Third Quarter 2006 • Volume 5, Number 3
Economic conditions at the national level are weighing heavily
on the minds of panelists. Responding to the third quarter topical
questions, Alabama business leaders expressed concerns
including rising interest rates and their effect on housing markets;
consumer confidence and the impact of high energy prices on
both business costs and consumer behavior; and competition and
the difficulty of passing price increases for commodity inputs
forward. Despite these ongoing worries, panelists are confident
that business growth will move in a positive direction during the
third quarter of 2006.
National Economic Outlook
Q3 2006 compared to Q2 2006
50
39.2
Percent
40
32.9
30
23.6
20
10
2.9
1.4
0
Much
Worse
Somewhat Remain Somewhat
Worse the Same Better
Much
Better
100
National Economy
53.1
Alabama Economy
60.9
Industry Sales
62.2
Industry Profits
59.5
Industry Hiring
57.6
80
59.7
60
54.0
59.3 61.4 58.9
40
Capital Expenditures 60.4
20
BLCI
0
Q3 Q4
2005
Q1 Q2 Q3
2006
58.9
Index above 50 indicates expansion.
increase from previous quarter
decrease from previous quarter
Caution about National Economy Tempers Optimism Continued
high energy prices, rising interest rates, a slowdown in the housing
sector, and increasingly stretched consumers are among factors taking
their toll on U.S. economic growth. While GDP increased by a robust
5.6 percent in the first quarter of 2006, gains are expected to be around
2.3 percent in the second quarter. BLCI panelists are cautious about the
pace of economic growth in the third quarter, with 25 percent expecting
economic performance to weaken during the summer. Still, almost 36
percent think conditions will improve compared to the spring quarter,
leaving the national economy component index in mildly positive territory
at 53.1. Strong business investment and export growth should
contribute to U.S. economic gains. But with inflation a factor, the
Federal Reserve may boost the federal funds rate to 5.5 percent at its
August 8 meeting.
Alabama Economy Continues to Outpace Nation Alabama business
leaders are much more optimistic about prospects for growth in the
state’s economy than they are for the nation’s. Although the Alabama
component index is down 3.3 points to 60.9 on the third quarter survey,
it is the second highest of the component indices and is almost 8 points
above expectations for the U.S. economy. The state continues to add
jobs, particularly in construction, durable goods manufacturing, and
services. Nonagricultural employment in May 2006 was 35,700 above its
year-ago level. Statewide unemployment averaged 3.6 percent in 2006
through May compared to 4.7 percent for the United States, with the rate
even lower in each of Alabama’s 11 metro areas. New industry
announcements and expansions continue, and the state is garnering
accolades in categories including business investment, workforce
training, and cost of living. Half of panelists expect the Alabama
economy to perform better in the third quarter of 2006 than in the
second, while 12.4 percent forecast slowing growth.
Alabama Economic Outlook
Q3 2006 compared to Q2 2006
60
50
44.1
37.4
40
Percent
60
THE OUTLOOK
Alabama
BLCI
Index
Alabama BLCI Signals Moderate Growth Alabama business
leaders moderated their expectations for the third quarter of
2006. The Alabama Business Leaders Confidence Index® (BLCI)
of 58.9 signals continued growth, but the decline of 2.5 points
from the second quarter suggests that growth will proceed at a
somewhat slower pace. While all six component indices slipped
from their second quarter readings, they remain in positive
territory. Expectations for the national economy are the weak
spot, with the component index dropping 6 points to come in well
below the other indices. Industry sales, capital expenditures, and
the Alabama economy will be the strongest contributors to growth
for Alabama businesses during the third quarter of 2006.
30
20
11.9
6.1
10
0.5
0
Much
Worse
Somewhat Remain Somewhat Much
Worse the Same Better
Better
Center for Business and Economic Research, The University of Alabama
Industry Profits
60
Q3 2006 compared to Q2 2006
46.4
50
Percent
40
29.1
30
18.0
20
10
5.6
0.9
0
No
Strong Moderate
Moderate Strong
Decrease Decrease Change Increase Increase
Industry Sales
Q3 2006 compared to Q2 2006
51.8
60
50
40
Percent
Sales Expectations Upbeat Fifty-nine percent of Alabama business
leaders forecast increased sales in their industry during the third quarter of
2006, in contrast to 16.2 percent anticipating a decline. Although the sales
component index value of 62.2 is down 2.9 points from the second quarter,
it remains the strongest contributor to the BLCI. Recent successes among
Alabama firms in boosting sales of their products and services contribute to
a positive outlook. And, while high gas prices are eating away at consumer
disposable incomes, more Alabamians are working and incomes are rising.
State sales tax collections were up 9.1 percent through June of the current
fiscal year compared to the same period last fiscal year. The University of
Michigan’s Index of Consumer Sentiment stood at 84.9 in June compared
to 96.0 a year ago, indicating that consumers are likely to be cautious with
discretionary spending. Panelists in manufacturing and wholesale trade are
most positive about increasing sales this quarter, while those in construction,
health care, and finance, insurance, and real estate (FIRE) are the least
optimistic.
