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Center for Business and Economic Research, Culverhouse College of Commerce, The University of Alabama
Volume 75, Number 3
Economic Outlook:
3rd Quarter 2006
United States
Review. After sluggish growth in the
fourth quarter of 2005, the U.S. economy expanded at an impressive 5.6 percent annual rate in the first quarter of
2006; the fastest pace in two and a half
years. A slight improvement in the
trade deficit resulted in an upward revision in GDP from a previously estimated
5.3 percent growth rate for the quarter.
Both consumer and business spending
contributed to strong GDP gains, registering their highest growth rates since
third quarter 2003. Consumer spending
rose 5.1 percent, outpacing income
growth and dropping the savings rate to
-1.7 percent for the quarter. Business
spending on software and equipment
increased by 14.8 percent. Corporate
profits rose 28.5 percent after being
revised up from $116.5 billion to $176.7
billion on a year over year basis.
The rapid pace of consumer spending on
imports, together with relatively high
prices for energy and other commodities,
have substantially deteriorated the U.S.
current account deficit. At the end of
2005 the deficit stood at $804.9 billion,
over 20 percent higher than the $668.1
billion deficit in 2004. U.S. foreign liabilities in 2005 exceeded U.S. foreign
assets by $2.7 trillion, up 14 percent
from 2004.
By second quarter 2006, however, the
U.S. economy began to show clear signs
of slowing as commodity prices and
interest rates continued to rise. U.S.
GDP growth for the second quarter is
currently estimated to be in the 2.3 to
2.5 percent range, primarily due to a
slowdown in consumer spending and a
weaker housing market. With increasing
Third Quarter 2006
inflationary pressures from higher
energy and raw material prices,
the Federal Reserve Bank raised
the federal funds rate from 5.0 to
5.25 percent at the June FOMC
meeting, the seventeenth consecutive increase. Long term yields
on treasury bonds increased from
4.6 percent in the first quarter to
approximately 5.1 percent in the
second quarter. Inflation, as
measured by the consumer price
index, rose at a 2.2 percent annualized rate in the first quarter of
2006 to reach approximately 5
percent in the second quarter.
Gross Domestic Product
Annual Percent Change
Over Same Quarter Previous Year
6
5
4
3
2
1
0
-1
-2
Q1
1991
Q1
1994
Q1
1997
Q1
2000
Q1
2003
Q1
2006
Source: U.S. Department of Commerce, Global Insight, and Center for
Business and Economic Research, The University of Alabama.
Higher energy costs are raising
other commodity prices, resulting
in higher prices for manufactured
6
goods. However, some manufacturers and retailers are still find5
ing it difficult to pass cost
4
increases on to their customers.
3
In the face of both rising interest
2
rates and persistently higher
energy prices, residential con1
struction and consumer spending
0
are beginning to show signs of
-1
cooling. Single family housing
Q1
starts and sales of both existing
1991
and new homes were significantly
Source:
lower in the first half of 2006
compared to the first half of
2005. Home price increases have moderated since 2005, reducing consumers’
ability to use home equity and refinancing to support spending.
With consumers pulling back on spending for big-ticket items, total expenditures are expected to rise just 2 percent
in the second quarter of 2006. Spending
on nondurable goods should increase by
about 1 percent, while spending on
durable goods is expected to decline by
2.5 percent. Business spending on
equipment and software is expected to
increase by 5 percent during the quarter,
with spending on information processing
equipment rising about 9 percent.
Consumer Expenditures
Annual Percent Change
Over Same Quarter Previous Year
Q1
1994
Q1
1997
Q1
2000
Q1
2003
Q1
2006
U.S. Department of Commerce, Global Insight, and Center for
Business and Economic Research, The University of Alabama.
In this issue:
Economic Outlook:
3rd Quarter 2006
1
Business Leaders
Confidence Index:
3rd Quarter 2006
5
Selected Indicators
9
Alabama’s Housing
Market Remains Strong
10
Residential investment is estimated to
drop by more than 7 percent in the second quarter, the first decline in over
four years.
The June employment report showed
softness in new job creation, with
increasing wage inflation. The 121,000
increase in payroll employment in June
was significantly below expectations.
