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Center for Business and Economic Research, Culverhouse College of Commerce, The University of Alabama
Volume 76, Number 4
Economic Outlook:
4th Quarter 2007
United States
Review. The U.S. economy grew 3.8 percent
in the second quarter of 2007, following a 0.6
percent increase in the first quarter. Growth
in personal consumption expenditures for services; exports; investments in nonresidential
structures; federal, state, and local government
spending; and business spending on equipment
and software offset the negative contribution
from residential fixed investment, which includes both home sales and home construction. Residential investment declined 16.3
percent and 11.8 percent in the first and
second quarters, respectively. GDP growth in
the second quarter reflected a downturn in
consumer spending on both durable and
nondurable goods, both of which slowed
significantly after a good first quarter. Total
industrial production increased 3.5 percent in
the second quarter, an improvement over the
first quarter’s 1.1 percent gain. The pickup in
industrial activity primarily reflected a 7.5
percent increase in exports.
The downturn in the housing market has made
consumers very cautious about the state of the
economy, which remains relatively fragile. According to Conference Board reports, consumer
confidence slipped to 99.8 in September, the
lowest level in almost two years. However, the
consumer confidence index remains well above
the level of 60 to 70 that is generally viewed as
a sign of an upcoming recession. Another
factor making consumers cautious is the
amount of household debt, which currently
stands at 136 percent of household income
and has increased 36 percent during the past
six years. Housing markets are weak and show
no clear signs of a recovery. Housing permits,
after peaking in June 2005 at 212,000, have
steadily declined since. And, as more subprime
and adjustable rate mortgages reset, there is a
good chance that conditions in the housing
market could deteriorate further. According to
the Wall Street Journal, $1.5 trillion of high
interest loans were made between 2004 and
2006. These high rate mortgages comprised
Fourth Quarter 2007
29 percent of loans originating
in 2006, up from 16 percent in
2004. Of 43.6 million mortgages originating in 2006, 10.3
million were classified as subprime mortgages. Furthermore,
there were significant numbers
of subprime and adjustable
rate loans made in the first half
of 2007 that have yet to reset
to higher rates.
After rising 3.7 percent in the
first quarter of 2007, consumer
spending, which accounts for
almost two-thirds of the economy, increased only 1.4 percent in the following quarter.
Expenditures for durable goods
increased 8.8 percent in the
first quarter and 1.7 percent in
the second quarter. Weakness
in housing markets resulted in
a slowdown in consumer
spending on household furniture and equipment. The
second quarter also saw a
steep decline in sales of light
trucks. Light truck sales
dropped almost 17 percent,
following a 39.5 percent
increase in the first quarter.
Spending on nondurable goods
fell 0.5 percent in the second
quarter, a sharp reversal from
the 3.0 percent gain seen in
the first quarter.
Business spending on equipment and software increased
1.4 percent in the second
quarter after a 0.3 percent
increase in the first quarter.
Industrial equipment expenditures declined 2.9 percent in
the first quarter of 2007, but
rose 16.3 percent in the
second quarter as strong
exports and a pickup in
manufacturing boosted
spending. However, firms’
expenditures on transportation
equipment declined 23.8
percent in the second quarter,
after falling 15.2 percent in the
Economic Outlook:
4th Quarter 2007. . . . . . . . . . . . . . 1
Business Leaders Confidence Index:
4th Quarter 2007 . . . . . . . . . . . . . 5
Economic Indicators . . . . . . . . . . . 9
Underemployment
in Alabama . . . . . . . . . . . . . . . . .10
In this issue: BLCI panelists focus on support from state and city governments
first quarter. Aircraft purchases rose significantly during both quarters, however.
The U.S. unemployment rate increased to 4.7
percent in September, slightly above its average
of 4.5 percent since September 2006. Payroll
employment rose by 110,000 in September,
following an increase of 89,000 in August.
However, average monthly private sector
employment growth slowed to 74,000 during
the third quarter, compared to 114,000 in the
second quarter. Weakness in the housing
sector is now clearly affecting other areas of
the economy. Construction jobs declined
14,000, primarily due to a loss of 20,000 jobs
in the housing sector. Credit intermediation
lost 12,000 jobs, while employment at building
materials stores fell by 17,000 in September.
