First Quarter 2006 • Volume 5, Number 1
60
National Economic Outlook
50
Q1 2006 compared to Q4 2005
44.0
40
36.4
30
20
14.9
10
0.8
0
3.9
No
Strong Moderate
Moderate Strong
Decrease Decrease Change Increase Increase
100
National Economy
58.8
Alabama Economy
62.8
Industry Sales
61.9
Industry Profits
57.8
Industry Hiring
56.0
80
60
61.6 61.5 59.7
54.0
59.3
40
Capital Expenditures 58.3
20
BLCI
0
Q1 Q2 Q3 Q4 Q1
2005
2006
59.3
Index above 50 indicates expansion.
increase from previous quarter
decrease from previous quarter
U.S. Economy Benefits from Hurricane Rebuilding During the first quarter
of 2006 the national economy is expected to rebound from the hurricaneinduced fourth quarter slowdown. At 58.8, the national economic outlook
component index is almost 12 points higher than the fourth quarter reading
and just above its pre-Katrina level. Growth in real GDP slowed from 4.1
percent in the third quarter of 2005 to around 3.1 percent in the fourth.
Global Insight, a global economic consulting and forecasting firm, expects the
U.S. economy to expand at a 3.8 percent rate during the first quarter of 2006.
While hurricane rebuilding will add to growth, continued high energy costs
could curtail consumer spending and push up inflation as firms exercise
pricing power. Two more interest rate hikes will likely bring the federal funds
rate to 4.75 percent by the end of the quarter. Almost 48 percent of Alabama
business leaders expect the U.S. economy to improve during the first quarter
of 2006, while 15.7 percent think economic activity could be curtailed.
Alabama Economy to Continue Steady Growth Alabama’s economy
expanded at a 3.4 percent rate in 2005 and is poised for growth of around
3 percent in 2006. About 30,000 new jobs helped spread prosperity across
the state. Every metro area added jobs in 2005 and in November, for the
first time in at least three decades, unemployment in every county was in
the single digits. Median family income rose 2.0 percent between FY2004
and FY2005, according to Department of HUD estimates. Total Alabama
tax revenues for the October to December 2005 period were up 8.8
percent compared to the same period a year ago. Business leaders
expect this momentum to carry over into the first quarter of 2006. At 62.8,
the Alabama economic outlook is the highest component of the BLCI and is
10 points above the fourth quarter dip that resulted from Hurricane Katrina.
About 55 percent of panelists expect growth in the Alabama economy to
accelerate this quarter, while 36.7 percent think growth will follow recent
trends. Only 8.4 percent of respondents anticipate a slowdown in the
state’s economy in the first quarter of 2006.
Alabama Economic Outlook
Q1 2006 compared to Q4 2005
60
50.1
50
36.7
40
Percent
Percent
Expectations for the Alabama economy early in 2006 are the
strongest of the six BLCI components as the state is poised
to build on its 2005 success, particularly in motor vehicle
manufacturing and professional and business services. For the
third consecutive quarter, panelists are more optimistic about
Alabama’s economy than the nation’s, although the U.S. outlook
bounced back almost 12 points from last quarter to 58.8. While
sales is the strongest industry indicator and the outlook for gains
in hiring is the most subdued, all four industry components of
the BLCI forecast expansion.
THE OUTLOOK
Alabama
BLCI
Index
Alabama BLCI Approaches Pre-Hurricane Level The
Alabama Business Leaders Confidence Index® (BLCI) came in
at 59.3 for the first quarter of 2006, gaining back 5.3 points to
approach its pre-hurricane level of 59.7. All components of the
index turned up this quarter. Uncertainty about the hurricanes’
aftermath depressed expectations for the fourth quarter but by
December, when the first quarter 2006 survey was conducted,
the spike in energy prices had abated and it was clear that
hurricane damage in Alabama was more than offset by the
involvement of state businesses in cleanup and rebuilding and
by the positive economic impact of an influx of storm evacuees.
Most importantly, the economy of the state held up well, with job
gains throughout the year.
30
20
8.1
10
0.3
0
4.8
No
Strong Moderate
Moderate Strong
Decrease Decrease Change Increase Increase
Center for Business and Economic Research, The University of Alabama
Percent
Percent
Industry Sales
Sales Rebound to Pre-Katrina Levels With the hurricane-induced spike
Q1 2006 compared to Q4 2005
in energy prices abated and demand for materials to be used in rebuilding
60
on the horizon, Alabama business leaders expectations for industry sales
53.2
improved in the first quarter of 2006. The sales component index of 61.9
50
is 3 points above its fourth quarter 2005 value, and about 60 percent of
panelists anticipate increased sales in their industry during the first three
40
months of 2006. Alabama consumers should be in better shape overall
than they were a year ago, with strong job gains during 2005 reducing
30
unemployment and raising income across the state. However, relatively
23.5
high energy costs may be a drag on consumer spending during the winter
20
heating season; 16.8 percent of respondents think sales could trend lower
15.1
this quarter. Sales expectations are especially robust in professional,
6.4
10
scientific, and technical services and in healthcare and social assistance
1.7
services where almost 75 percent of panelists forecast an increase. In the
face of already-strong demand, just half of construction firms expect sales
0
No
Strong Moderate
Moderate Strong
to increase this quarter. Only 48.4 percent of retail firms anticipate sales
Decrease Decrease Change Increase Increase
gains compared to the fourth quarter holiday period.
