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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 3
Economic Outlook:
3rd Quarter 2007
United States
Review. The U.S. economy, as measured by
Gross Domestic Product, grew at an annualized
rate of 0.7 percent in the first quarter of 2007,
compared to 2.5 percent in the fourth quarter
of 2006. The national economy is expected to
have expanded by 3.2 percent in the second
quarter of 2007. Primary contributors to
growth in the first quarter were consumer
spending and state and local government
spending. The sharp slowdown was due
mainly to an increase in imports, which are a
subtraction from GDP; deceleration in federal
government spending; and a decline in
residential investment, including both new
home sales and construction. Overall consumer spending, which accounts for almost
two-thirds of the economy, rose 4.2 percent
in the first quarter, but is expected to have
increased only 1.4 percent in the second
quarter. The slowdown in consumer spending
is attributable to higher interest rates, weaker
home price appreciation, and higher energy
costs. The second quarter of 2007 could very
well be the bottom of the current economic
slowdown. But for the sagging housing
market, the slump is expected to continue
at least until the first quarter of 2008.
Consumer spending on durable goods saw an
increase of 8.7 percent in the first quarter, with
an almost 37 percent increase in light truck
sales and a greater than 9 percent increase
in purchases of furniture and household
equipment. Spending on durable goods likely
increased about 0.2 percent in the second
quarter. Declines in residential investment
and persistently high fuel prices are expected
to significantly impact consumer spending.
Shortages in supplies of refined oil and continually rising demand in world markets are
expected to exert further upward pressure on
oil prices. According to Global Insight, each
ten cent increase in the price per gallon of gas
costs consumers an additional $12 billion a
year. The increase in gasoline prices during the
first half of 2007 could then cost consumers
Third Quarter 2007
$90 to $100 billion on an
annualized basis, almost one
percent of total disposable
income. That amount represents money that will not be
spent on other purchases of
goods and services.
Residential investment, which
includes both new home construction and sales, declined
by 15.8 percent in the first
quarter and is expected to
drop a further 12.6 percent
in the second. In each of the
three previous quarters, ending in March 2007, the decline in residential investment
has subtracted almost 1 percent from GDP growth. From
2001 to 2005 home prices
across the United States
increased an average of 54.4
percent, while in some areas
of the country average price
gains were over 140 percent.
After their peak in 2005,
according to a study coauthored by former Federal
Reserve Chairman Alan
Greenspan, “home equity
extraction” boosted personal
consumption expenditures by
3 percent—or an average of
$115 billion annually. The
increase in home prices began
to moderate in 2006 and then
slowed dramatically in 2007.
In some areas of the country,
home prices actually began to
fall in 2007, something that
has not happened in the past
three or four decades. That
drag on the economy is
expected to continue if
consumers are not able
to cash out equity during
refinancing or are not able
to sell their homes.
New home construction has
declined from an annualized
peak of 2.3 million units in
January 2006 to slightly over
1.5 million units in the
Economic Outlook:
3rd Quarter 2007
1
Business Leaders Confidence Index:
3rd Quarter 2007
5
Economic Indicators
A Look into Alabama’s
Iron and Steel Industry
In this issue: BLCI panelists focus on strategic cost management
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counties. The remaining 39 counties gained
1,300 jobs. The Birmingham-Hoover metropolitan area led the state with 6,800 new jobs,
followed by Mobile (5,800), Huntsville (4,500),
and Montgomery (3,900). The Tuscaloosa
metro area added 2,500 jobs, while the
Florence-Muscle Shoals area gained 1,700.
The Decatur and Dothan metro areas each
added 1,200 new workers.
From May 2006 to May 2007, the largest
number of new jobs were in professional
and business services (8,100). Specifically,
professional, scientific, and technical services
added 3,400 jobs and administrative, support,
and waste management and remediation
services gained another 4,600. The leisure
and hospi-tality industry added 5,700
workers, with food services and drinking
places accounting for 5,400 of these jobs.
Educational and health services gained 4,800
jobs, most of which were in ambulatory
health care services (2,100) and nursing and
residential care facilities (1,300). Retailers
added 4,600 workers to their payrolls over
the 12-month period ending in May 2007,
with department stores accounting for 2,000
of these jobs. The financial activities sector
had a net loss of 700 jobs, while the telecommunications industry lost 400.
