First Quarter 2008 • Volume 7, Number 1
National Economic Outlook
Q1 2008 compared to Q4 2007
55.0
60
Percent
50
40
28.2
30
20
12.3
10
0
3.9
0.6
Much Somewhat Remain Somewhat Much
Worse
Worse the Same Better
Better
THE OUTLOOK
100
National Economy
37.7
80
Alabama Economy
50.2
70
Industry Sales
51.4
60 53.6 56.0 56.8
50.7 47.2
50
Industry Profits
47.4
Industry Hiring
47.9
90
40
30
Capital Expenditures 48.7
20
BLCI
10
0
47.2
Index above 50 indicates expansion.
Q1 Q2 Q3 Q4
2007
Q1
2008
increase from previous quarter
decrease from previous quarter
Probability of U.S. Recession Rises Expectations for the U.S.
economy fell 5.2 points to 37.7 in the first quarter of 2008, with
almost 59 percent of panelists finding it likely that economic conditions
will be worse than in the fourth quarter of 2007. Pessimists outnumber
optimists by almost five-to-one, pushing the index well below the neutral
point of 50. Only 12.9 percent of survey respondents forecast improvement during the first quarter. The continuing decline in housing starts,
sales, and prices and the credit crunch, which makes it harder for both
households and businesses to secure funding, are the primary culprits—
forecasting group Global Insight estimates that housing will cut GDP
growth by one percentage point in 2008. High fuel costs and their
effect on consumer well-being is another major factor; consumer
spending normally accounts for about two-thirds of the U.S. economy.
Steady growth in exports, helped by a weak dollar, is a key factor in
keeping the U.S. economy out of recession. Looking back, Alabama
business leaders correctly forecasted the third quarter as the high point
for the national economy in 2007.
Alabama Economy Stays the Course Early in 2008 Growth in the
state’s economy is generally expected to continue the pace seen in
the fourth quarter of 2007. At 50.2, this component index indicates that
economic conditions will be stable during the first quarter of 2008.
Almost 43 percent of panelists anticipate no change, while about equal
shares forecast worsening versus improving performance. Large-scale
projects, including the National Alabama railcar plant in Muscle Shoals,
the ThyssenKrupp steel plant in the Mobile area, and BRAC-related
development in Huntsville, will contribute to construction employment
in 2008. Federal spending for national defense, a growing aerospace
industry, burgeoning biotech and information technology, and additions
to the state’s auto supplier network should help Alabama maintain a
relatively healthy economy. The state’s housing market is holding up
better than the nation’s—for the year ending with the third quarter of
2007, the Alabama OFHEO House Price Index rose 5.3 percent, while
the U.S. average increase was 1.8 percent.
60
Alabama Economic Outlook
Q1 2008 compared to Q4 2007
50
42.7
Percent
Three of the four industry indicators dropped into negative
territory; sales is the only category expected to show an
increase during the first quarter of 2008. The stressed
consumer has companies planning to reduce hiring and
capital expenditures as they reign in costs in the wake of
weakening profits and slowing sales. This tightening by
businesses is also reflected in a forecast for smaller
increases in employee compensation in 2008, as shown
in this quarter’s topical question series.
Alabama
BLCI
Index
Business Leaders Increasingly Pessimistic The
Alabama Business Leaders Confidence Index® (BLCI) fell
into negative territory for the first quarter of 2008, marking
the first time that the index has been below the neutral
point of 50 in the six years of the survey. At 47.2, the
BLCI is down 3.5 points from the fourth quarter of 2007
and is 6.4 points below its reading a year ago. Problems
in the U.S. economy weigh heavily on the expectations of
Alabama business leaders; at 37.7, the national economy
index is well below the other five BLCI component indexes.
While the probability of a recession in the U.S. economy
has increased, the performance of the state’s economy
should be approximately the same as last quarter, with
growth continuing at a moderate pace.
