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Center for Business and Economic Research, Culverhouse College of Commerce, The University of Alabama
Volume 75, Number 1
Economic Outlook:
1st Quarter 2006
United States
Review of 2005. After expanding at an
average annual rate of 3.7 percent for the
first three quarters of 2005, the U.S. economy grew by only 1.1 percent in the fourth
quarter, according to advance estimates.
This was the slowest pace since the fourth
quarter of 2002, when the economy grew
by just 0.2 percent. For all of 2005, U.S.
economic growth averaged 3.5 percent.
The slowdown in the fourth quarter was
primarily the result of declines in defenserelated federal government spending and in
business spending, as well as a significant
cutback in consumer spending. Higher
energy prices and rising interest rates both
had an effect on consumer spending. Energy
prices also pushed the inflation rate up to a
five-year high of 3.4 percent. At the same
time, inflation-adjusted average wages for
production and nonmanagerial workers
declined for the third consecutive year.
Consumer spending, which grew at an
average annual rate of 3.7 percent through
the third quarter of 2005, increased by only
1.1 percent in the fourth. This was its
slowest pace since the second quarter of
2001, when the economy was actually in a
recession. The fourth quarter weakness will
bring growth in consumer spending, which
accounts for about two-thirds of the U.S.
economy, down to an average annual rate of
3.0 percent for 2005 as a whole. Spending
on durable goods fell by 17.5 percent in the
fourth quarter, following an increase of 9.3
percent in the third. This was the sharpest
decline in purchases of durable goods, such
as automobiles and major household
appliances, since the first quarter of 1987.
Spending on durable goods increased at an
average annual rate of only 0.6 percent in
2005. Consumer spending on nondurable
goods, including clothing and food, rose by
4.4 percent for all of 2005, while spending
on services such as healthcare increased by
2.9 percent.
First Quarter 2006
Federal government expenditures
declined by 7.0 percent in the fourth
quarter, following a third quarter
increase of 7.4 percent. Business
spending on equipment and software grew 3.5 percent in the fourth
quarter after experiencing an average
annual increase of almost 10 percent
for the first three quarters of 2005.
For the year as a whole, business
spending on equipment and software climbed more than 8 percent.
With exports increasing by 7.0
percent and imports by 6.4 percent,
the U.S. trade deficit reached $730
billion in 2005. It should be pointed
out, however, that a significant
portion of this deficit results from
U.S. companies manufacturing
products abroad and then importing
them back into the country.
Despite a slowdown in the fourth
quarter, the economy still managed
to add 2.0 million new jobs, with
unemployment averaging 5.1 percent, in 2005. Most of the gains
were in service-related businesses,
and in construction, retailing, and
travel and tourism-related firms.
The manufacturing sector continued
to shed workers despite a 3.0 percent increase in industrial production. Manufacturing lost almost
45,000 jobs in 2005. Strong competition made it difficult for most
manufacturers to pass higher energy
and raw material costs through to
their customers. Although manufacturing continued to experience
job losses, professional and business
services added over 500,000 jobs,
while retailing created approximately
140,000 new jobs in 2005. Construction firms generated about
278,000 new jobs and state and
local governments around the
country added almost 185,000
workers to their payrolls.
Outlook for 2006. Given the
current high rate of labor productivity, the U.S. economy is expected
to expand by 3.4 percent in 2006,
with first quarter growth averaging
In this issue:
Economic Outlook:
1st Quarter 2006
1
Business Leaders Confidence
Index: 1st Quarter 2006
5
Selected Indicators
9
Alabama Metro Areas:
Driving the State in 2005
10
3.8 percent. In recent years, labor productivity has increased by close to 3.5 percent
compared to its long-term average of around
2 percent. Hurricane-related reconstruction
activity will help support economic growth in
the first half of 2006. During the course of
the year, as interest rates continue to rise
gradually, the housing market will begin to
lose steam. While this will have a negative
effect on the overall level of economic
activity, we do not expect a full-fledged
recession. Another sign pointing to a
pending slowdown in the economy was the
inversion of the yield curve in late 2005,
with short-term interest rates being slightly
higher than long-term rates. The shape of
the yield curve is a good predictor of the
economy down the road, generally with
about an 11 to 12-month lag. It should be
pointed out that, although the yield curve is
a fairly good predictor of the economy, it has
also given some false signals over the course
of recent history.