Despite a pickup in industrial activity, manufacturing continues to shed jobs. Payroll
employment in the sector dropped 18,000
in September after a loss of 45,000 jobs in
August. This was the seventh consecutive
month of decline in temporary payrolls, with
losses totaling 93,000 this year, including
20,000 in September. There are still some
sectors that are adding to their payrolls.
Healthcare gained 33,000 new workers, while
food and drinking places added 25,000 jobs.
Professional and technical services also gained
37,000, its strongest month since April.
Although the number of subprime mortgages is
relatively small compared to total mortgages
outstanding, the problem in the credit markets
lies with instruments used to spread this risk
around, such as mortgage-backed securities
and other debt obligations that package these
mortgages and other risky assets. Falling or
flat home prices, together with tougher lending
standards, have furthered the housing market
problem. Housing starts dropped 2.6 percent
in August 2007 to 1.33 million, their slowest
pace in nearly 12 years, while single-family
2
Alabama Business
housing permits slid 8.1 percent in August to
0.93 million. From August 2006 to August
2007, single-family housing permits declined
28 percent. According to the National
Association of Home Builders (NAHB),
confidence among home builders dropped to an
index reading of 20, which is the same as the
all-time low seen in January 1991. NAHB
started the index in 1985, and just two years
ago the index reading was 70. With more
adjustable rate mortgages coming up for reset,
home sales will continue to fall. Builders will
have to cut construction and prices in order to
bring down the current levels of inventory.
Total residential construction dropped 11.6
percent in the second quarter, following a 16.6
percent decline in the first quarter. During the
first two quarters of 2007, construction on
single family homes dropped 29.8 percent and
14.3 percent, respectively. Every category of
residential construction experienced a decline
in the second quarter.
Outlook. With weakening consumer spending and a slowdown in the housing markets,
the U.S. economy is now expected to grow
2.7 percent in the third quarter, followed by
1.5 percent in the fourth quarter. Given slower
employment growth, falling home prices, and
tighter credit conditions, consumer spending
will likely increase 3.4 percent in the third
quarter, with growth of 2.1 percent forecasted
for the fourth quarter. Housing starts will drop
to the 1.2 million level by 2008, down from a
current level of 1.4 million. The housing market is not expected to recover until at least the
second half of 2008. Residential construction
will decline approximately 17 percent in the
third quarter and 24 percent in the fourth
quarter of 2007.
The Federal Reserve will most likely cut the Fed
Funds rate to 4.5 percent. However, with
inflation slowing, we would not be surprised if
they drop the rate to 4.25 percent in the fourth
quarter, which could send the value of the U.S.
dollar even lower. A cheaper dollar is great
news for exporters, but not for U.S. consumers, who end up paying higher prices for imported goods. Oil prices will probably increase
in the second half of the year, averaging $76
to $78 per barrel compared to the first half’s
average of $60 to $62. On the bright side, the
inflation rate is expected to remain low over
the next two quarters. Overall, prices are
expected to increase 1.8 percent in the third
quarter and 1.6 percent in the fourth quarter
of 2007. U.S. exports will grow 11.8 and 8.2
percent during the third and fourth quarters,
respectively.
Alabama
Employment. During the twelve-month
period ending in August 2007, the state added
27,700 net new jobs. Almost 86 percent, or
23,800, of these jobs were located in the 11
metropolitan areas, comprising 28 counties.
The remaining 39 counties added 3,900 jobs.
The Mobile metropolitan area led the state
with 5,400 jobs, followed by the BirminghamHoover, Huntsville, and Montgomery metropolitan areas, adding 5,000, 4,900, and 3,800
jobs, respectively. Most of the jobs added in
the Mobile metro area were in education and
health services (1,100), local government
(1,100), and professional and business services (1,000). The majority of jobs added in
Birmingham-Hoover were in local government
(1,400) and food service and drinking places
(1,300). Most of the Huntsville MSA’s new
jobs were in professional, scientific, and technical services (1,300), while in Montgomery
they were in retailing (1,200) and business and
professional services (1,100).
