Second Quarter 2007 • Volume 6, Number 2
A stronger outlook for sales will lead the improvement across
the state’s industry sectors; the sales component index rose
4.2 points to 60.3. Hiring will be the weakest component, with
that index up just 0.9 points from last quarter and a smaller
percentage of panelists expecting hiring in their industry to
increase. The positive economic climate should enable
Alabama firms to continue the revenue growth, business
development, and expansion they have experienced over
the last three years.
Q2 2007 compared to Q1 2007
60
50
Percent
43.1
40
28.6
30
25.8
20
10
1.4
0
Much
Worse
1.1
Somewhat Remain Somewhat Much
Worse the Same Better
Better
100
80
61.4
60
58.9
National Economy
49.2
Alabama Economy
61.5
Industry Sales
60.3
Industry Profits
55.9
Industry Hiring
54.0
54.2 53.6 56.0
50
40
Capital Expenditures 55.2
BLCI
20
56.0
Index above 50 indicates expansion.
0
Q2 Q3 Q4
2006
Q1 Q2
2007
increase from previous quarter
decrease from previous quarter
Concern about U.S. Economic Growth Continues BLCI panelists
remained cautious in their outlook for the U.S. economy. For the second
survey in a row, the national economy component index came in under 50,
with this quarter’s reading of 49.2 up just 0.8 points from the first quarter.
Thirty percent of respondents think the economy could worsen during the
quarter, while a lesser 26.9 percent expect it to improve. Recent indications
are that growth will be sluggish through the second quarter; forecasting
group Global Insight expects GDP gains for the first half of 2007 in the
1.5 to 2.0 percent range. Housing continues to be a drag nationally, with
concerns in the subprime mortgage market, stricter lending standards, and
declining home prices contributing to a drop in housing starts that could
take 1.0 percentage point off GDP growth. Inventory corrections, falling
business investment spending, and rising inflation are contributing to the
weakness, while exports, rising defense spending, and continued consumer
spending are positive factors for growth. Job creation and wage gains are
supporting consumption as the home equity resource declines.
Outlook for Alabama Economy Strengthens The Alabama economic
outlook component index rose to 61.5 in the second quarter of 2007,
making it the most positive contributor to the forecast for the third
consecutive survey period. A gain of 5.3 points over the first quarter
was the largest increase among the BLCI components. Half of the
state’s business leaders expect the economy to improve during the
quarter, while just 9.7 percent think performance could worsen. Growth
in the transportation equipment sector is helping Alabama avoid the
recent declines in U.S. manufacturing employment, while strong demand
for services of the many national defense-related firms is contributing to
professional and business services job gains. And a number of projects
that would represent sizeable investments are currently under consideration. The addition of 11,000 nonagricultural jobs in February and
continuing low unemployment should keep new people moving into the
state, helping to support the residential housing market.
Alabama Economic Outlook
Q2 2007 compared to Q1 2007
60
50
40.2
Percent
National Economic Outlook
THE OUTLOOK
Alabama
BLCI
Index
Alabama Business Outlook Improves The Alabama
Business Leaders Confidence Index® (BLCI) reversed two
quarters of decline to come in at 56.0, up 2.4 points from the
first quarter 2007 value. Panelists are confident of moderate
improvement in business conditions during the second quarter
of 2007. Positive developments in the Alabama economy will
be a primary impetus for business growth; at 61.5, this index
is the highest of the six BLCI components. Continued strength
in the state’s housing markets, strong employment gains, and
rising personal income should help Alabama companies
counter weaknesses in the U.S. economy during the second
quarter. Business leaders expect national economic problems
to be a slight drag on growth, with the component index
registering 49.2.
