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Center for Business and Economic Research, Culverhouse College of Commerce, The University of Alabama
Volume 77, Number 1
First Quarter 2008
Economic Outlook:
1st Quarter 2008
United States
Current Economic Conditions. The
U.S. economy grew by almost 5 percent in
the third quarter of 2007, its fastest pace
in nearly four years, despite the fact that
homebuilders reduced spending by 20.5
percent, the steepest decline in 16 years.
While the economy looked like it might
be headed for a recession in the fourth
quarter, growth came in at a meager, but
positive, 0.6 percent. Still, residential
fixed investment, which includes both
home sales and construction, declined by
an estimated 30 percent in the fourth
quarter. Residential construction’s share
of GDP has fallen from over 6 percent in
2005 to 3.4 percent in 2007. Growth in
consumer and business spending slowed
in the fourth quarter, with increases of
2.0 percent and 7.5 percent, respectively.
High energy costs and rising food prices
are imposing additional burdens on both
consumers and firms, causing inflation
to increase at the same time that the
economy is faltering.
Overall inflation rose by 4.1 percent yearon-year in November 2007, one of the
highest rates in decades. Prices usually
fall during a downturn because of
declining demand from consumers and
producers. The Fed has the option to
curtail rising prices by raising short term
interest rates; however, with economic
conditions deteriorating, the Fed is
expected to keep lowering rates until the
economy shows signs of a recovery. There
is now a 50 percent chance that the U.S.
economy could go into recession in 2008,
primarily due to weakening consumer
spending, rising prices, and faltering
employment growth. Furthermore, the
financial crisis in the housing markets has
resulted in tighter credit conditions for
both consumers and businesses.
Selected Economic Indicators
2007
2008
Economic Growth (Annual Percent Change)
United States
Alabama
2.2
2.3
1.9
2.2
Employment Growth (Annual Percent Change)
United States
Alabama
1.3
1.0
0.8
1.0
Consumer Expenditures (Annual Percent Change)
Total
Durable Goods
Nondurable Goods
Services
Inflation Rate
2.9
4.9
2.5
2.8
2.9
1.9
1.1
1.8
2.2
2.2
Prime Interest Rate
3-month Treasury Bill Rate
10-year Treasury Note Rate
30-year Fixed Mortgage Rate
8.0
4.4
4.6
6.3
6.8
3.1
4.1
6.0
3.1
$72.28
3.1
$77.37
Employment Cost Index (Annual Percent Change)
Average Price of West Texas Intermediate Crude
Source: U.S. Department of Commerce, Global Insight, and Center for Business and
Economic Research, The University of Alabama.
Consumer and business confidence in the
economy fell significantly at the start of
2008. Both the University of Michigan
and the Conference Board’s surveys of
consumer confidence have dropped to
near recession levels in recent months.
Further retrenchment on the Michigan
survey to around 70 would clearly signal
a consumer-led recession. The Institute
for Supply Management (ISM) index of
factory activity fell from 50.8 in November
to 47.7 in December, its lowest reading
since April 2003; a value below 50 indicates contraction in the manufacturing
sector. The index of new orders, an
indicator of future business activity, fell
6.9 points in December to 45.7, while the
production index dropped 4.6 points to
47.3. Businesses are becoming more
cautious about hiring and spending.
Payrolls increased by only 18,000 in
December, with heavy losses reported in
construction, manufacturing, and retailing.
The U.S. unemployment rate increased
from 4.7 percent in November to 5.0 percent in December, a 0.3 percent monthly
rise not seen since the recession in 2001.
Residential fixed investment fell 23.9
percent in the fourth quarter, its steepest
decline yet in the current downturn and
its eighth consecutive quarterly drop.
With the inventory of new homes at
Inside the BLCI: Fewer employees to see compensation gains in 2008 as business optimism declines.
record levels, conditions in the housing
markets seem to be getting worse.
According to the U.S. Department of
Commerce, construction of new homes
fell to an annualized level of around 1.0
million in December, the slowest pace
since May 1991. A sharp decline in both
multi- and single-family homes dropped
the pace of new home construction to
almost 50 percent below its peak of
January 2006. Sales of new homes
declined by 26.4 percent to around
774,000 in 2007, the largest downturn
since the recession of 1980. In December
overall single-family home sales fell 13.0
percent, the largest drop in almost 25
years, while sales of condominiums
declined 25.0 percent.
The number of home mortgages entering
foreclosure reached an all-time high in
2007, and with almost $352 billion in
subprime mortgages due to reset in 2008
(approximately 1.5 million loans), housing
markets are expected to get much worse
before the current home inventory can be
sold. High loan-to-value originations in
recent years, together with falling home
prices and the reset of adjustable mortgages, have left many people unable to
meet their monthly mortgage payments,
refinance their homes, or extract equity.
The nonprime share of mortgage originations (including both Alt-A and subprime
mortgages) increased from 11.3 percent in
2001 to 33.5 percent in 2006; typically
there is a substantial increase in monthly
payments when these adjustable rate
loans reset. According to the National
Association of Realtors, the average
median price of a single-family home fell
by 1.8 percent to $217,800 in 2007, the
first decline in nearly four decades. From
December 2006 to December 2007, the
price of existing homes declined 6.0
percent
Outlook. After cutting the federal funds
rate by 1.25 basis points to 3.0 percent in
January, the Fed is expected to continue
aggressive cutting, taking the rate as low
as 2.5 percent by its April 30 meeting,
despite inflationary pressures. Housing
will remain the biggest drag on the
economy. Elevated inventories of both
existing and new homes will continue
to exert downward pressure on home
construction, sales, and prices. However,
falling prices will make homes more
2
Alabama Business
affordable—a necessary condition to work
through the current high level of housing
inventory. Housing starts are expected to
be below the 1.0 million unit annualized
rate during the first half of 2008. Home
prices are expected to drop by around 6
percent during the year.
