Third Quarter 2007 • Volume 6, Number 3
The positive direction of the state’s economy is expected
to be the strongest contributor to growth during the
quarter. Alabama is continuing to attract large-scale
development projects, as well as other new industries
and expansions, and is beginning to see BRAC-related
relocations. Although sales remains the highest industry
indicator, panelists anticipate some slowing in sales
growth as consumers turn more cautious. Profits are also
expected to weaken, with rising wages and continued high
energy and material costs affecting gains. Hiring should
pick up slightly, while capital spending will be boosted by
nonresidential construction and by productivity-enhancing
investments.
National Economic Outlook
60
Q3 2007 compared to Q2 2007
50
Percent
42.7
40
31.7
30
23.7
20
10
1.3
0
0.6
Much Somewhat Remain Somewhat Much
Worse
Worse the Same Better
Better
Alabama
BLCI
THE OUTLOOK
100
National Economy
51.7
Alabama Economy
64.0
Industry Sales
59.6
Industry Profits
54.4
Industry Hiring
54.6
90
80
70
Index
Alabama’s BLCI Strengthens Panelists are feeling
more optimistic about the business environment in the
third quarter of 2007. The Alabama Business Leaders
Confidence Index® (BLCI) rose 0.8 points to 56.8 for the
highest reading of the last four quarters. Improved outlooks
for the national and state economies are largely responsible
for the BLCI gain. Each of these component indices moved
up 2.5 points on the third quarter forecast. Alabama business leaders remain much more upbeat about prospects
for the state’s economy; the gap between the U.S. and
Alabama outlooks is a substantial 12.3 points.
60
58.9
56.8
54.2 53.6 56.0
50
40
30
Capital Expenditures 56.7
20
BLCI
10
Index above 50 indicates expansion.
0
Q3 Q4
2006
Q1 Q2 Q3
2007
56.8
increase from previous quarter
decrease from previous quarter
Outlook for U.S. Economy Improves The outlook for the national
economy moved back into positive territory on the third quarter survey,
following two quarters with readings below 50 that indicated a mild
deterioration in economic conditions. At 51.7 the national economy
component index is up 2.5 points from last quarter and forecasts modest
growth. The 32.3 percent of panelists expecting U.S. economic
conditions to improve is above the 25 percent thinking conditions could
worsen. Forecasting group Global Insight anticipates third quarter GDP
growth of around 2.5 percent. Nationally, the housing sector is expected
to continue to decline, with its negative wealth effect impacting
consumers. But rising wages, low unemployment, and some moderation
in gas prices should help consumers pick up spending during the quarter.
An uptick in industrial production, strong export orders, and continued
strength in nonresidential construction will also contribute to GDP growth.
Lower core inflation is enabling the Federal Reserve to hold interest rates
steady at 5.25 percent.
Alabama Economic Outlook
Q3 2007 compared to Q2 2007
60
51.3
50
Percent
Expectations for Alabama Economy Continue to Rise The Alabama
component index climbed 2.5 points to 64.0 in the third quarter of 2007,
up more than 3 points from a year ago. Panelists are upbeat about the
direction of the state’s economy, with 58.3 percent forecasting improvement and only 8.8 percent thinking the economy could worsen during the
quarter. ThyssenKrupp AG’s May 2007 selection of a site near Mobile for
its $3.7 billion, 2,700-worker steelmaking complex is the latest major
industrial commitment. Higher U.S. spending for national defense and the
implementation of BRAC are among factors having a positive impact on
the economy. The state is continuing to add jobs, unemployment remains
about one percentage point below the U.S. rate, personal income is rising,
and home prices are holding up fairly well. BLCI panelists are also quite
aware of factors that could constrain growth and on a recent poll ranked
education quality and funding, workforce development and the lack of
qualified workers, and infrastructure/roads among the top five issues
facing the state in 2007.