The housing market, which has been the
main driver in the current economic
expansion, will begin to cool in 2006,
primarily due to rising interest rates and
overextended price levels. Most housing
indicators began slowing down in the fourth
quarter of 2005 and are expected to continue
to show some weakness. Housing prices for
existing homes are still growing at a faster
pace than prices for new homes, with
homebuilders likely selling new homes at a
discount, particularly in markets where home
prices have soared in recent years. After
growing by about 4.5 percent in 2005,
residential construction is forecasted to
increase 4.0 percent in 2006, and will
probably slow to around a 2.8 to 3.0 percent
rate by 2007. However, due to hurricane
reconstruction, residential construction could
grow by approximately 5 percent in the first
two quarters of 2006.
As mortgage refinancing activity tapers off it
will have an effect on consumer spending.
Overall consumer spending is expected to
increase by around 3 percent in 2006 and,
after a very slow fourth quarter of 2005, first
quarter 2006 expenditures could grow by 3.5
percent. Spending on home furnishings and
appliances will slow considerably as home
sales and construction decline. Auto sales
are also expected to grow only modestly in
2006.
Business spending on equipment and
software is forecasted to remain strong,
offsetting some of the decline in economic
activity resulting from slowing consumer
expenditures. Investment spending for
equipment and software is expected to
increase by 9.5 percent in 2006, with growth
for the first quarter estimated at close to 12
percent. Spending on industrial equipment
will rise by 6.0 percent in 2006, with a first
quarter increase of approximately 8 percent.
Given relatively high energy prices,
investment expenditures on mining and
petroleum-related structures will climb by
almost 30 percent in 2006, following an
increase of 17.0 percent in 2005.
2
Alabama Business
Energy prices will stay relatively high in 2006
as strong growth in the world economy
continues to rapidly absorb existing supplies
as well as any new supplies coming online.
The price of West Texas Intermediate Crude
is expected to hover around $60 per barrel.
Higher energy prices, together with higher
raw material prices, will keep the inflation
rate around 2.5 to 3 percent for 2006. At
present, energy prices remain the biggest risk
to the forecast. A sharp spike in prices could
have an adverse effect on the cost of doing
business and further erode the consumer’s
purchasing power.
Alabama
Review of 2005. During the 12-month
period ending in December 2005, payroll
employment in the state increased by
17,400. Most of the increase was in servicerelated businesses. Some of the largest gains
were seen in administrative and support
services, which added 4,100 new jobs.
Relatively strong housing markets helped the
construction sector gain approximately 800
jobs. Other sectors of the state’s economy
that performed well included healthcare and
social assistance, adding 2,300 new jobs
from December 2004 to December 2005, and
restaurants and drinking places, where
payroll employment increased by 3,300.
Businesses providing professional, scientific
and technical services added 2,200 jobs to
their payrolls in 2005. Some job gains were
also seen in retailing. However, during the
12-month period ending in December, firms
associated with the finance and insurance
industries lost 1,100 jobs, while the
telecommunications sector shed 100 jobs.
Alabama’s manufacturing sector had a
relatively strong year. During the 12-month
period ending in December, manufacturing
industries added 3,600 net new jobs.
Industries producing durable goods created
4,000 jobs while industries producing
nondurable goods experienced a decline in
their payrolls of 400 workers. Within the
durable goods sector, transportation
equipment manufacturing, which includes
motor vehicle manufacturing, had another
remark-able year in 2005, adding 4,800 jobs
during the 12-month period ending in
December. Other industries that added
workers to their payrolls in 2005 included
foundries (500), fabricated metal (300),
machinery manufacturing (700), and
computer and electronic products manufacturing (400). However, furniture
manufacturers lost 1,300 jobs and the wood
products industry shed 700 workers. Within
nondurable goods manufacturing, food
manufacturing and plastics and rubber
products were the only industries to add to
their payroll employment, creating 1,400 and
400 jobs, respectively. All other nondurable
goods industries experienced job losses.
The upturn in economic growth over the last
two years has had a significant impact on
state tax receipts. During the first quarter of
the current fiscal year, ending in December,
state tax revenues totaled about $1.9 billion.
