Economic Outlook
Fall 2002
United States
Overview. Judging by the financial markets, one
would assume that the national economy is again
dipping into a recession. But in reality, the economy
is recovering. Overall economic growth for 2002 is
now expected to be around 2.5 percent, with growth
of about 3 percent anticipated for 2003. Actually,
gains in the first three quarters of this year were
much more robust than the first three quarters after
the 1990-91 recession, when growth averaged only
1.8 percent.
Two reasons why the economy does not seem like it
is improving are the lack of job creation and the lack
of business commitment to investment spending.
Despite a lack of new jobs, consumer spending and
housing markets are keeping the economy from
falling into another downturn. Although consumer
spending has slowed, it is still expected to increase
modestly for the second half of 2002. Consumers
are spending on household furnishings, related
durable goods, and real estate.
In September housing starts surged by 13.3 percent
to an annualized rate of 1.8 million units, the highest
rate seen since 1986. Construction of single-family
homes increased by 18.2 percent, a level not seen
since 1978, primarily due to low mortgage rates and
consumers’ expectations that housing values will
increase. In the third quarter of 2002, consumer
spending, particularly on durable goods, was increasing. However, consumers are now noticing their
increased debt burdens, the weak job market, and
their mounting losses in stock and retirement portfolios. There is a risk that consumers could decide to
take a spending breather.
Federal government spending is expected to remain
healthy throughout the remainder of the year and
into 2003. But the current situation produces a
tough environment for private business. Excess
capacity and weak demand will keep downward
pressure on prices.
The economic recovery is being driven right now by
four factors—consumer spending, housing markets,
automobile sales, and federal government spending.
Some of these may not continue to grow at the same
pace in the near future. With few jobs being created
and consumer debt at very high levels, retailers may
have to sell at deep discounts to get the consumer to
make purchases. And in recent weeks, mortgage rates
have been creeping up, which could affect housing
markets. With capacity utilization for industrial
firms at fairly low levels, business investment is not
expected to grow much. Nonresidential commercial
and industrial construction investment and equipment spending are at a standstill and will continue so
in the near future. Bankruptcies and layoffs have
created substantial excess capacity, which will have to
be absorbed before businesses begin to spend again.
In order for the economic recovery currently underway to feel more like a recovery, business investment
will have to increase, which in turn will add to payrolls.
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Manufacturing. After growing for seven straight
months, industrial activity began to slow in August.
The strong housing market and demand for automobiles made it seem like the manufacturing sector was
well on its way to recovery, but instead, the manufacturing sector appears to be going back into recession.
The Institute of Supply Management’s Survey of
Purchasing Managers Index dropped to 49.5 in
September. A reading below 50.0 indicates contraction in industrial production. However, things may
not be as bad as they seem. After two months of
decline, hours worked in manufacturing actually
went up in September.
Both industrial and electrical goods output have not
shown any signs of recovery since the manufacturing
sector dipped into a recession almost two years ago.
In the manufacturing sector, the weakest industry has
been communication equipment manufacturing.
From year ago levels, communication equipment
output is down almost 20 percent. Some good news
is that new orders for defense-related capital goods
increased in the first half of 2002 from year ago
levels. But the rest of manufacturing, particularly
nondefense capital goods, will continue flat at least
through the rest of the year. Orders for nondefense
capital goods fell 6.6 percent in September, the
biggest decline since September 2001. Without an
increase in capital spending, the manufacturing sector will remain weak.
Employment. As long as investment spending and
consumer demand are weak, there is no reason for
firms to hire new workers. In the previous recession
(1990-91) there was also a very weak recovery coming
out of the recession. Then, the employment situation did not begin to improve until the recovery was
almost 15 months old. In September 2002 job losses
in manufacturing, retailing, and transportation outweighed any impact of new jobs added in health
care, real estate, and other services-related businesses.
Employment in financial services and real estate
increased, while manufacturing lost more jobs.
Manufacturing continues to be haunted by overcapacity, cheaper imported goods, and a lack of domestic and global demand. The overall manufacturing
sector has lost jobs every month for 25 consecutive
months.
Even though consumers continue to spend, competition in retailing is adversely affecting retailing’s
employment growth. After cutting close to 44,000
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jobs in August, retailers cut almost 16,000 jobs in
September. Retailers are still suffering from overbuilding the sector in the late 1990s.
Consumer Spending. Consumer spending slowed
in the first and second quarters but probably
increased in the third quarter of 2003, primarily
because of an increase in automobile sales. That was
temporary. There is a probability that consumer
spending will significantly slow down in the fourth
quarter. The University of Michigan’s Consumer
Sentiment Index fell for the fifth consecutive month
in October, bringing consumer sentiment to an eight
year low. Yet, consumers continue to play an important role in keeping the economy afloat.
One of the major concerns is the sharp increase in
consumer debt. During recent years, consumer debt
has grown much faster than income. Furthermore,
the decline in stock market valuations has substantially devalued consumers’ net worth. According to
Federal Reserve Bank statistics, consumer debt has
increased from $1.28 trillion in 1997 to $1.73 trillion
at present, an increase of almost 36 percent. Debt
repayments as a percent of disposable income are
now at their highest level since 1992, when consumers took on unprecedented levels of debt.
A factor that has helped consumers is increased
home prices and low interest rates. Consumers have
been able to refinance their existing home mortgages
at lower rates. In some cases people have taken out
home equity loans and in other cases they have
transferred high-interest credit card debt to tax
deductible home equity loans. Consumer spending
on household items and automobiles has remained
healthy in recent months. Consumer purchases of
durable goods items, which traditionally see a decline
during recessions, have also remained strong.