40
32.9
30
20
8.5
10
0
7.0
0.3
Much Somewhat Remain Somewhat Much
Worse
Worse the Same Better
Better
THE UNIVERSITY OF ALABAMA
Industry Sales
60
Percent
50
40.1
40
36.0
30
19.6
20
10
2.5
1.9
0
Strong Moderate
No
Moderate Strong
Decrease Decrease Change Increase Increase
30
52.8
Percent
50
40
32.7
30
20
9.1
10
1.9
2
2.8
1.3
0
Strong Moderate
No
Moderate Strong
Decrease Decrease Change Increase Increase
Industry Hiring Plans
Q3 2007 compared to Q2 2007
60
53.9
50
40
28.2
30
20
13.2
10
1.6
0
3.1
Strong Moderate
No
Moderate Strong
Decrease Decrease Change Increase Increase
Q3 2007 compared to Q2 2007
60
0
13.5
10
Profit Growth Weakens While the component index for profits remains in
positive territory at 54.4, it is down 1.5 points from the second quarter of
2007 and 5.1 points compared to the third quarter of 2006. The 38.5
percent of survey participants forecasting an increase in industry profits
during the third quarter of 2007 is the lowest share in BLCI survey history.
Profits should increase modestly overall, as a lesser 21.5 percent foresee a
decline. Low unemployment and relatively weak productivity gains are
helping push up wage rates as firms try to attract and retain workers, while
energy and other material costs are also cutting into profits. Alabama
corporate tax receipts are up just one percent in the current fiscal year
compared to the same period last year and were down 11.8 percent in the
second quarter compared to a year ago. Expectations for profit gains are
weakest in healthcare, manufacturing, and FIRE and well above average in
TIPU and professional, scientific, and technical services.
Pace of Hiring to Pick Up Hiring has been steady in Alabama in recent
months, with about 11,000 nonfarm jobs added from April through May.
Most new jobs have been in service-providing industries, notably leisure
and hospitality businesses and administrative and support services. BLCI
panelists expect hiring to pick up slightly in the third quarter—the component
index value of 54.6 is 0.6 points above last quarter’s reading. While about
31 percent of survey respondents see hiring increasing compared to almost
15 percent forecasting a decrease, most anticipate no change in hiring
plans. Finding qualified workers was the foremost industry concern of
Alabama BLCI panelists on a recent survey, emphasizing the importance
of training to assure that the workforce does not constrain development
efforts. Hiring plans are most robust among firms in professional, scientific,
and technical services and in TIPU, while retail businesses expect a modest
reduction in workers and manufacturing, healthcare, and wholesale trade
firms anticipate slight gains.
Industry Capital Expenditures
33.7
20
Percent
60
48.7
40
Industry Profits
Q3 2007 compared to Q2 2007
Q3 2007 compared to Q2 2007
50
Percent
Forecast for Sales Off Slightly The sales component index registered
59.6 for the third quarter of 2007, down 0.7 points from the previous
quarter and 2.6 points from a year ago. Alabama business leaders
anticipate a cautious consumer; about a third of panelists expect sales
to be flat—the highest percentage in almost six years of survey results.
Overall, sales should pick up modestly, with 51.5 percent of respondents
forecasting an increase in sales during the third quarter and only 14.8
percent expecting a decrease. Alabama’s second quarter sales tax
receipts were up 3.8 percent compared to a year ago. Lower gas prices
and rising wages should help the consumer this quarter, while weakness
in the housing market could negatively impact sales. Manufacturing firms
are the least optimistic about sales prospects, and expectations in FIRE
are two points below the overall component index. Panelists in TIPU and
in professional, scientific, and technical services have the most positive
outlooks for sales in the third quarter.
