2002, compared to
6.1 percent in the fourth quarter of 2001. Most
spending was on nondurable goods and services.
Durable goods purchases actually declined 9.4 percent, after an amazing increase of 39.4 percent in the
fourth quarter of 2001. Sustained consumer spending was one of the main reasons the most recent
recession was mild. Consumer expenditures tend to
fall during recessions; this time, however, they not
only remained strong but surpassed all expectations.
With payroll employment still declining and consumers watching their savings and retirement
accounts dwindle in the stock market, spending has
slowed. Also worrisome is that during the 2001
downturn, consumer debt did not decline as it usually does during a recession. Consumer installment
debt is now at levels higher than prior to the recent
recession. Despite everything, consumer spending is
expected to rise as employment recovers. Most consumer spending will be for automobiles, furniture,
appliances, and computers and related equipment.
Housing. Housing markets remain generally strong.
During the last six months, U.S. housing prices have
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Business Investment. Business investment and
spending continue to lag the rest of the economy.
Fixed business investment dropped in the fourth
quarter of 2001, followed by another drop in the first
quarter of 2002. Investment’s share of GDP is currently around 11 percent; its 25-year average is 11.6
percent. The current share is significantly below the
peak of 13.2 percent experienced in the third quarter
of 2000 and the record high level of 13.9 percent in
late 1981. Business investment spending initially led
the economy into a downturn and is still not showing signs of recovery, particularly in communications
equipment and software. Although business spending on capital equipment might be picking up, we
will not see any noticeable recovery until 2003.
Outlook. Overall, the U.S. economy is expected to
grow 3.8 percent for the remainder of the year, for an
average annual rate of 2.5 percent. Industrial production is expected to increase at the modest rate of
0.3 percent. The unemployment rate should average
around 6.0 percent. The risks to the forecasts include a large U.S. current account deficit. With the
U.S. dollar falling against other major currencies,
industrial overcapacity, and weak worldwide demand
in general, it could get harder to finance the national
deficit without an increase in interest rates. Furthermore, if the U.S. dollar gets substantially weaker, that
could prompt foreigners to reduce their exposure in
U.S. markets, thus triggering another downward spiral in domestic financial markets. However, the
biggest risk to the economy is that consumers will
hold on to their cash and credit cards as they see
their retirement savings dwindle. Reduced consumer
spending would adversely affect the mild economic
recovery underway.
Alabama
Employment. From May 2001 to May 2002, the
state’s economy gained jobs in some sectors and lost
jobs in others, with a net loss overall of 17,000.
Although most of the job losses were in manufacturing, wholesale and retail trade also saw significant
declines. Manufacturing firms lost 11,500 jobs; the
trade sector as a whole lost 5,900; and retailing lost
4,400. Existing overcapacity continues to be a factor
behind this downsizing. Two sectors that had major
jobs gains during the period were services-related
businesses (+2,300 jobs) and the government sector
(+4,300). Almost 2,700 of the 4,300 jobs added by
governments were in public school systems.
Goods producing businesses in the state, which
include manufacturing, mining, and construction,
account for almost 23 percent of nonagricultural
employment. Manufacturing, in particular, generally
weakens before the rest of the economy and continues to stay weak until a recovery is well underway.
Except for the transportation equipment industry,
which includes automobile and defense-related production, every subgroup within manufacturing lost
jobs last year.
Within nondurable goods production, most job losses were in apparel and other textile firms (3,500 jobs
lost) and rubber and plastics producing firms (-1,300
jobs). Within durable goods producing firms, job
losses were concentrated in primary metals (-1,400
jobs), fabricated metal products (-700), electronic and
other electrical equipment producers (-1,100),
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and industrial machinery and equipment producers
(-2,500). Employment in manufacturing is expected
to increase very little in the coming year, adding only
about 1,800 jobs overall. Most of these will be in
auto and related industries.
Although consumer spending has remained stable,
the state has lost almost 3,200 jobs in services producing businesses. These businesses include transportation and public utilities; finance, insurance, and
real estate; services; government; and wholesale and
retail trade. In retailing alone, the state lost almost
4,400 jobs between May 2001 and May 2002.
Transportation and public utilities lost 3,500 jobs.
The only sectors that had significant job growth were
state and local government and services. Most new
state jobs were in education. Finance, insurance, and
real estate added approximately 100 new jobs, mostly
in insurance and real estate.
In 2002 retailing and services businesses are expected
to grow faster than goods producing businesses.
However, overbuilding of retailing centers continues
to affect retailers’ profitability. All major metropolitan areas of the state are losing jobs in this sector.
The Birmingham metropolitan area, the state’s largest
retailing center, has recently lost almost 300 trade
jobs, while the Huntsville metro area lost almost
1,000. Retail and wholesale employment remain flat
in Mobile, while Montgomery lost 200 trade-related
jobs and Tuscaloosa lost 800.
Tax Revenues. During the first nine months of the
current fiscal year, total tax revenues increased slightly over last year’s levels. Sales tax revenues depend
on both consumer and business spending. As the
state’s economy shows signs of a gradual recovery, so
do sales tax revenues. During the first three quarters
of the current fiscal year, sales tax revenues have
increased almost two percent, or approximately $23
million.
Income tax collections tell a different story. Individual income tax revenues declined 0.9 percent,
or approximately $16 million, mainly due to payroll
layoffs and very little new hiring. Corporate tax revenues, on the other hand, increased 33.6 percent, or
$48 million.
Appropriations made to the Alabama Education
Trust Fund during the first three quarters of the current fiscal year increased almost $37 million over the
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previous year’s comparable time period. However,
appropriations made to the state’s General Fund
declined slightly, by approximately $2.2 million. For
the fiscal year as a whole, total tax revenues are expected to increase less than one percent. Sales tax
receipts and income tax revenue will increase, but all
remaining taxes are expected to decline.
Outlook. The state’s economy is expected to grow
2.1 percent in 2002; however, employment will lag.
The manufacturing sector will remain weak at least
through the rest of this year. Most growth will be in
services in major metropolitan areas. The state will
continue to show divergence between the urban and
rural economies of the state, with rural areas contributing very little toward the state’s economic
growth, particularly in services-related industries.
Ahmad Ijaz
Alabama Nonagricultural Employment
Change in Number of Jobs
May 2000
to May 2001
Total Nonagricultural
Mining
Construction
Manufacturing
Durable Goods
Lumber Products
Primary Metals
Fabricated Metals
Industrial Machinery
Electrical Machinery
Transportation Equipment
Stone, Clay & Glass
Nondurable Goods
Food Products
Textile Mill Products
Apparel
Paper & Allied Products
Printing & Publishing
Chemicals
Rubber and Plastics
TCPU
Wholesale & Retail Trade
FIRE
Services
Hospitals
Total Government
Federal Government
State Government
State Education
Local Government
Local Education
May 2001
to May 2002
-15,500
-100
2,600
-13,800
-10,800
-1,900
-3,200
-900
-2,300
200
-1,800
-100
-3,000
800
-1,600
-1,700
-500
300
-500
200
-200
-1,500
-400
5,000
300
-7,100
-9,800
2,300
2,200
400
-1,400
Source: Alabama Department of Industrial Relations.
-17,000
0
-2,300
-11,500
-3,400
200
-1,400
-700
-2,500
-1,100
300
-200
-8,100
0
-1,000
-3,500
-800
-900
-600
-1,300
-3,500
-5,900
100
2,300
0
3,800
-500
3,600
2,700
700
200