Private payrolls averaged a gain of just
86,000 in the second quarter, compared
to 169,000 during the first quarter of
2006. Surprisingly, after years of laying
off workers, manufacturing industries
actually added 15,000 jobs to their payrolls in June. Currently the U.S. industrial sector is operating at 82.4 percent
of total capacity, a six-year high and up
from a May capacity utilization rate of
81.8 percent. The construction industry
lost 4,000 workers in June, with residential construction dropping almost 9,000
jobs as housing markets weakened.
Employment in services-related private
firms was up 75,000 in June. Payroll
employment in retailing fell by 7,000,
the third consecutive monthly decline.
General merchandise stores have lost
almost 61,000 jobs over the last three
months as slower growth in payroll
employment, high gasoline prices, and
interest rate increases continue to
squeeze household spending.
Outlook. A slowdown in real consumer
spending coupled with declining residential investment are expected to remain a
drag on the economy during the second
half of 2006. Slowing gains in payroll
2
Alabama Business
employment will further
deteriorate household
finances and make consumers even more cautious.
Persistently high energy
prices will keep inflationary
pressures on the economy
and affect both consumer
financing and production
and raw material costs for
businesses. Growth in
inflation-adjusted household spending is estimated
to decline from 3.5 percent
in the first half of the year
to around 2.5 to 2.7 percent in the second half.
The Blue Chip Consensus
forecast calls for 3.1 percent GDP growth for the last three quarters of the year. However, in our view
the economy will grow by 2.5 to 2.7
percent for that period, as high oil and
commodity prices are not likely to abate
anytime soon. Oil prices are expected to
stay around $70 per barrel for the
remainder of the year.
Growth in consumer spending is estimated to be in the 2.5 to 3.0 percent
range for the second half of 2006.
Business spending will remain fairly
robust, growing at an average annual
rate of almost 9 percent; business
spending on equipment and software
will increase by approximately 11 percent. Spending on industrial equipment
should also hold up for the remainder of
the year, growing by almost 12 percent
in the third quarter and by about 10
percent in the fourth quarter. With a relatively weaker U.S. dollar, exports are
expected to increase much
faster than imports,
although this will not significantly improve the
imbalances in the U.S. current account. The overall
trade deficit could conceivably be about $825 to $850
billion by year’s end.
The yield on the 10-year
Treasury note is forecasted
to be around 5.2 percent by
the end of 2006 and the
30-year fixed mortgage rate
will increase from its cur-
rent level of about 6.6 percent to almost
6.9 percent. Although the Fed has been
giving mixed signals that it may be
through raising rates, in our view continued inflationary pressures could result
in another 25 basis point increase in the
funds rate to 5.5 percent in August, and
perhaps one more at their September
meeting to end the Fed’s tightening
cycle. Interest rates might start to ease
in 2007, particularly if economic growth
dips below its long-term potential rate
of 3.0 percent. The biggest risk to the
economy at present remains high gasoline prices, which could have a significant downside impact on both industrial
activity and consumer purchases. Most
of the growth in the second half of 2006
will come from capital spending and
exports, a boon for the nation’s industrial sector.
Alabama
Review. During the 12-month period
ending in May 2006, the state’s economy added 35,700 jobs. Over 71 percent
of these new jobs were located in the 28
metro area counties; the remaining 39
counties added about 10,200 jobs.
Unlike the U.S. manufacturing sector,
which in recent years has consistently
lost jobs, Alabama’s manufacturing sector has been growing, primarily due to
the automotive sector. In the 12-month
period ending in May 2006, the state
gained 3,700 new manufacturing jobs.
Durable goods producing industries
added 6,600 jobs, of which 5,200 were
in transportation equipment manufacturing. Wood product manufacturing
gained 600 jobs and computer and electronic product manufacturers created
1,100 new jobs. Nondurable goods
manufacturing industries lost 2,900
workers, including 2,300 in textiles and
apparel. Pulp and paper manufacturing
lost 300 jobs, while employment in
plastics and rubber products manufacturing rose by 500.
ers in the category classified as administrative support, waste management and
remediation services. While wholesale
trade added 1,900 workers, retailing lost
800 jobs. The accommodation and food
services industry gained 4,300 jobs, of
which 2,700 were at eating and drinking
places. Health care and social assistance
employment rose by 5,100 workers,
while state and local government added
2,700 jobs.