30
24.8
20
15.1
7.2
10
1.1
0
No
Strong Moderate
Moderate Strong
Decrease Decrease Change Increase Increase
Climb in Corporate Profits Unabated Corporate profits should continue
to climb in the third quarter of 2006. Fifty-two percent of BLCI respondents
forecast gains in profits, while 29.1 percent think profit growth will hold
steady. The profits component index of 59.5 decreased just half a point
from last quarter. Continuing growth in profits will help sustain business
spending on equipment and structures in the third quarter. While profitability is up for many firms as a result of productivity gains, companies are
challenged to pass along the increased prices they pay for commodities.
Recent wage gains are becoming a concern, while rising interest rates and
inflation could begin to cut into profits. Among third quarter BLCI panelists,
profit expectations are highest in the other services and manufacturing
sectors. About 29 percent of panelists in both wholesale and retail trade
and almost 26 percent in transportation, information, and public utilities
(TIPU) think profits could fall, compared to 18.9 percent of all respondents
forecasting a decline in industry profits.
Industry Hiring Plans
60
Q3 2006 compared to Q2 2006
40.8
41.0
Percent
40
30
20
11.0
6.5
10
0.7
2
Q3 2006 compared to Q2 2006
50.0
50
40
33.8
30
20
10.8
10
0.9
0
4.5
No
Strong Moderate
Moderate Strong
Decrease Decrease Change Increase Increase
Industry Capital Expenditures
50
0
60
Percent
Hiring to Pick Up Moderately Half of Alabama business leaders
surveyed expect hiring plans in their industry to be unchanged from the
second quarter. Job growth should strengthen as 38.3 percent of panelists
forecast an up-tick in hiring and only 11.7 percent forecast a decline. The
hiring component index of 57.6 is down 1.3 points from its second quarter
value. Alabama’s economy has continued to create jobs during the spring,
with motor vehicle manufacturing, trade, FIRE, leisure and hospitality, and
other services among the sectors adding to employment. Responses to
this quarter’s open-ended topical question indicate that finding qualified
workers continues to be a problem for many businesses. During the third
quarter, hiring is expected to be most robust in professional, scientific, and
technical services and in construction. While the majority of panelists in
manufacturing and wholesale trade expect hiring to continue at the current
pace, very few see any downside to employment.
No
Strong Moderate
Moderate Strong
Decrease Decrease Change Increase Increase
Capital Spending Boosts Economy Strong increases in corporate profits
are providing companies with ample funds for capital investment. At 60.4,
the third quarter 2006 capital expenditures component index is down just
0.6 points from the second quarter and is the second highest of the industry
indices. Capital spending should be a driver of economic growth this
quarter, with 47.5 percent of panelists expecting to see an increase,
compared to just 11.7 percent forecasting a decline. Business equipment
spending grew at a double-digit rate in 2005 and should experience similar
gains in 2006. Investment in structures is picking up, with post-hurricane
rebuilding, rising capacity utilization, and demand for warehouse and office
space factoring into growth. Capital spending increases are expected to be
the weakest in trade and FIRE, while TIPU could see the largest gains.
The outlook for capital expenditures is particularly upbeat for the Mobile
metro area.
Center for Business and Economic Research, The University of Alabama
How Do You Manage and Motivate Your Sales Force? This
quarter’s topical questions focus on how Alabama business
leaders compensate their sales force while controlling costs.
How do you compensate your sales staff?*
13.0
Contract labor
Compensation Among Alabama businesses surveyed in June
2006, three-fourths of the sales staff receives a salary as all or
part of their compensation. In 27.1 percent of firms, sales
personnel are only paid a salary. Another 23.4 percent pay a
salary plus commissions only, while 15.3 percent of panelists
report compensation of a salary paired with hourly wages.
Commissions figure into sales force compensation at about half
of firms surveyed and are the only form of remuneration at 15.7
percent of companies. Hourly wages are generally combined
with other types of payment. Thirteen percent of firms say that
their sales force works under contract with various payment
arrangements.
What type of sales incentives do you offer?*
Bonus
65.0
Contribution-based profit sharing
27.3
15.7
Prizes
Stock options
Other
None
5.8
3.7
30.8
Hourly wages
49.8
Commission
Salary
75.0
0
20
40
60
80
100
Percent
* Panelists could choose multiple responses on each
of the topical questions.
Incentives Almost 24 percent of third quarter BLCI panelists
report that their companies do not offer incentives to the sales
staff. But the majority (65 percent) use bonuses to reward sales
performance. While bonuses are the only incentive employed by
about 35 percent of firms, they are often paired with contributionbased profit sharing and/or prizes. Profit sharing makes up all or
part of the incentive package at 27.3 percent of panelists’ firms.
Prizes and stock options are generally paired with other
incentives.