40
28.2
30
26.5
20
10
0
0.7
1.9
Much Somewhat Remain Somewhat Much
Worse
Worse the Same Better
Better
THE UNIVERSITY OF ALABAMA
Q1 2008 compared to Q4 2007
Percent
50
40
35.7
30.2
30
27.6
20
10
3.9
0
2.6
Strong Moderate
No
Moderate Strong
Decrease Decrease Change Increase Increase
Industry Capital Expenditures
Q1 2008 compared to Q4 2007
50
Percent
40.8
40
30
26.7
20.3
20
10
9.0
3.2
0
2
Strong Moderate
No
Moderate Strong
Decrease Decrease Change Increase Increase
40
30.5
30
34.1
28.0
20
10
4.2
3.2
0
Strong Moderate
No
Moderate Strong
Decrease Decrease Change Increase Increase
Six-Year Trend of Increasing Profits Coming to an End Profit
expectations slipped to 47.4 for the first quarter of 2008. This is down
3.2 points from the component index value of 50.6 in the fourth quarter
of 2007. Equal shares of panelists, 30.2 percent, predict profits will be
unchanged or higher for the first quarter of 2008, while almost 40
percent expect earnings to decrease. Slower productivity growth, wage
gains, a falling dollar, and an inability to raise prices due to weak
consumer demand are among factors cutting into profits for many firms.
However, profits from foreign divisions and from exports are helping
some companies. Global Insight forecasts a 3.9 percent decline in aftertax profits during 2008, the first negative year since 2001. Panelists in
most Alabama industries are predicting lower profits in the first quarter;
the drop-off will be most pronounced in retail trade and construction.
Profit growth should continue in the services sector, with the strongest
increases in professional, scientific, and technical services.
Job Growth Slowing in 2008 An increasing number of firms are
trimming hiring plans—the 28 percent of BLCI panelists forecasting a
decrease in hiring in their industry during the first quarter of 2008 is
approximately 7 percentage points above the 20.9 percent expecting
an increase. This discrepancy throws the hiring component index into
negative territory at 47.9, despite the fact that 51.1 percent of respondents expect hiring to continue at fourth quarter 2007 levels. While
these reports indicate reductions in hiring at existing businesses and
perhaps curtailment of expansion plans, recently announced projects
entering the construction phase and new firms and expansions coming
online early in 2008 will contribute to job growth in many areas of
Alabama. Companies in transportation, information, and utilities (TIPU)
and in the services sector are most likely to add jobs during the first
quarter, while construction and retail trade businesses will cut back
most severely. Panelists in manufacturing and FIRE expect modest
reductions in hiring.
60
Q1 2008 compared to Q4 2007
50
Industry Hiring Plans
Q1 2008 compared to Q4 2007
60
51.1
50
Percent
Industry Profits
60
Industry Sales
60
Percent
Gains in Sales Help Support State’s Economy Sales by Alabama
businesses are forecasted to increase modestly in the first quarter of
2008, as indicated by a component index of 51.4. Rising exports are
helping some companies; approximately $10.9 billion in products were
exported during the first nine months of 2007, up 3.7 percent from the
same period in 2006. Other businesses are hurting, however, from the
negative effects of high energy prices and housing and credit market
problems on the U.S. consumer. The Reuters/University of Michigan’s
Index of Consumer Sentiment reading of 75.5 in December 2007
compares to 91.7 a year ago. While 38.3 percent of BLCI panelists
think sales in their industry could increase during the first quarter of
2008, 33.7 percent expect a decline. A marked decrease in sales is
forecasted for construction and retail trade, with a modest drop in sales
among the state’s manufacturing industries. Flat sales are expected in
finance, insurance, and real estate (FIRE).
40
30
24.1
18.3
20
10
0
3.9
2.6
Strong Moderate
No
Moderate Strong
Decrease Decrease Change Increase Increase
Some Firms Putting the Brakes on Investment The 9 percent share of
Alabama BLCI panelists who expect capital spending in their industry to
show a strong decrease in the first quarter of 2008 is almost double the
percentage on the previous quarterly survey. At 48.7, the capital expenditures component index is down 2.8 points. Pessimism about the course
of the national economy is causing firms to be cautious, particularly concerning investments in structures—a position that will deal a further blow
to the already-depressed construction sector. Weak consumer demand
has reduced the need for investment at some businesses, while declining
profits have cut into resources available for capital expenditures. Higher
credit costs and less available credit have also hurt capital spending.