Alabama’s manufacturing sector experienced
the net loss of 3,400 jobs during the 12
months ending in August 2007. However,
durable goods manufacturers in the state
continue to surprise on the upside. From
August 2006 to August 2007, durable goods
industries netted 1,500 new jobs, most of
which were in motor vehicle and parts
manufacturing (1,000). Aerospace products
and parts manufacturing also gained 600 jobs,
while primary and fabricated metal industries
added 400 jobs. Transportation equipment
manufacturing is also the state’s largest
exporter, accounting for 39 percent of
Alabama’s total $5.4 billion in exports.
Industries producing nondurable goods shed
4,900 jobs during the twelve-month period
ending in August 2007, with declines in most
nondurable sectors except for 100 jobs added
in animal slaughtering and processing. The
majority of the losses were in textiles and
apparel, which dropped a total of 4,300
workers from their payrolls.
During the twelve-month period ending in
August 2007, mining-related firms lost 200
jobs. The construction sector added 2,800
workers, primarily in the area of specialty trade
contractors (2,100). Service providing firms in
the state continue to add to their payrolls.
Altogether, from August 2006 to August 2007,
these firms added 28,500 jobs, primarily in
leisure and hospitality services (4,600),
education and health services (3,700), and
professional and business services (6,000).
Despite a slowdown in consumer spending,
retailers in the state added 4,500 net new jobs,
most of which were in department stores
(2,100). Firms providing professional,
scientific and technical services added 3,600
jobs. Most of the new jobs within leisure and
hospitality (4,800) were associated with food
services and drinking places. The government
sector, primarily local governments, gained
5,600 jobs during the twelve-month period
ending in August 2007.
Tax Receipts. After experiencing remarkable
growth in recent years, tax revenue gains have
slowed somewhat. During the fiscal year
ending in September 2007, state tax revenues
grew 4.2 percent and totaled over $8.7 billion.
Sales tax revenues rose 2.5 percent to about
$2.0 billion, almost $49 million higher than
the previous fiscal year. Corporate income tax
receipts totaled slightly over $509 million, a
decline of nearly 3.5 percent, or $19 million
below the previous fiscal year. Individual income tax revenues grew 9.1 percent to approximately $3.5 billion, about $292 million higher
than the previous fiscal year. Appropriations
made to the Alabama Education Trust Fund
increased about $358 million to approximately
$5.5 billion, a rise of 6.5 percent. Appropriations made to the state’s General Fund were
up approximately $3.5 million, a 0.22 percent
increase, and totaled approximately $1.6
billion.
Alabama Business
3
Alabama Nonagricultural Employment
Change in Number of Jobs
Aug 2006 to
Aug 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
Motor Vehicle Parts
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
27,700
-200
2,800
3,400
1,500
-600
400
300
300
-200
1,400
-300
1,000
-300
-4,900
300
-800
-1,600
-1,900
-400
-100
8,100
2,200
4,500
1,400
0
-100
-100
-200
100
6,000
3,700
4,600
4,700
4,800
600
5,600
-400
900
-1,500
5,100
2,000
Source: Alabama Department of Industrial Relations.
Outlook. After a strong first half of the year, the state’s economy is
forecasted to grow approximately 2.8 percent in the third quarter of
2007 and 2.0 percent in the fourth quarter. For the year as a whole,
Alabama’s economy is estimated to expand by 2.7 to 3.0 percent.
Consumers will remain cautious over the next few months as both high
energy prices and constricted housing markets continue to affect the
state. Although Alabama did not have a housing bubble like a number
of other states, some areas did see relatively rapid increases in home
prices. Tightened lending standards across the nation will have an effect
on Alabama consumers. Residential construction is forecasted to
decelerate even further in the coming months.
4
Alabama Business
2008 Economic
Outlook Conference
REMEMBER
THIS DATE:
Thursday,
January 17,
2008!
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
Job growth has been slowing in recent months and will continue to
do so for the remainder of the year. However, the state’s motor
vehicle and parts manufacturing companies should help cushion
some of the shock. Transportation equipment-related industries,
including motor vehicle manufacturing, aerospace products, and
parts manufacturing, will continue to add to their payrolls well into
2008. The new Kia automotive plant is being constructed just
across the state line in Georgia, but Alabama is expected to land a
majority of its suppliers. These new and expanding parts
manufacturers will supply both Kia and the Hyundai plant in
Montgomery.
Ahmad Ijaz
[email protected]
Sam Addy
[email protected]