Another sector where spending has been high is
computer and software sales. There is a possibility
that expenditures during the fourth quarter will not
be as robust as in recent months; however, as the
economy improves, computers could pick back up in
the first and second quarters of 2003.
Business Investment. Business investment has been
the weakest link in the economy. Nonresidential
fixed investment declined by an average annual rate
of almost 3 percent in the first three quarters of
2002. Industrial construction has experienced a
severe decline since 1998 and is showing no signs of
revival. With high vacancy rates in office space,
commercial construction is also at a standstill.
Business investment in communication equipment
has experienced the most severe decline. It is expected to continue its decline in the fourth quarter and is
not expected to pick up at least until the middle of
next year. Business investment initially led the economy into a recession, and until firms increase their
spending on capital goods, the economic recovery
will remain weak.
Alabama
Employment. From August 2001 to August 2002,
the only two Alabama sectors that gained significant
numbers of jobs were local government and transportation equipment. Most job gains were in local
government, particularly education, while the
increase in the transportation industry was primarily
in motor vehicle production-related industries. All
other sectors of Alabama’s economy experienced job
losses. Even with this disheartening news, the economy is indeed showing signs of improvement over last
year. The rate of decline in job losses from August
2001 to August 2002 was substantially lower than the
declines experienced from August 2000 to August
2001, when most of the manufacturing sector was
experiencing a recession. A cautionary note is that
slower consumer spending is affecting the services,
retail, and wholesale trade sectors.
Although residential construction has remained
strong throughout the most recent economic downturn, both commercial and industrial construction
have experienced significant declines. The manufacturing sector, which now has been in a recession for
almost two years, continues to lose jobs. Within
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manufacturing, the exception is Alabama’s transportation equipment industry, which has experienced
healthy growth mainly due to continuing high
demand for automobiles and the incentives being
offered by auto manufacturers. Almost every other
manufacturing group in the state has lost jobs. The
sectors losing significant numbers of jobs include primary and fabricated metals, apparel and other textile
products, chemicals and allied products, rubber and
plastic products, and both industrial and electrical
machinery manufacturing.
A slow and uneven recovery is now beginning in the
services sector. Although health services is adding
jobs, overall the sector has not yet begun to show
positive employment gains.
Tax Revenues. During the fiscal year that just ended
(FY2001-02), Alabama’s tax revenues increased by 2.2
percent. Total tax receipts amounted to approximately $6.1 billion, almost $130 million over last fiscal
year’s tax receipts. Sales tax revenues, which largely
depend on consumer and business spending,
increased by 2.5 percent, approximately $37 million
over the previous year. Although consumer spending has remained strong throughout the most recent
downturn, lack of business spending has constrained
growth in sales tax revenues. Traditionally, business
spending contributes anywhere from one third to
one half of the receipts in sales tax revenues.
The state’s individual income tax revenues have suffered a decline, the first such decline in recent history, due to three factors: the lack of any increase in
payroll employment, several layoffs in recent
months, and severe erosion in capital gains.
Individual income tax revenues, which account for
almost 40 percent of total tax receipts, declined by
almost $38 million over the previous year. Individual income tax revenues totaled approximately $2.4
billion, a decline of 1.6 percent over the previous fiscal year.
Appropriations made to the Alabama Education
Trust Fund during the fiscal year ending in
September 2002 increased by 1.2 percent, or almost
$46 million, giving the Trust Fund a total of $4.05
billion. However, appropriations made to the state’s
General Fund declined by 4.05 percent, or about $46
million, giving the General Fund a total of approximately $1.1 billion.
Outlook. The state’s economy is expected to grow
1.8 percent in 2002, with output totaling $113 billion. Real output of all sectors will increase, except
for the mining industry whose output is estimated to
decline by 3.0 percent. Employment will decline by
0.5 percent. The manufacturing sector is forecasted
to remain weak at least through the first quarter of
2003. Most growth will be in metro areas of the
state. For 2003 the state’s economy is expected to
grow by 2.2 percent, with an improving manufacturing sector, while the state’s employment will increase
by 0.8 percent. For the remainder of 2002 and 2003,
most employment growth will be in services-producing rather than goods-producing sectors.
Construction and motor vehicle-related industries are
the only goods-producing sectors that will add any
significant number of jobs. Both commercial and
industrial construction will remain weak.
Ahmad Ijaz
Alabama Nonagricultural Employment
Change in Number of Jobs
Total Nonagricultural
Mining
Construction
Manufacturing
Durable Goods
Lumber Products
Primary Metals
Fabricated Metal
Industrial Machinery
Electrical Machinery
Transportation Equipment
Stone, Clay and Glass
Nondurable Goods
Food Products
Textile Mill Products
Apparel
Paper and 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
August 2000August 2001
August 2001August 2002
-23,700
-100
-1,000
-16,900
-11,000
-2,200
-2,700
-1,000
-1,900
-700
-600
-300
-5,900
400
-2,900
-2,000
-300
-200
-900
100
-1,600
-6,300
-300
1,200
-400
1,300
-900
2,300
1,900
-100
-1,500
-18,900
0
-300
-9,600
-2,100
0
-1,100
-500
-1,900
-1,100
2,800
0
-7,500
-300
-200
-3,200
-700
-800
-800
-1,400
-3,100
-4,700
-500
-1,900
200
1,200
-300
100
-600
1,400
1,000
Source: Alabama Department of Industrial Relations.
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