43.9
40
30
20
9.1
10
6.2
0.6
0
Much
Worse
Somewhat Remain Somewhat Much
Worse the Same Better
Better
Center for Business and Economic Research, The University of Alabama
50
39.9
40
Percent
50
40
34.0
30
21.0
20
10
3.7
1.4
10
6.2
1.1
0
No
Strong Moderate
Moderate Strong
Decrease Decrease Change Increase Increase
No
Strong Moderate
Moderate Strong
Decrease Decrease Change Increase Increase
Industry Hiring Plans
Q2 2007 compared to Q1 2007
60
Industry Capital Expenditures
60
Q2 2007 compared to Q1 2007
50
47.6
40
34.6
30
20
14.2
10
1.7
2.0
No
Strong Moderate
Moderate Strong
Decrease Decrease Change Increase Increase
56.4
50
40
30
26.1
20
12.7
10
1.7
0
Percent
17.0
Profits Should Show Modest Increase The profits component index
stands at 55.9 for the second quarter of 2007, up 1.9 points over the first
quarter, but more than 4 percentage points below its year-ago reading.
Indications are that growth in after-tax profits will move into the single-digits
for 2007, after five years of annual gains ranging from 14.3 to 32.6 percent.
Among Alabama panelists, 43.6 percent expect profits in their industry to
increase this quarter, while 22.4 percent anticipate a decline. Rising costs
for labor and commodity inputs, slowing productivity gains, and limited
ability to raise prices could contribute to falling profit margins. Strong profits
have been a major contributor to increases in the overall market value of
many Alabama companies over the last three years. During the second
quarter, profit growth should be strongest in manufacturing and in
professional, scientific, and technical services. Trade, FIRE, TIPU, and
construction are expected to see below-average profit gains.
Job Growth to Continue at Moderate Pace Alabama’s expanding
economy should support moderate job gains during the second quarter of
2007. At 54.0, the hiring component index is up 0.9 points from the first
quarter, but is almost 5 points below the year-ago value. The 29.2 percent
of panelists expecting hiring in their industry to accelerate is down from
31.7 percent last quarter. But just 14.4 percent forecast a decrease and
more than half anticipate no change in hiring plans. Helped by strong
federal government demand and growing biotech and aerospace sectors,
professional, scientific, and technical services should see the strongest
job gains, with 45.3 percent of panelists in the industry expecting second
quarter hiring to increase. TIPU is also expected to post above-average job
gains. Manufacturing job growth may be slowing, as just 24.5 percent of
industry panelists forecast increased hiring and over 60 percent anticipate
no change in hiring plans.
2
27.5
30
20
Percent
Q2 2007 compared to Q1 2007
0
Q2 2007 compared to Q1 2007
48.2
Industry Profits
60
0
Industry Sales
60
Percent
Sales Expectations Rebound from Last Two Quarters More than
54 percent of Alabama business leaders forecast sales growth in their
industry during the second quarter of 2007, up from about 48 percent on
the first quarter survey. The sales component index rose to 60.3, more
than 4 points above the two previous quarters. Job and wage gains have
encouraged Alabama consumers to keep on spending—the state’s sales
tax revenues were up 3.7 percent in the first quarter of 2007 compared to
a year ago. Alabama’s housing market appears to be holding up better
than the nation’s, with home prices higher in February 2007 than a year
ago and the average time on the market down a month. And, from this
quarter’s topical questions, it is clear that many Alabama firms have seen
good results from their efforts to develop and market new products and
services. More than two-thirds of panelists in manufacturing and in TIPU
anticipate sales increases during the second quarter, while fewer than half
in retail trade and FIRE forecast gains.
3.1
No
Strong Moderate
Moderate Strong
Decrease Decrease Change Increase Increase
New Capital Investments May Slow The share of Alabama BLCI
panelists expecting capital investment in their industry to increase slipped
slightly, from 37.3 percent in the first quarter to 36.6 percent on the second
quarter 2007 survey. Nationally, orders and shipments of business fixed
equipment have been falling since a November 2006 peak, with businesses
seeming more cautious. The capital expenditures component index rose
1.1 points to 55.2, however, as fewer panelists expect business investment
to decrease. Responses to this quarter’s topical questions indicate that
almost 35 percent of Alabama companies have taken advantage of
increasing revenues and strong profits over the last three years to expand
or remodel their facilities. Capital spending is most robust in the Huntsville
metro, where a number of defense-related firms are building or expanding
facilities. Across the state, investment should be highest in manufacturing,
construction, and TIPU and weakest in trade and FIRE.