This was an increase of 8.8 percent, or
approximately $154 million, compared to the
first quarter of the previous fiscal year. Over
the same period, sales tax revenues increased
by 13.4 percent to $494 million, almost $58
million higher than receipts from the same
period of the previous fiscal year. First
quarter corporate income tax receipts totaled
$109 million, an increase of 5.7 percent, or
$6 million, over the first quarter of the
previous fiscal year. Individual income tax
revenues of $654 million were up approximately 5 percent compared to the same
quarter last year, for an increase of $31
million.
In the first quarter of the current fiscal year,
ending in December, appropriations made to
the Alabama Education Trust rose by over
$46.9 million to total $1.2 billion, an
increase of 4.0 percent. Appropriations
made to the state’s General Fund amounted
to $417 million, an increase of approximately
$83.9 million, or over 25 percent, compared
to the first quarter of the last fiscal year.
Outlook for 2006. In 2006 the state’s
economy is expected to grow by slightly over
3 percent and add approximately 26,000 new
jobs. Currently, higher interest rates and
energy prices present the biggest risks to the
forecast. Higher energy prices can place
inflationary pressures on the economy, which
in turn push interest rates higher and erode
consumers’ disposable incomes. Furthermore, higher interest rates could adversely
affect interest sensitive sectors of the
economy.
Alabama’s manufacturing sector should grow
by 5.1 percent, largely due to an almost 27
percent increase expected in the production
or motor vehicles. Although the state’s
economy is forecasted to slow slightly from
2005, some sectors of the economy,
including retailing, construction, professional
and business services, and health services
Alabama Business
3
Alabama Nonagricultural Employment
Change in Number of Jobs
December 2004 to
December 2005
Total Nonagricultural
Natural Resources and Mining
Construction
Manufacturing
Durable Goods Manufacturing
Wood Products Manufacturing
Primary Metal Manufacturing
Fabricated Metal Product Manufacturing
Machinery Manufacturing
Computers and Electronic Products Manufacturing
Electrical Equipment, Appliance, and Component Mfg.
Transportation Equipment Manufacturing
Motor Vehicle Manufacturing
Furniture and Related Products Manufacturing
Nondurable Goods Manufacturing
Food Manufacturing
Textile Mills
Textile Product Mills
Apparel Manufacturing
Paper Manufacturing
Plastics and Rubber Product Manufacturing
Trade, Transportation, and Utilities
Wholesale Trade
Retail Trade
Transportation, Warehousing, and Utilities
Information
Telecommunications
Financial Activities
Professional and Business Services
Educational and Health Services
Leisure and Hospitality
Other Services
Government
Federal Government
State Government
State Education
Local Government
17,400
200
800
3,600
4,000
-700
100
300
700
400
0
4,800
3,000
-1,300
-400
1,400
-500
-200
-400
-300
400
3,500
2,000
500
1,000
0
-100
-200
6,500
2,400
2,100
700
-800
-100
-1,500
-2,000
800
Source: Alabama Department of Industrial Relations.
NOW AVAILABLE!
Alabama Economic Outlook 2006
The Alabama Economic
Outlook 2006 examines
current economic conditions
and trends and their likely
effects on the national and
Alabama economies in the
coming year.
The Alabama forecast focuses
on the short term outlook for
output and employment in
the state by sector and
presents a look at state revenues. Trends in the state’s
metropolitan areas are also discussed.
The Alabama Economic Outlook 2006 is the 27th in an
annual series produced by the Center for Business and
Economic Research. The Outlook is supplemented by a
companion publication of detailed forecast tables. Each
publication is $30.
For more information, call 205.348.6191 or visit our web
site at: cber.cba.ua.edu
To Order:
Please make checks payable to The University of Alabama
and send to:
Center for Business and Economic Research
Box 870221
Tuscaloosa, Alabama 35487-0221.
Name:
Address:
will hold up well. Employment in professional and business services is
expected to increase by slightly over 3 percent, with the addition of
approximately 6,500 jobs. Most of these jobs will be in scientific and
technical services and in administrative and support services. The
educational and healthcare sectors of the economy will add about
3,400 new jobs to their payroll employment, primarily in healthcare
and social assistance-related services. With higher energy prices,
economic activity in Alabama’s natural resources and mining sector is
also expected to improve.
If the state’s economy remains on its current trajectory, barring any
unforeseeable exogenous shocks, Alabama’s tax revenues should rise
by at least 8 percent in the current fiscal year. Sales tax receipts are
expected to increase by over 5 percent.
Ahmad Ijaz
[email protected]
4
Alabama Business
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