While Alabama firms in wholesale and retail trade, manufacturing, and
construction expect to curtail capital spending, businesses in professional,
scientific, technical, and other services, as well as those in TIPU plan to
increase investment during the first quarter of 2008.
Center for Business and Economic Research, The University of Alabama
Topical Question Series:
Revisiting Alabama Compensation Issues
Percentage of Alabama Workers Seeing Compensation Gains
Could Slip Among panelists completing the first quarter 2008
BLCI survey, 76.2 percent expect employee compensation
(excluding benefits) at their firm to increase during 2008. This
is the weakest report of the last three years—83.7 percent of
respondents forecasted gains in 2007 and 81 percent anticipated
increasing wages and salaries in 2006. In the face of a stretched
consumer and with little pricing power, companies are more likely
to be conservative with regards to pay increases in 2008. Survey
results indicate that, for employees who receive a raise, the
average amount will be around 3 percent, modestly above
projected inflation of approximately 2.2 percent for the year. The
41.1 percent of businesses surveyed in the fourth quarter of 2007
that expect compensation increases to average 3 percent or
more during the coming year is down from 46.4 percent on last
year’s survey. And the 18.2 percent of firms anticipating that their
employee compensation will be the same as in 2007 compares to
12.5 percent expecting compensation to be flat last year.
Over the next year do you expect employee
compensation* in your firm to:
Decrease
3.3
Stay the same
18.2
Increase 0.1-1.99%
10.9
Increase 2-2.99%
24.2
Increase 3-3.99%
22.2
Increase 4-4.99%
11.6
Increase 5% or more
7.3
Don’t know
2.3
0
5
10
15
20
Percent
25
30
* Compensation excludes benefits.
What portion of the change in total compensation
will each of these categories comprise?
Cost of living adjustment 41.4%
Other 2.1%
Granting of stock options 1.6%
2007 year-end bonus 12.9%
Merit/performance increase 41.9%
Use of Bonuses Increases About two-thirds of Alabama
panelists report that their firm offered a bonus to employees at
year-end 2007, a sizeable jump from the 39 percent awarding
bonuses at the end of 2006. This increase supports findings by
benefits consulting firm Hewitt Associates that businesses are
increasingly using pay (in the form of bonuses) to reward and
retain, as well as motivate, employees. Bonuses were generally
larger in 2007—28.4 percent of firms indicated that bonuses
averaged 9 percent or more of employee wages, up from 21.6
percent in 2006. And the share of companies where bonuses
averaged 5 to 8.99 percent of wages rose from 19.1 percent in
2006 to 26.4 percent in 2007. During the same period, the
percentage of businesses giving employee bonuses of less
than 1 percent fell from 23.2 to 11.9 percent.
Merit Increases Barely Beat Cost of Living
Adjustments Merit or performance-based increases as
a share of the change in employee compensation slipped
from 43.2 percent for 2007 to an anticipated 41.9 percent
for 2008. At the same time, cost of living adjustments
rose from 40.5 percent of average total compensation
gains in 2007 to a projected 41.4 percent in 2008. With
the current economic environment negatively impacting
profits at many companies, it appears that more firms are
trying to make certain that employee wages and salaries
at least keep up with inflation. A year-end bonus is of
growing importance in compensation packages—12.9
percent of the total increase in the coming year will come
from bonuses, up from 10.1 percent last year. Stock
options will contribute just 1.6 percent of the gains in
2008. Sixty-eight percent of businesses responding to
the BLCI survey planned to use more than one form of
compensation in their total package.
If your firm offers a year-end bonus, what
percentage of employee wages does it average?