Center for Business and Economic Research, The University of Alabama
What type of revenue growth have you
experienced during the past three years?
Topical Question Series:
The Wealth Effect and Business Growth
Last Three Years Good for Many Alabama Businesses
Alabama experienced steady gains in both output and jobs
across the three-year period from 2004 through 2006. Rapid
expansion of the state’s automotive sector certainly contributed
to growth, as did strong gains in professional and business
services and in educational and health care services. The
“wealth effect” factored into demand for the goods produced and
services offered by Alabama businesses as increases in home
values and improving stock market returns helped consumers
feel better off and, hence, able to spend more. On the business
side, strong profit growth and tax law changes that created
generous depreciation allowances encouraged investment in
capital improvements and in information technology.
6.9
50% or more
13.1
40 - 49%
5.1
30 - 39%
14.6
20 - 29%
26.6
10 - 19%
19.7
5 - 9%
16.3
0 - 4%
7.7
Decrease
0
5
10
15
20
25
30
Percent
During the past three years, have you?*
Increased marketing
efforts/expenditures
50.3
Increased hiring
45.1
Developed new
markets/channels
44.5
Implemented new
technology/processes
38.2
35.6
Created new products/services
Expanded/remodeled facilities
34.8
Operations largely unchanged
23.3
2.9
Other
0
10
20
30
40
Percent
50
Various Directions Taken to Grow Business Over the last
three years, Alabama companies have worked to increase
revenues in a number of ways, with most pursuing more
than one of the initiatives listed. Just over half of BLCI
panelists report that their firm has increased marketing
efforts and expenditures. Many have taken their marketing
efforts in new directions, with 44.5 percent developing new
markets and/or channels. More than 45 percent have
increased hiring—a percentage that goes along with the
steady employment gains and low unemployment seen
across much of Alabama since 2004. About 38 percent of
companies have upgraded their operations to incorporate
new technologies and/or processes. While another 23.3
percent note that their operations have changed little over
the last three years, these companies may have made other
changes such as increasing marketing or developing new
products that they do not regard as operational. Alabama
businesses have been creative in recent years, with 35.6
percent of firms bringing new products and services to
market. And more than a third of companies surveyed have
invested in their facilities during the past three years.
*Panelists can choose multiple responses.
60
Revenues Up for Most Firms Seventy-six percent of Alabama
businesses surveyed in March 2007 reported overall revenue
growth of 5 percent or more over the last three years. Another
16.3 percent saw flat revenues or slight gains in the 0 to 4
percent range from 2004 through 2006. Median growth rates
among the firms represented by second quarter 2007 BLCI
panelists fell into the 10 to 19 percent range. Some did much
better, with 6.9 percent reporting revenue growth of 50 percent
or more. Not all firms were able to grow their income, however,
and 7.7 percent of respondents have faced declining revenues
over the last three years. Firms which are relatively small in
terms of sales are most likely to struggle—19.3 percent of
businesses with annual sales under $1 million reported a
decrease in revenue since 2004, while another 19.3 percent
saw revenue growth in the 0 to 4 percent range. Among
businesses with annual sales from $1 to $5 million, 23.2
percent had revenue gains under 5 percent and 8.7 percent
experienced a decline.
During the past three years have you
considered (or undertaken)?*
Expanding your business
53.8
Merging with/acquiring
new companies
29.1
Paying off debt earlier
than anticipated
28.5
20.2
Starting an offshoot or
new company
19.9
No plans to change operations
8.8
Increasing dividends
Other
0
1.4
10
20
30
40
Percent
50
60
Revenue Growth Spurs Action A positive climate for
businesses in Alabama is evident in the 53.8 percent of survey
respondents expanding their businesses over the last three
years or considering an expansion. Mergers and acquisitions
have been undertaken or explored by 29.1 percent of companies, while 20.2 percent of firms have pursued starting an offshoot or a new company. In financial dealings, 28.5 percent of
Alabama businesses have paid off debt early or considered
doing so. While many of the firms responding to the survey are
privately held, almost 9 percent of panelists report increasing or
considering increasing dividends.