During the 12-month period ending in
May 2007, Alabama’s manufacturing sector
experienced a net loss of 5,000 jobs. Durable
goods producers actually gained 1,500 new
jobs, while nondurable goods producers lost
6,500. Although transportation equipment
manufacturing industries added 2,300 new
workers, layoffs in other manufacturing firms
overshadowed these gains. The slowdown
in residential construction impacted wood
products manufacturing; that industry lost
800 workers. Almost all nondurable goods
firms experienced job losses, with the textiles
and apparel industry shedding 5,200 workers.
In the same 12-month period, construction
businesses added 3,100 to their payrolls. Most
of the new employees were specialty trade
contractors.
The Birmingham-Hoover area saw its strongest
job growth in food services and drinking places
(1,900), healthcare and social assistance
(1,200), and government (1,900). In the
Huntsville metro area, job gains were highest
in professional, scientific, and technical services
(1,000) and retail trade (900). Also in
Huntsville durable goods manufacturers and
food services and drinking places each added
600 workers to their payrolls.
Tax Receipts. After experiencing remarkable
growth in recent years, tax receipt gains moderated during the first three quarters of the
current fiscal year. Total state tax revenues of
over $6.7 billion were up 4.6 percent (approximately $297 million) compared to the first nine
months of the previous fiscal year. Sales tax
revenues rose 3.1 percent to about $1.5 billion.
Alabama Business
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second quarter of 2007. In our opinion, the
housing slump has not hit bottom yet. The
yield on 10-year notes, which affects both
consumer loans and mortgages, has steadily
increased in recent months. The national
average for 30-year conventional mortgages
increased from 6.2 percent at the beginning
of the year to 6.7 percent in June. Almost
25 percent of the home loans made last year
were with adjustable rate mortgages. The
adjustable rates will have a significant impact
on borrowers when these loans reset to higher
levels. Over $100 billion in subprime loans
are scheduled to reset over the next twelve
months. According to RealtyTrac, a foreclosure
tracking firm, foreclosures in June 2007 were
up almost 87 percent from June 2006. And
according to the Mortgage Bankers Association, the percentage of mortgages entering
foreclosure during the first quarter of 2007
was the highest in more than 50 years. Furthermore, the National Association of Home
Builders/Wells Fargo Housing Market index fell
four points in June to 24, its lowest reading
since January 1991, apparently due to a
surplus of unsold homes. Until the inventory
of homes is worked off, home sales and
housing markets in general will continue
to lag the rest of the economy.
Not all things are bad, however. Domestic
manufacturing production and exports continue to show gains, buoyed by growing
overseas economies and a lower U.S. dollar.
The manufacturing index from the Institute for
Supply Management rose to 56 in June, the
fifth consecutive monthly increase. A reading
above 50 indicates growth, while a reading
below 50 indicates contraction. Index readings
for new orders, production, and employment
all increased in June. The top performing
industries during the second quarter of 2007
were petroleum and coal products; chemical
products; plastics and rubber products; food,
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Alabama Business
beverage and tobacco products; nonmetallic
mineral products; computer and electronic
products; paper products; fabricated metal
products; primary metals; miscellaneous
manufacturing; and machinery manufacturing.
Most overseas export markets for U.S. manufactured products continue strong and exports
now account for an increasing share of profits.
With a substantial decline in the value of the
dollar, earnings of U.S. firms increase as export
revenues are translated back into U.S. dollars.
On the flip side, strong growth in global
economies will exert upward pressure on
both interest rates and prices.
Outlook. Weaker consumer spending and
the slowdown in home sales will remain a
drag on the national economy during the
second half of 2007. Slower gains in payroll
employment in recent months could further
deteriorate household finances and make
consumers even more cautious. Persistently
high energy prices will keep inflationary
pressures on the economy and affect consumer
finances, business production costs, and raw
material costs. The U.S. economy is expected
to expand by 2.5 percent in the third quarter
and 2.6 percent in the fourth quarter of 2007.
Growth in inflation-adjusted household
spending is estimated to slow from close to
3 percent during the first half of the year to
about 2.8 percent in the second half. The
overall inflation rate is expected to be around
2.5 percent in 2007 with labor costs, as
measured by the employment cost index, up
around 3.1 percent, compared to 2.9 percent
in 2006.
