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cber.cba.ua.edu
alabama.business
Center for Business and Economic Research, Culverhouse College of Commerce, The University of Alabama
Volume 76, Number 2
Economic Outlook:
2nd Quarter 2007
United States
Review. The U.S. economy grew 3.3 percent
in 2006, slightly above the 3.2 percent rate
seen in 2005. Consumer spending rose 3.2
percent, down from a 3.5 percent increase in
2005; expenditures on durable goods were up
5.0 percent, beating the 3.7 percent increase
in spending for nondurable goods. Business
spending on equipment and software rose
6.6 percent, significantly below the previous
year’s 8.9 percent growth rate. Residential
fixed investment, which includes both home
construction and sales, fell 4.2 percent, the
first decline since 1995. The U.S. current
account deficit, the difference between the
country’s exports and imports, set another
record in 2006 by rising to almost $860 billion
from $792 billion in 2005.
The economy grew by 1.3 percent in the first
quarter of 2007, the slowest rise since early
2003 and significantly below the first quarter
of 2006, when growth was 5.6 percent. The
largest contributor to this slowdown has been
residential investment. The GDP price index,
an inflation gauge, increased by 4.0 percent
during the quarter, the largest increase in
nearly 16 years.
In the first three months of 2007, payroll
employment gains averaged 152,000; the
Second Quarter 2007
average monthly gain for 2006 was
189,000. The nation’s unemployment
rate crept down to 4.4 percent in
March from 4.5 percent in February
with the creation of 180,000 new
jobs. However, manufacturing firms
continued to shed jobs. The sector
lost 16,000 workers in March after
losing 11,000 in February. Furniture
and related goods producers lost
4,000 workers in March, bringing the
total job decline in the industry over
the last 12 months to 33,000. The
losses were primarily due to the
downturn in home sales and an
increase in cheaper furniture imports
from China. Overall, manufacturing
lost 167,000 jobs in 2006.
Construction added 56,000 new jobs
in March after losing 61,000 jobs in
February, mainly due to cyclical
variations and warmer weather in
March. The sector shed 47,000 jobs
for all of 2006, mostly in residential
and commercial construction. The
services sector gained 137,000 jobs in
March following a 180,000-job gain
in February. Most of the increases
were in healthcare (38,000), retailing
(36,000), and education (16,000).
Surprisingly, professional and business
services, one of the strongest serviceproviding industries, lost 7,000 jobs in
March. This industry group had been
the fastest growing segment of the
economy, adding a monthly average
of 33,000 jobs over the previous
12 months.
Gross Domestic Product
Annual Percent Change
Over Same Quarter Previous Year
6
5
4
3
2
1
0
Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1
2000 2001 2002 2003 2004 2005 2006 2007
Source: U.S. Department of Commerce, Global Insight, and Center for
Business and Economic Research, The University of Alabama.
Consumer Expenditures
Annual Percent Change
Over Same Quarter Previous Year
6
5
4
3
2
1
0
Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1
2000 2001 2002 2003 2004 2005 2006 2007
Source: U.S. Department of Commerce, Global Insight, and Center for
Business and Economic Research, The University of Alabama.
Total U.S. Nonfarm Employment
3
Annual Percent Change
Over Same Quarter Previous Year
2
1
0
-1
-2
Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1
2000 2001 2002 2003 2004 2005 2006 2007
Source: Bureau of Labor Statistics, Global Insight, and Center for
Business and Economic Research, The University of Alabama.
Government entities hired 16,000 new
workers in March, mainly in state and
local agencies. After adding an average
of 11,000 jobs each month over the
previous 12 months, the financial sector
shed 2,000 jobs in March, perhaps due
to losses among sub-prime and other
mortgage lenders. Overall U.S. payroll
employment is expected to record 1.3 to
1.5 percent growth in the first quarter of
2007, with consumer spending rising
3.0 percent. Business spending on
equipment and software is expected to
decline 2.3 percent. Residential investments are forecasted to decreased by
17.7 percent.
In this issue:
Economic Outlook:
2nd Quarter 2007
1
Business Leaders
Confidence Index:
2nd Quarter 2007
5
Economic Indicators
9
Alabama Population
Trends
10
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Although some segments of the U.S. economy,
particularly housing and business spending,
continue to show signs of weakness, consumer
spending is still strong. Rising energy prices
and inflation increase the probability that the
Fed may raise short term interest rates another
25 basis points in the second half of the year.
The sharp rise in consumer prices in March was
primarily due to a 5.9 percent increase in fuel
prices, including a 10.6 percent jump at
gasoline pumps. In the first three months of
2007, fuel prices rose at an annual rate of 22.9
percent. Rising gasoline prices, together with
higher debt payments and falling home prices,
may force consumers to pull back on their
spending. National economic growth is
expected to register just 2.2 percent in the
second quarter of 2007.
Consumer Expenditures. Consumer
expenditures are forecasted to increase
2.1 percent in the second quarter of 2007.
Spending on durable goods will rise 2.2
percent, significantly below the first quarter’s
6.6 percent gain. Spending on new autos will
decline about 13 percent in the second quarter,
after a 5.4 percent drop in the first quarter.