3.5
Capital Spending Expected to Rise An increase in business investment
is forecasted for the third quarter of 2007. The capital expenditures
component index is up 1.5 points to 56.7 and the 11 percent of panelists
expecting capital spending in their industry to decrease is the lowest in
more than a year. Over 36 percent of respondents forecast increased
investment this quarter, while most anticipate no change. Low
unemployment and rising wages are leading firms to make productivity
improvements in order to grow. Private nonresidential building has been
supporting the construction industry—nationally spending was up 2.7
percent in May for the fourth straight monthly gain. In Alabama new and
expanding manufacturing and service firms as well as public sector
projects should keep business-related construction strong. Every industry
in the state is expecting to see moderate growth in capital expenditures.
Strong Moderate
No
Moderate Strong
Decrease Decrease Change Increase Increase
Center for Business and Economic Research, The University of Alabama
Areas of highest cost
Topical Question Series: Strategic Cost Management
(Percent of panelists ranking #1)
This quarter’s topical question series focuses on strategies and
tactics Alabama businesses use to manage costs. In today’s
global environment, the issue of costs has evolved from a shortterm focus on simply reducing spending toward a long-range
strategic vision that strives to create a true competitive
advantage.
Workforce Often Largest Investment About 69 percent of
panelists completing the topical questions on the third quarter
BLCI survey ranked benefits and salaries as their area of highest
cost, and almost 18 percent ranked it second. Analysts suggest
that as much as 80 percent of a company’s worth is tied to its
workforce, making recruiting, training, and retaining employees
an important emphasis. Materials and supplies are also a major
expense, with almost 19 percent of respondents ranking this as
their highest cost and 28.3 percent listing it second. Energy and
transportation is the largest expense category for about 10
Areas in which firms reduce costs when necessary
(Percent of panelists ranking #1)
Raises/bonuses/
benefits
Across the board
Travel/expense
accounts
People
Marketing
Stretch payables
0%
29.8%
24.2%
17.4%
12.1%
10.9%
4.9%
5%
10% 15% 20% 25% 30% 35%
Cost Management Strategies Receive Regular Review The
majority of Alabama firms responding to the third quarter 2007
survey review their cost management strategy on a regular basis.
Most (52.8 percent) find a monthly schedule best for evaluating
cost efficiencies in the context of their business model and for
cost-focused planning. Just over 20 percent of panelists’ firms
review costs and/or areas in which to cut costs more often than
monthly, while about the same percentage conduct this review on
a quarterly or annual basis. Just 6.3 percent report no regular
cost review.
How ingrained is cost management
in your business and strategy?
Very ingrained 40.7%
Not ingrained at all 1.1%
Not very ingrained 7.7%
Somewhat ingrained 21.4%
Benefits/
salaries
69.2%
Materials/
supplies
Energy/
transportation
Equipment
18.9%
10.1%
1.0%
0% 10% 20% 30% 40% 50% 60% 70% 80%
percent of businesses surveyed and ranked second for 22.0
percent. While few spend heavily on equipment, 18.5 percent
rate it as their category of second highest expense. Other
expenses ranked first or second include marketing and
advertising, interest costs, continuing education and training,
insurance, information technology, and occupancy.
Firms Try to Shelter Personnel and Marketing Budgets When
it is necessary to cut costs, most Alabama businesses surveyed
try to hold onto their employees—just 12.1 percent rank people as
the first place they look for cost savings and another 13.6 percent
rank it second, while about 32 percent indicate that they would not
consider personnel cuts. Firms are most likely to look at cuts in
raises, bonuses, or benefits, with 29.8 percent ranking this as the
first area they would consider and another 21.1 percent likely to
make this their second choice for savings. Almost a quarter of
companies surveyed try first to spread the pain of cost reductions
across the board, although about 46 percent of panelists would
not use this approach. Travel and expense accounts are another
target, with 38.2 percent of respondents ranking this as one of
their top two areas for cost cutting. Firms try to protect expenses
critical to income production, such as marketing. And few
Alabama companies are likely to stretch payables.
How often do you review costs?
Weekly 19.6%
No regular review 6.3%
Daily 0.7%
Annually 4.9%
Monthly 52.8%
Quarterly 15.7%
Culture of Cost Management Ingrained in Business Strategy
A comprehensive approach that is regularly monitored and
revised as needed is essential to effectively managing costs.