Consumer spending on durable goods is
expected to increase just 1.2 percent in the
second half of 2007. Business spending will
remain strong, increasing at an average
annualized rate of 6.2 percent in the third
quarter, followed by 4.8 percent in the fourth
quarter. Spending on equipment and software
will rise 6.0 percent and 4.9 percent during the
third and fourth quarters of 2007, respectively.
However, spending by firms on industrial
equipment is expected to fall 2.1 percent in
the third quarter and 4.6 percent in the fourth
quarter. With a weaker U.S. dollar, exports will
grow much faster than imports. This trend
could correct some of the imbalances in the
U.S. current accounts. On the other hand, if
gasoline prices continue to rise, those higher
prices could further deteriorate U.S. trade
balances.
The yield on the 10-year Treasury note is
forecasted to be around 5.2 percent by the end
of 2007, up from 4.9 percent at midyear. The
30-year fixed mortgage rate will increase from
its current level of around 6.7 percent
to 6.9 or 7.0 percent by the fourth quarter.
Although inflation could ease slightly if
gasoline prices move lower, strong global
demand for commodities is expected to keep
upward pressure on inflation. Therefore, it is
unlikely that the Fed will lower short-term
rates anytime soon. Most of the growth in the
second half of the year will come from capital
spending and exports. Both of these factors
should help the nation’s industrial sector.
Alabama
Review. Alabama’s housing market slowed
modestly in the first quarter of 2007. According to the National Association of Realtors,
year-over-year sales of existing homes in the
state were down 4.1 percent for the quarter,
while permits issued for new homes were off
14.0 percent. During the 12-month period
ending in May 2007, Alabama’s economy
added 30,300 jobs. Almost 96 percent, or
29,000, of these jobs were located in the
state’s 11 metropolitan areas, comprising 28
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Alabama Nonagricultural Employment
Change in Number of Jobs
Mark your calendars!
2008 Economic Outlook
Conference
May 2006 to
May 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
Local Education
30,300
-200
3,100
-5,000
1,500
-800
800
100
800
-200
2,300
100
-900
-6,500
-1,000
-1,300
-1,500
-2,400
-100
-600
8,200
2,000
4,600
1,600
-300
-400
-700
-700
0
8,100
4,800
5,700
5,500
5,400
700
5,900
-100
2,400
1,500
3,600
2,200
Source: Alabama Department of Industrial Relations.
Corporate income tax receipts totaled over $404 million, an increase of
$4 million compared to the same period last year. Individual income tax
revenues grew 9.3 percent to about $2.7 billion, $233 million higher.
Appropriations made to the Alabama Education Trust Fund rose by
about $328 million to approximately $4.4 billion, an increase of 8.0
percent. Appropriations made to the state’s General Fund declined by
around $22 million, a decrease of close to 2 percent.
Outlook. Although residential construction is expected to remain weak
in the coming months, both commercial and industrial construction
should be fairly strong. German-based ThyssenKrupp AG will start
construction in south Alabama on a $3.7 billion steel plant that is
slated to begin production in 2010 and employ 2,700. The project
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The University of Alabama’s Center for Business and
Economic Research will hold its annual Economic
Outlook Conference on Thursday, January 17, 2008
in Montgomery, Alabama.
For more information:
Phone: 205.348.6191
Fax: 205.348.2951
Email: [email protected]
http://cber.cba.ua.edu
will generate around 29,000 jobs during its construction phase.
Hyundai Motor Manufacturing in Montgomery announced plans
for a $270 million expansion to be completed by 2008 that will
create 500 jobs. Honda also plans a $65 million expansion at its
assembly plant in Lincoln, while Isuzu will build a truck assembly
plant near Birmingham. Clearly, employment in transportation
equipment-related manufacturing will continue strong for the
remainder of the year.
The state’s economy is expected to see 2007 growth in the 2.7 to
3.0 percent range, adjusted for inflation. The downside risk remains
the housing sector, which has been relatively stable in this state
despite deep concerns in other parts of the nation. That stable
situation could change as adjustable rate mortgages are reset in
coming months, especially given tightened lending practices for
both consumers and businesses. The fastest growing segments of
Alabama’s economy are forecasted to be business and healthcarerelated services and automotive production-related industries within
the manufacturing sector.
Ahmad Ijaz
[email protected]
Samuel Addy
[email protected]