With a significant decline in new home sales,
spending on furniture and household
equipment will increase only 2.4 percent,
following an 11.0 percent climb in the first
quarter. However, spending on computers
is forecasted to remain strong. Following a
roughly 17 percent rise in the first quarter,
computing equipment expenditures will jump
nearly 30 percent in the second quarter of
2007. Spending on nondurable goods will
rise 1.6 percent during the quarter, after a
3.9 percent increase in the first quarter.
Following a 5.7 percent increase in the first
quarter, spending on clothing and shoes
will drop 1.7 percent. Spending on food and
beverages will also slow in the second quarter.
2
Alabama Business
The price of animal feed is rising due to
increased corn prices and these higher feed
costs eventually are reflected in meat prices.
Business Spending. Business spending
will remain strong on information processing
equipment (including computers and peripherals), aircraft, and structures. Expenditures
on equipment and software will increase
10 percent in the second quarter of 2007,
after rising 7.7 percent in the first quarter.
However, spending on core capital goods,
excluding software, will remain soft in the
second quarter and probably for the remainder
of the year. A decline in home sales will also
affect expenditures made by manufacturers of
construction and housing-related products.
Housing Markets. After falling 17.7 percent
in the first quarter of 2007, fixed residential
investment will fall a further 16.4 percent in
the second quarter. Residential construction
will remain weak in the second quarter. Single
family home construction could fall 22 percent
in the second quarter, following a 32.3 percent
drop in the first. Housing affordability remains
a concern. According to a study by the Federal
Reserve Bank of Atlanta, average housing costs
rose almost 50 percent between 2002 and
2006, with nearly 100 percent increases in
some markets, including Florida.
Meanwhile, income growth has not kept pace
with rising home prices. Wages for lower
skilled and unskilled workers have essentially
remained stagnant; this stagnation could
further depress home sales. According to the
Mortgage Bankers Association, delinquency
rates for subprime loans increased 13.3 percent
in the fourth quarter of 2006. The delinquency
rate for prime loans was 2.6 percent. Delinquency rates have increased in 49 of the 50
states, while 44 states saw an increase in
foreclosures. Roughly $3.5 trillion in singlefamily mortgage debt, out of a total of about
$10 trillion, was associated with adjustable
rate mortgages (ARMs). As those mortgages
adjust upward they are adversely affecting both
delinquency and foreclosure rates. According
to Fannie Mae, about $1.1 to $2.2 trillion in
ARMs will reset in 2007, followed by $1.4 to
$2.4 trillion in 2008.
Outlook. For 2007 the U.S. economy is
expected to grow 2.1 percent. Consumer
spending, which has been the primary source
of growth in the last two quarters, will rise
3.0 percent. Total business spending will increase only 3.0 percent; spending on equipment and software will increase 3.7 percent.
In our view, housing markets have not reached
the bottom yet. With tougher lending standards enacted in 2007, reset of ARMs, and
the volume of families affected by these resets,
housing markets can remain in recession at
least through the first half of 2008. After
falling 4.2 percent in 2002, residential investment will plummet nearly 17 percent in 2007.
Overall employment growth is forecasted to be
just 1.2 percent in 2007, with unemployment
rising to 4.8 percent.
Alabama
Exports. In 2006 Alabama exports went to
179 countries and were valued at $13.9 billion,
up 28.5 percent over the previous year’s $10.8
billion. The state’s largest export market in
2006 was Germany at $3.6 billion. Exports
to Germany alone rose 120.7 percent, from
$1.6 billion in 2005 to $3.6 billion in 2006,
and consisted mostly of automobiles. In 2006
our next largest export markets were Canada
($2.2 billion), Mexico ($960 million), Japan
($774 million) and the United Kingdom
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($742 million). Alabama’s exports to the
United Kingdom grew 60 percent from 2005 to
2006. Exports to China, which is the state’s
seventh largest export market, rose from $466
million to $662 million, a 42 percent increase.
However, the U.S. trade deficit with China is
about $300 billion and data on imports are not
readily available at the state level. It is likely
that imports from China into Alabama rose
much faster than exports to China.
Transportation equipment, Alabama’s largest
export commodity, accounted for 39.1 percent
of all exports and rose in value from $3.1 billion in 2005 to $5.4 billion in 2006, up 74
percent. Other major Alabama exports in 2006
included chemicals ($1.9 billion), computers
and electronic products ($908 million), machinery ($855 million), and paper products
($808 million). All remaining export commodities accounted for 29 percent of total exports.
Employment. In the twelve-month period
ending in January 2007, total nonagricultural
employment in the state increased 35,900.
While the state’s 11 metropolitan areas,
comprising 28 counties, gained 31,000 jobs,
the remaining 39 counties gained only 4,900
workers. The Birmingham-Hoover metropolitan area led the state with 7,700 new jobs,
followed by Huntsville (5,200), Mobile (4,000),
and Montgomery (3,300). The Tuscaloosa
metro area added 2,500 jobs, while the
Auburn-Opelika and Florence-Muscle Shoals
metro areas added 2,100 and 2,000 new
workers, respectively.