In the same 12-month period,
construction-related businesses added
5,100 employees to their payrolls, mostly with specialty trade contractors and
heavy and civil engineering construction
firms. Alabama’s services sector added
26,400 jobs. Almost 10,300 of these
jobs were in professional and business
services, including a gain of 8,100 work-
Although the May 2005 to May 2006
job growth in the state is impressive
compared to recent years, much of the
gain in payrolls was in businesses and
services that typically pay relatively
lower wages compared to jobs in the
industrial sector. For instance, some of
the largest gains in payroll employment
were in eating and drinking places and
administrative support services. Wages
in both these industries are significantly
below the wages paid in other sectors of
the state’s economy. In terms of payroll
employment, from May 2005 to May
2006, the fastest growing areas of the
state included the Birmingham-Hoover
metro area (6,900 jobs), the Huntsville
metro area (5,900 jobs), and Mobile
(5,000 jobs). Among smaller metro
areas, Auburn-Opelika added 1,800 new
jobs and the Florence-Muscle Shoals
metro had a net gain of 1,500 jobs.
With the exception of the AnnistonOxford metro area, where payroll
employment was flat, the state’s other
metro areas also added jobs between
May 2005 and May 2006.
Tax Receipts. Alabama experienced
remarkable growth in tax revenues for
Alabama Business
3
Alabama Nonagricultural Employment
Change in Number of Jobs
May 2005 to
May 2006
Total Nonagricultural
Natural Resources and Mining
Construction
Manufacturing
Durable Goods Manufacturing
Wood Product Manufacturing
Primary and Fabricated Metal Product Manufacturing
Machinery Manufacturing
Computers and Electronic Product Manufacturing
Electrical Equipment, Appliance, and Component Mfg.
Transportation Equipment Manufacturing
Motor Vehicle Manufacturing
Furniture and Related Product Manufacturing
Nondurable Goods Manufacturing
Food Manufacturing
Textile Mills
Textile Product Mills
Apparel Manufacturing
Paper Manufacturing
Plastics and Rubber Products 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
35,700
300
5,300
3,700
6,600
600
300
0
1,100
0
5,200
1,200
-200
-2,900
-200
-600
-700
-1,000
0
500
1,900
1,700
-800
1,000
0
200
1,100
10,300
4,700
4,900
400
3,100
400
1,400
2,200
1,300
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Source: Alabama Department of Industrial Relations.
the first nine months of the current
fiscal year and state tax revenues are
expected to continue to show strong
gains. During the period from October
2005 to June 2006, state tax revenues
totaled more than $6.4 billion, up 9.7
percent, or approximately $565 million,
over the first nine months of the previous fiscal year. Sales tax revenues rose
9.1 percent to about $1.5 billion, an
increase of $123 million. Corporate
income tax receipts totaled over $400
million, up nearly 21.5 percent or about
$70 million. Individual income tax revenues grew 9.0 percent to approximately
$2.5 billion, about $207 million higher
than in the same period of the previous
4
Alabama Business
fiscal year. Appropriations to the
Alabama Education Trust Fund rose by
about $360 million to approximately
$4.1 billion, an increase of 9.7 percent.
Appropriations to the state’s General
Fund increased by approximately $156
million, a gain of 16.1 percent, to total
about $1.1 billion.
Outlook. After remarkable growth in
the first half of the year, the state’s
economy is expected to slow down
somewhat for the remainder of 2006.
With high gasoline prices putting a
strain on household budgets, consumer
spending levels will deteriorate and
stress the retailing industry. Conditions
in housing markets will weaken slightly
in the coming months. However, with
continued sizeable gains in corporate
profits, business spending is expected
to remain strong. The fastest growing
segments of Alabama’s economy are
forecasted to be business and health
care-related services, and automotive
production-related manufacturing industries. Overall the state’s economy is
estimated to grow by 2.5 percent for the
last two quarters of 2006.
Ahmad Ijaz
[email protected]