Center for Business and Economic Research, The University of Alabama
3
Most Companies See Marked Growth in Market Value The
second quarter survey included an open-ended question asking
panelists about factors contributing to the increasing or
decreasing market value of their company over the past three
years. Responses indicate that the 2004 to 2006 period has
provided a positive economic climate for Alabama businesses,
with 71.6 percent reporting significant improvement in market
value versus 28.4 percent saying that market value has been
relatively flat or declining.
While a small number of respondents attribute their company’s
higher value at least in part to the wealth effect, an equal number
say that the wealth effect is definitely not involved. Alabama
business leaders list a wide range of reasons why their
businesses have prospered over the last three years. Factors
most frequently cited include better sales revenue and profits,
marketing improvements that expand the client base and
increase demand for the firm’s products or services, and the
development of new and/or better products or services. Others
list the positive economic environment or changes within their
industry as well as relevant price increases. Many businesses
have made operational changes that have boosted market
value—implementing advanced technology, working smarter or
more efficiently, and controlling costs. Staff development and
other investments are among factors contributing to increased
market value.
Firms which have seen their market value remain flat or decline
over the past three years most often noted the negative effects of
increasing business costs, inability to raise prices, and lack of
profit growth. Some of these firms are in a market that is
generally declining or in a business that is adversely affected by
weather events. A lack of qualified workers and loss of key
clients are among problems contributing to the lack of growth.
And some firms with stagnant market value are at full capacity,
stable, or in a finite market and do not expect to expand.
Component Index by Area, Q2 2007
Q2 2007
Alabama
Change from Q1 2007
Birmingham
MSA
Huntsville
Mobile
Montgomery
National Economy
49.2
0.8
49.2
53.8
51.1
48.2
Alabama Economy
61.5
5.3
58.6
62.1
69.3
63.4
Industry Sales
60.3
4.2
58.4
66.7
65.9
60.4
Industry Profits
55.9
1.9
54.9
56.1
62.5
53.7
Industry Hiring
54.0
0.9
52.5
59.8
61.4
52.4
Capital Expenditures
55.2
1.1
55.1
61.4
56.1
50.6
BLCI
56.0
2.4
54.8
60.0
61.0
54.8
Huntsville, panelists there are much more positive about capital
expenditure trends for the second quarter.
Alabama BLCI by Component and Region
All six components of the BLCI turned up in the second quarter
of 2007. The Alabama economy and industry sales component
indexes showed the largest increases and were also the two
strongest reasons for business confidence this quarter. At 61.5,
the Alabama economic outlook indicator is 12.3 points higher
than the component index for the U.S. economy. Sales
continues to be the most robust industry indicator, while
hiring is the weakest.
Although panelists from firms in the Mobile metropolitan area
continued to be the most upbeat with an area BLCI of 61.0,
Huntsville business leaders were close behind at 60.0. In
particular, Mobile respondents were more optimistic about the
state’s economy (the RSA’s Battle House Tower and Hotel are
set to open in May), while with a spate of corporate building in
The second quarter area BLCI for both Birmingham and
Montgomery was 54.8, with the Birmingham index up two points
from last quarter and the Montgomery index 5.8 points higher.
Both metro areas expect hiring to be below the statewide
average and respondents in Montgomery anticipate relatively
weak capital investment during the quarter. Panelists in
professional, scientific, and services were the most upbeat
in both metro areas.
Thank you to the more than 350 Alabama business leaders
who completed the second quarter 2007 BLCI survey.
Please join us in June for the third quarter 2007 survey at
www.blci.com/alabama.
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.