The largest number of new jobs in the
Birmingham-Hoover metro area were at leisure
and hospitality businesses. Specific job gains
were in food services and drinking places
(2,500), healthcare and social assistance
(1,700), government (1,500), construction
(1,200), and professional and business services
(1,000). Manufacturing firms in the area added
500 to their payrolls, but retailers shed 1,200
workers and the finance and insurance
industries lost 600 jobs.
Industries that added the most jobs in the
Huntsville metro area were durable goods
producers (1,100) and professional and
business services (900). About 800 new
workers were hired in education and health
services and also in leisure and hospitality
industries. Information-related businesses lost
300 jobs. The Mobile metro area’s job gains
were concentrated in education and health
services (1,000) and wholesale and retail trade
(800). In the Montgomery metro area, 2,400
of the 3,300 new jobs were in professional and
business services, while retailers lost 500 jobs.
Statewide, manufacturing industries lost 3,300
jobs from January 2006 to January 2007.
Alabama Business
3
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Alabama Nonagricultural Employment
Change in Number of Jobs
January 2006 to
January 2007
Total Nonagricultural
Natural Resources and Mining
Construction
Manufacturing
Durable Goods Manufacturing
Wood Products
Primary and Fabricated Metals
Machinery
Computers and Electronic Products
Electrical Equipment, Appliances, and Components
Transportation Equipment
Motor Vehicles
Furniture and Related Products
Nondurable Goods Manufacturing
Food
Textile Mills
Textile Product Mills
Apparel
Paper
Plastics and Rubber Products
Trade, Transportation, and Utilities
Wholesale Trade
Retail Trade
Transportation, Warehousing, and Utilities
Information
Telecommunications
Financial Activity
Finance and Insurance
Real Estate and Rental and Leasing
Professional and Business Services
Educational and Health Services
Leisure and Hospitality
Accommodation and Food Services
Food Services and Drinking Places
Other Services
Government
Federal Government
State Government
State Education
Local Government
Source: Alabama Department of Industrial Relations.
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Alabama Business
35,900
-200
4,600
-3,300
3,500
-700
700
500
600
-300
3,200
-100
-800
-6,800
-500
-2,000
-2,300
-2,100
-100
-500
5,800
2,800
1,400
1,600
-500
-800
700
100
600
8,400
5,100
7,200
6,100
6,400
1,100
7,000
-300
3,300
1,400
4,000
Nondurable goods firms lost 6,800 workers while durable goods
producers added 3,500 new workers. Within durable goods
manufacturing, payroll gains were highest in transportation
equipment manufacturing (3,200), and primary and fabricated
metals (700). Job gains for machinery manufacturing and computer
and electronic products manufacturing were 500 and 600,
respectively. All nondurable goods producing industries lost jobs,
with the largest losses in textiles and apparel (6,400), animal
slaughtering and processing (600), and plastics and rubber products
manufacturing (500).
The state’s service-providing firms added 34,800 jobs to their
payrolls during 2006. The gains were primarily in leisure and
hospitality (7,200, of which 6,400 were in food services and
drinking places); education and health services (5,100, mostly in
healthcare and social assistance); professional and business services
(8,400); government (7,000, mainly in state and local government
agencies). Despite the loss of 2,000 jobs by general merchandise
stores, the retailing industry added 1,400 new workers statewide.
Tax Revenues. State tax revenues continue to show relatively
strong growth. For the first six months of the current fiscal year,
which ends in September, state tax revenues totaled $4.2 billion,
up 4.8 percent or about $194 million over the first six months
of the previous fiscal year. Sales tax revenues are up 2.7 percent
($26 million) to almost $1 billion. At $232 million, corporate
income tax receipts are 13.1 percent, or $27 million, higher
compared to the first two quarters of the previous fiscal year.
Individual income tax revenues have risen 8.3 percent, or $122
million, to nearly $1.6 billion.
For the first two quarters of the current fiscal year, appropriations
to the Alabama Education Trust Fund increased by more than $216
million, or 8.8 percent, to almost $2.7 billion, while those to the
state’s General Fund decreased approximately $27 million to $805
million, a decline of 3.4 percent.
Outlook. In 2007 Alabama’s economy is expected to grow
2.9 percent. Slowdowns in both consumer spending and business
spending will negatively impact certain segments of the economy,
particularly manufacturing, retail and wholesale trade, and residential and commercial construction. However, the manufacturing
sector is still expected to expand by 4.1 percent, driven by an increase of almost 15 percent in motor vehicle production. Employment is expected to remain strong in automobile manufacturing.
Other positive economic forces in 2007 will be professional and
business services, industrial construction, health services, and food
service and drinking places.
The effects of higher energy prices are likely to spill over to prices
of other commodities, which can slow consumer and business
expenditures. Most job gains in 2007 will be in eating and drinking
places, administrative services, and healthcare and social assistance.
Ahmad Ijaz
[email protected]
Samuel Addy
[email protected]