Less than 1%
11.9
1-2.99%
17.9
3-4.99%
15.4
5-6.99%
17.4
7-8.99%
9.0
9% or more
28.4
0
5
10
15
20
Percent
25
30
35
Center for Business and Economic Research, The University of Alabama
3
Alabama BLCI by Component and Area Expectations for the
national and Alabama economies both dropped by more than
5 points in the first quarter 2008 survey. While the forecast
indicates a larger probability of recession in the U.S. economy,
the state’s economy should remain on a steady course. Panelists
are much less optimistic now than they were on the BLCI survey
a year ago—the BLCI is down 6.4 points from its first quarter
2007 reading, while expectations for the U.S. economy have
fallen 10.7 points, and the Alabama outlook is down 6 points.
Among industry indicators, only the sales component index
managed to stay above 50 this quarter—at 51.4, the index
portends a modest increase in sales overall. Profits came in as
the lowest of the four industry indicators, falling 3.2 points to 47.4.
Sliding profits and weaker sales growth contribute to the declines
in both the hiring and capital expenditure component indexes.
Panelists in the Mobile metro area are the most upbeat coming
into 2008; a BLCI of 54.4 forecasts a moderate uptick in economic activity. Construction of the ThyssenKrupp steel plant
should get underway during the first quarter of 2008, while business at the Alabama State Docks and in the area’s aerospace
and shipbuilding industries is strong. Mobile is expected to see
good growth in capital spending in the first three months of 2008.
Huntsville panelists are also optimistic, with a BLCI reading of
53.3, indicating that economic growth will increase from the
already healthy pace seen during the past year. BRAC construction and job moves are ongoing, while national defense work at
area companies is increasing. Aerospace initiatives are bringing
new firms and contracts to the area. Profit gains should be
robust among Huntsville businesses. Respondents in both
Mobile and Huntsville are forecasting strong growth in sales
and moderate increases in hiring during the first quarter.
Forecasts of economic activity slipped farther into negative
territory for both the Birmingham and the Montgomery metropolitan areas in the first quarter 2008 BLCI survey. The
Birmingham metro area’s BLCI index value of 45.9 was down
3.9 points from the previous quarter. While sales growth in
Birmingham is expected to be flat during the quarter, profits,
hiring, and capital expenditures are all forecasted to decline.
The area’s sizeable construction and FIRE industries contribute
to a 6.3 point drop in profit expectations; 46 percent of panelists
forecast lower profits during the first quarter. Montgomery’s
BLCI is the lowest among the four major metro areas at 44.5,
with panelists particularly pessimistic about hiring and capital
spending trends.
Component Index by Area, Q1 2008
Q1 2008
Alabama
Change from Q4 2007
Birmingham
MSA
Huntsville
Mobile
Montgomery
National Economy
37.7
-5.2
36.9
40.5
40.5
37.5
Alabama Economy
50.2
-5.6
48.0
54.3
59.5
50.0
Industry Sales
51.4
-1.4
50.2
60.3
60.0
49.4
Industry Profits
47.4
-3.2
44.8
58.6
54.0
46.2
Industry Hiring
47.9
-2.5
47.0
56.0
56.0
41.9
Capital Expenditures
48.7
-2.8
48.6
50.0
56.5
41.9
BLCI
47.2
-3.5
45.9
53.3
54.4
44.5
BLCI Survey Enters Seventh Year The first quarter of 2008
marks the 25th quarter that Alabama panelists have recorded their
opinions in the online Business Leaders Confidence Index survey.
Expectations for the U.S. and Alabama economies and for industry
sales, profits, hiring, and capital expenditures are equally weighted
in the composite BLCI index. Six years of forecasts have been
prescient in indicating both slowing and accelerating trends in
economic activity. BLCI values consistently above the neutral point
of 50 from the first quarter of 2002 through the fourth quarter of
2007 have correctly forecast six years of expansion. With the index
falling to 47.2 on the first quarter 2008 survey, panelists predict the
strong possibility of recession.
Thank you to the more than 300 Alabama business leaders who
completed the first quarter 2008 BLCI survey during the first two weeks
of December 2007. Please join us in the first two weeks of March for
the second quarter 2008 survey at www.blci.com/alabama.
70
Alabama BLCI History
65
60
55
50
47.2
45
40
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
2002
2003
2004
2005
2006
2007 2008
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.