Higher Energy and Commodity Prices Constrain Profits The profits
60
Industry Profits
component index regained 4.8 points from its fourth quarter low to come in at
Q1 2006 compared to Q4 2005
57.8 for the first quarter of 2006. However, profit expectations remain below
50
their third quarter 2005 level of 59.4. Higher prices for both energy and
44.0
commodity inputs are cutting into profits, although recent surveys by the
40
Institute of Supply Management and the National Federation of Independent
31.9
Business indicate that firms are becoming more likely to raise prices to help
30
cover these costs. Wage gains are also a factor, partially offset by continuing
productivity increases. Across Alabama businesses, 48.5 percent of panelists
17.6
20
expect profits in their industry to rise during the first quarter of 2006, while
19.6 percent forecast a decline. Sixty-nine percent of respondents in
transportation, information, and public utilities (TIPU) industries expect higher
10
4.5
first quarter profits. Expectations are also well above average in professional,
2.0
scientific, and technical services. The wholesale and retail trade and
0
No
Strong Moderate
Moderate Strong
construction industries have the weakest profit forecasts this quarter.
Decrease Decrease Change Increase Increase
Industry Hiring Plans
60
Industry Capital Expenditures
50
44.3
Q1 2006 compared to Q4 2005
38.1
Percent
40
30
20
10.4
10
2.2
0
2
5.0
No
Strong Moderate
Moderate Strong
Decrease Decrease Change Increase Increase
60
Q1 2006 compared to Q4 2005
49.6
50
40
Percent
Job Gains to Continue at Moderate Pace Alabama business leaders
forecast moderate job growth in the first quarter of 2006, with the hiring
plans component index of 56.0 up just 1.1 points from its fourth quarter
2005 value. After a year that saw the addition of about 30,000 jobs across
the state, hiring will likely be slightly lower in 2006. Half of BLCI survey
respondents expect to hold the status quo on hiring this quarter, while
37.3 percent think hiring in their industry will accelerate. Following a year
of strong growth in the motor vehicle industry, job gains in manufacturing
should slow—57.1 percent of manufacturers surveyed expect no change in
hiring plans for the first quarter of 2006, while 30.5 percent plan to step up
hiring. Strongest job growth is forecasted in TIPU; professional, scientific,
and technical services; finance, insurance, and real estate (FIRE); and
construction. Job gains in trade and healthcare are projected to be below
average.
34.2
30
20
10
0
10.1
3.1
3.1
No
Strong Moderate
Moderate Strong
Decrease Decrease Change Increase Increase
Business Investment Boosted by Hurricane Rebuilding Capital
expenditures will continue to grow in the first quarter of 2006. The capital
spending component index, which fell only slightly on the fourth quarter
survey, passed its third quarter 2005 reading with a value of 58.3. Slightly
more BLCI panelists expect investment to continue at fourth quarter 2005
levels (44.3 percent) than to pick up the pace (43.1 percent) in the first
quarter of 2006, but just 12.6 percent see a downside. Capital spending
increases should be well above average in construction, supporting Global
Insight’s expectation that industrial and commercial construction will get a
boost from Hurricane Katrina-related rebuilding, particularly of mining and
petroleum structures. Companies in the TIPU sector also expect a strong
increase in capital spending. Information processing equipment, software,
and transportation equipment are all expected to be important investment
targets in 2006. Below average capital spending is forecasted for firms in
trade, FIRE, and professional, scientific, and technical services.
Center for Business and Economic Research, The University of Alabama
Compensation to Rise for Most Alabama Workers Three out
of four Alabama business leaders responding to the first quarter
survey expect employee compensation in their firm to increase
during the first six months of 2006. Increases will generally be
from 2 to almost 4 percent. And 11.5 percent of businesses
expect compensation to rise 5 percent or more. Overall, 19.9
percent of companies surveyed plan no change in employee
compensation through June, but this varies by firm size—28.8
percent of firms with fewer than 20 employees fall into this
category as do 18.1 percent of companies employing 20 to 99
and 13.4 percent of firms employing 100 or more. The most
frequent category of planned compensation increases for
companies with under 100 employees is 2 to 2.99 percent, while
gains are most likely to fall in the 3 to 3.99 percent range at firms
with 100 or more employees. Small firms (under 20 employees)
are most likely to grant large compensation increases of 5
percent or more (17.1 percent of firms), while 11.2 percent of
large companies and just 5.7 percent of mid-size firms expect
compensation increases of this magnitude. Nationally, Global
Insight expects total employee compensation to increase at an
annualized rate of around 3.8 percent in the first half of 2006.