The majority of companies that responded to this quarter’s topical
questions are firmly vested in the process of cost management,
with 69.8 percent saying that it is very ingrained or ingrained in
their business and strategy. Another 21.4 percent indicated that
structured cost management is somewhat ingrained in their
business model. Only 8.8 percent replied that it is not very
ingrained or not ingrained at all.
Ingrained 29.1%
Center for Business and Economic Research, The University of Alabama
3
Alabama Firms Have Varied Strategies for Driving Out Costs
Many panelists responded to an open-ended question concerning
strategies used to productively drive costs out of their system.
Several identified better use of technology, implementation of
new technology, or automation as key directions. Communication
with and input from employees are noted as important aspects of
a cost management strategy. Consolidation of offices, tasks, or
processes can help drive out costs. Businesses look for
efficiencies, such as better plant flow, combining trips, or using
online training, that can result in cost savings. In the personnel
area, firms strive for fully utilized, productive employees who
understand the importance of their contribution; they may offer
education and training for their employees or work to retain
experienced personnel. Companies are looking for new and
better ways to get the job done and strive to be lean and to
eliminate redundancies. Regular review and rebidding of
contracts, tight inventory control, monitoring of the cost of goods,
and outsourcing to obtain a cheaper cost are among processes
used. Benchmarking, both against the best years of their own
company and against other firms in the industry, can help focus
the cost management strategy. Involving an outside facilitator in
the process enables a business to look objectively at costs.
Component Index by Area, Q3 2007
Q3 2007
National Economy
51.7
Alabama Economy
Industry Sales
Alabama
Change from Q2 2007
Birmingham
MSA
Huntsville
Mobile
Montgomery
2.5
50.9
55.6
53.8
48.7
64.0
2.5
60.6
66.9
73.8
60.9
59.6
-0.7
59.7
63.3
61.1
58.3
Industry Profits
54.4
-1.5
56.4
58.1
56.2
51.3
Industry Hiring
54.6
0.6
54.2
63.3
57.8
53.2
Capital Expenditures
56.7
1.5
57.7
57.8
59.6
55.8
BLCI
56.8
0.8
56.6
60.8
60.4
54.7
Alabama BLCI by Component and Area Expectations for the
national and Alabama economies both moved up 2.5 points on
the third quarter 2007 survey, bringing the national index back
into positive territory. The gap between these two component
indices remained a sizeable 12.3 points, with panelists much
more optimistic about prospects for the state’s economy this
quarter. All four industry variables continue to forecast moderate
improvement, although expectations for both sales and profits
decreased. Sales and capital spending should be the strongest
contributors to growth during the third quarter.
turning up. Although auto manufacturing-related and retail
development is ongoing, Montgomery area panelists are the least
optimistic and are particularly concerned about the course of the
national economy and about prospects for company profits.
65
64.0
State
60
Panelists in the Huntsville metro area tallied the most positive
business sentiment for the third quarter, with an area BLCI of
60.8 that was 4.0 points above the statewide number. National
defense-related activity, including BRAC developments are likely
contributing to Huntsville’s most optimistic outlooks for the
national economy and for industry sales, profits, and hiring
among the four largest metro areas. As they look ahead toward
work beginning on the massive ThyssenKrupp steel plant, Mobile
respondents are almost as upbeat, with a metro BLCI of 60.4 and
the most positive outlooks for both the Alabama economy and
capital expenditures.
Birmingham business leaders surveyed are feeling more positive
in the third quarter, with the metro area BLCI 1.8 points above
the second quarter reading and every component of the index
U.S. and Alabama Economies
National and State Expectations
70
55
National
50
51.7
45
Q1
Q2 Q3 Q4
2005
Q1 Q2 Q3 Q4
2006
Q1 Q2 Q3
2007
Thank you to the Alabama business leaders who completed
the third quarter 2007 BLCI survey. Please join us in
September for the fourth 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.