23.8
0 10 20 30 40 50 60 70 80
Percent
Tactics to Offset Rising Costs Faced with rising costs, 48.9
percent of Alabama businesses surveyed in the third quarter
look at their product offerings, creating new products or services
to boost sales revenues. Developing strategic alliances is also
an important focus, with 37.5 percent of companies reporting
that this is at least part of their strategy. Exploring market or
channel expansion figures into the sales strategy of over 30
percent of responding companies. Making changes in sales
staff, sales incentive packages, or benchmarks are less
prominent among tactics used to offset rising costs. Just 8.6
percent of companies report discounting to boost sales. Other
tactics noted include raising prices, conservation upgrades to
save on energy costs, investing in technology, increasing staff
productivity, outsourcing, and layoffs.
Sales Challenges When asked about the biggest sales
challenges facing their industry, over 250 Alabama business
leaders responded and most listed more than one concern.
From their responses, it is clear that in addition to specific
concerns related to sales, many commented in a broad sense
about issues including the economic environment, workforce,
and regulation.
Rising interest rates are foremost on the minds of Alabama
business leaders, particularly as they affect homebuilding and
home sales. The available workforce is also an important
concern, with panelists noting difficulty staffing their jobs and the
lack of a talent pool in their area. Competition, in terms of price,
foreign imports, and internet sales presents a challenge to many
Alabama firms. The effect of energy prices is a worry,
particularly as it affects consumer disposable income. And,
generally, companies are concerned about the economy and
about consumers’ perceptions of the economy.
Tactics implemented to offset rising costs*
48.9
New product/service offerings
37.5
Strategic alliances
30.4
Market or channel expansion
15.9
Strategic shifts in sales staff
New incentive packages
13.4
New benchmarking systems
13.4
Discounting
8.6
7.1
Other
0
10 20 30 40 50 60
Percent
Panelists report challenges holding onto profit margins in the
face of higher costs for commodities, labor, technology, health
care, etc., noting efforts to grow revenues, increase close ratios,
and negotiate to preserve price. Some mention difficulty with
product saturation and limited markets. Educating customers on
change and the need for a particular product or service is an
ongoing issue. Other specific sales concerns include meeting
sales quotas to maintain product lines, keeping up with demand,
increasing customer contacts, and keeping certifications for
technical services up-to-date. The reluctance of customers to
close a deal in the face of uncertain future operating costs was
also noted.
More general considerations include tax laws and government
regulations, the state’s legal climate, mergers and acquisitions,
the ongoing war in Iraq, and the effects of recent natural
disasters.
Center for Business and Economic Research, The University of Alabama
3
Metro Area Economies Diverse Very different BLCI values
for Alabama’s four major metropolitan areas highlight the
diversity of their economies. At 55.9, the BLCI for Birmingham
area panelists was three points below the statewide score and
even farther below the index values reported for the other three
metro areas. News of the planned merger of local banking
companies Regions and AmSouth and of pending job losses
severely depressed sentiment in Birmingham’s FIRE sector.
the influx of military and civilian jobs that will result from BRAC.
Mobile business leaders present the most optimistic outlook,
with a BLCI of 65.0, as the area continues to spring back from
Hurricane Katrina. Both construction and professional,
scientific, and technical services firms tallied particularly high
scores. The Montgomery area’s BLCI of 59.0 reflects a
dampening of recent job growth and capital investment as
Hyundai reaches its full production stage.
Huntsville garnered a BLCI value of 61.2, with defense-related
businesses having ample work and the area readying itself for
Component Index by Area, Q3 2006
Q3 2006
Alabama
Change from Q2
Birmingham
MSA
Huntsville
Mobile
Montgomery
National Economy
53.1
-6.0
49.5
54.5
60.3
53.9
Alabama Economy
60.9
-3.3
55.3
67.3
67.1
64.4
Industry Sales
62.2
-2.9
59.4
64.1
67.4
63.4
Industry Profits
59.5
-0.5
56.6
62.2
64.0
60.2
Industry Hiring
57.6
-1.3
55.3
63.5
64.5
54.2
Capital Expenditures
60.4
-0.6
59.5
55.8
66.6
57.8
BLCI
58.9
-2.5
55.9
61.2
65.0
59.0
A Look into the BLCI Almost 450
Alabama business leaders from across the
state completed the third quarter 2006
survey online during June. Panelists came
from all of the broad industry groupings,
with the largest shares in professional,
scientific, and technical services, finance
and insurance, other services, and
manufacturing.
Many thanks to all of our panel members
for making this survey a useful and reliable
indicator. And special thanks to the more
than 250 panelists who took the time to
record their opinions concerning sales
challenges facing their industries. Please
join us in September for the Fourth Quarter
2006 Survey.
Distribution of Alabama BLCI Panelists by Industry, Q3 2006
Agriculture/Forestry/Fishing
0.9
Mining
1.1
Public Administration
2.7
Other Services
12.4
5.9
Health and Social Assistance Services
14.4
Professional/Scientific/Technical Services
13.7
Finance and Insurance
9.7
Real Estate
Transportation/Information/Public Utilities
7.0
Retail Trade
7.0
6.1
Wholesale Trade
7.9
Construction
11.3
Manufacturing
0
5
10
15
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.
20