Composition of Change in Compensation
Cost of living
adjustment
30.5%
2005 year-end bonus
21.7%
Granting of
stock options
2.0%
Merit/performance
increase
45.8%
Expectations for Employee Compensation
Over the Next Six Months
Increase 5% or more
11.5
Increase 4 - 4.99%
7.0
Increase 3 - 3.99%
19.6
24.1
Increase 2 - 2.99%
13.4
Increase 0 - 1.99%
19.9
Stay the same
1.7
Decrease
2.8
Don’t know
0
5
10
15
20
25
30
Percent of Panelists
Merit Increases, Cost of Living Raises, and Bonuses Figure
into Gains Awards for merit and performance should account for
the largest share of changes in employee compensation over the
first six months of 2006, amounting to 45.8 percent of the total
increase. Incentive compensation is becoming increasingly
important as firms seek to attract and retain good talent and to
reward high performance. Cost of living adjustments will
contribute 30.5 percent of the change in compensation. Year-end
bonuses are a substantial component, amounting to 21.7 percent
of the overall increase as 2005 came to a close. Stock options
are a meager 2.0 percent, reflecting the fact that most Alabama
businesses are privately held. About 72 percent of Alabama
business leaders reported that their firm will use more than one
form of compensation in awarding increases—slightly below the
78 percent of companies planning to utilize “variable pay plans”
in 2006 on a recent nationwide survey.
Compensation Plans
Compared to One Year Ago
Lower
100
About the same
Higher
85.5
83.3
78.0
80
Percent
Bonuses, Cost of Living Adjustments More Prominent The
majority of employee compensation plans will be structured
about the same this year as last. However, bonuses are more
evident at year-end 2005 than they were a year ago—13.2
percent of companies surveyed this quarter that plan to increase
compensation expected to award year-end bonuses to more
employees than last year. Adjusting for 8.8 percent that planned
to award fewer bonuses yields a net gain of 4.4 percent of
companies expanding year-end bonuses. Cost of living
adjustments will reach a larger share of employees in 2006, with
10.3 percent of firms planning to expand coverage for a net gain
of 3.9 percent awarding cost of living increases to more
employees. However, in line with national trends, stock options
are expected to become a less important component of Alabama
employee compensation packages in 2006.
60
40
20
8.8
13.2
6.4
10.3 12.5
0
2005
Year-end
bonus
2006
Cost of living
adjustment
2.0
2006
Stock
options
Center for Business and Economic Research, The University of Alabama
3
Post-Hurricane Bounce Propels Mobile Economy A number
of Hurricane Katrina evacuees moved east toward the closest
inhabitable coastal area—the Mobile metro area. Home sales
and prices, rental and motel occupancy, and retail sales were all
driven up and remain above normal levels. New and expanding
industries as well as rebuilding of oil and gas infrastructure in the
Gulf of Mexico are also propelling the Mobile economy. Mobile
MSA panelists garnered a BLCI of 64.8, 5.5 points above the
statewide index. The Birmingham, Huntsville, and Montgomery
MSAs all saw strong job growth in 2005 and are poised for
continued economic gains in 2006. Huntsville’s average was
pulled down by a less optimistic outlook among its professional,
scientific, and technical services businesses.
Component Index by Area, Q1 2006
Q1 2006
Alabama
Change from Q4
Birmingham
MSA
Huntsville
Mobile
Montgomery
National Economy
58.8
11.8
58.3
58.6
60.4
60.0
Alabama Economy
62.8
10.0
61.8
62.9
69.8
62.5
Industry Sales
61.9
3.0
62.9
59.3
69.3
60.6
Industry Profits
57.8
4.8
58.2
57.9
62.5
60.6
Industry Hiring
56.0
1.1
57.1
55.0
62.5
54.4
Capital Expenditures
58.3
1.2
58.7
56.4
64.1
58.1
BLCI
59.3
5.3
59.5
58.3
64.8
59.4
A Look into the BLCI Over 350 Alabama
business leaders completed the first quarter
2006 survey online during the month of
December. Panelists came from all of the
broad industry groupings in the state, with the
largest contingent in the combined finance,
insurance, and real estate sector. Manufacturing, trade, and professional, scientific,
and technical services were also particularly
well represented.
Many thanks to all of our panel members for
making this survey a useful and reliable
indicator. Your continued participation is very
important. Please join us in March for our
Second Quarter 2006 Survey.
Distribution of Alabama BLCI Panelists by Industry
Q1 2006
Agriculture/Forestry/Fishing
1.1
Mining
1.1
Public Administration
2.0
Other Services
11.2
Health and Social Assistance Services
5.6
Professional/Scientific/Technical Services
12.6
Finance/Insurance/Real Estate
20.4
Transportation/Information/Public Utilities
8.1
Retail Trade
8.7
Wholesale Trade
8.7
Construction
6.7
Manufacturing
13.7
0
5
10
15
20
Percent of Panelists
Analysis provided by Carolyn Trent, Socioeconomic Analyst,
Center for Business and Economic Research, The University of Alabama.
The BLCI is a
Compass on Business
initiative created in
collaboration with:
For more details on the Alabama Business Leaders Confidence Index®, visit www.blci.com/alabama.
For more details on the Center for Business and Economic Research, visit cber.cba.ua.edu.
25