Declining home prices and tightened
lending conditions will make consumers
relatively more cautious about their
spending. In recent years, growth in
consumer spending has outpaced gains
in income, with the gap fueled primarily
by home equity extraction. Home equity
extraction as a share of disposable income
increased from about 1 percent in 1994 to
close to 8 percent in 2004; for the first
three quarters of 2007, it amounted to
around 5.5 percent of disposable income.
rebates to individuals will have a positive
impact on consumer spending, while
business tax cuts of approximately $50
billion through depreciation allowances
should boost spending on capital
equipment and other investments.
The housing sector will remain a drag on
the economy. Residential investment,
including both home construction and
sales, will decline by almost 25 percent in
the first half of 2008, and is not expected
to improve before the fourth quarter of
2008 or perhaps early 2009. Housing
starts are expected to drop by over 30
percent in 2008, while sales of existing
homes will plunge more than 20 percent.
Sales of new homes are forecasted to drop
by over 15 percent in 2008.
Alabama
The current forecast has the U.S. economy
growing by about 1 percent in the first
half of 2008 and by around 2 percent in
the second half. Consumer spending,
which normally accounts for almost 70
percent of the growth in GDP, will rise by
just 1.2 percent in the first half of 2008,
followed by a 2.5 percent increase during
the second half. Consumer expenditures
on durable goods are expected to decline
by 3.4 percent in the first half of the year.
After increasing by 4.5 percent in 2007,
business spending is forecasted to rise
only 0.5 percent in the first half of 2008,
followed by an increase of close to 1
percent in the second half. The fiscal
stimulus package of $150 billion that is
currently being worked on should provide
some help for the economy during the
second half of the year. The $100 billion in
Current Economic Conditions. The
state’s economy grew 2.3 percent in 2007
to $141.1 billion. The fastest growing
sectors were professional and business
services and leisure and hospitality,
particularly food services and drinking
places. For the first nine months of 2007
compared to the same period in 2006,
exports from Alabama rose 3.8 percent
to $10.9 billion. Motor vehicle manufacturing is one of the strongest industries in
the state; a total of 738,832 vehicles were
produced in 2007 by Alabama’s Honda,
Hyundai, and Mercedes plants. Transportation equipment is the state’s largest
export sector; exports increased from $4.0
billion in the first nine months of 2006 to
$4.5 billion for the same period in 2007.
Germany was the destination for almost
26 percent of the state’s total exports,
followed by Canada, Mexico, Japan, and
the United Kingdom.
During the twelve month period ending in
December 2007, Alabama gained 25,400
new jobs. Approximately 20,000, or 79
percent, were located in the 11 metropolitan areas, comprising 28 counties. The
remaining 39 counties added 5,400 new
jobs. The Birmingham-Hoover metropolitan area led the state with 6,300
jobs, followed by Huntsville (5,200),
Montgomery (3,100), Mobile (2,500),
and Tuscaloosa (900). The majority of
(continued on page 7)
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jobs added in the Birmingham-Hoover area
were in retailing; professional, scientific,
and technical services; food services and
drinking places; and local government
entities. Strongest sectors for job growth
in the Huntsville metro area were professional, scientific and technical services;
local government entities; educational and
health services; and information. About
52 percent, or 1,600, of the new jobs in
Montgomery were in retailing, with
another 800 in professional and business
services. Payroll gains in the Mobile metro
area were strongest in educational and
health services and at food services and
drinking places. Tuscaloosa added 600
jobs in state and local government
entities.
From December 2006 to December 2007,
the largest statewide payroll gains were in
construction (2,800); retail trade (2,600);
professional and business services (5,500);
educational and health services (3,500);
food services and drinking places (3,600);
and local government institutions (4,500).
Manufacturing suffered a net loss of 1,800
jobs. While durable goods manufacturing
gained 100 workers, nondurable goods
manufacturing lost 1,900. Within durable
goods manufacturing, the only industries
that gained jobs were transportation
equipment manufacturing—which
includes motor vehicle and parts manufacturing and aerospace products and
parts manufacturing—with 1,000 new
jobs, and primary and fabricated metals,
which added 600. Among nondurable
goods manufacturing industries, gains of
1,400 jobs in plastics and rubber products
manufacturing and 300 in animal slaughtering and processing were negated by
losses in all other industries. Textiles and
apparel manufacturers saw 2,500 jobs
disappear during the year.
For the first quarter of the current fiscal
year compared to the first quarter a year
ago, total state tax revenues increased 4.3
percent to $2.1 billion. Individual and
corporate income tax receipts rose 1.9 and
12.1 percent, respectively. For September
through December 2007, sales tax receipts
totaled $512.7 million, up 1.9 percent
over the first quarter a year ago. First
quarter appropriations to the state’s
General Fund increased 21.5 percent to a
total of $487.6 million. Appropriations to
the Alabama Education Trust Fund climbed
4.2 percent, compared to the first quarter
of the previous fiscal year, to $1.4 billion.
The state is faring much better than the
nation when it comes to the housing
market crisis. One major reason is that
home prices in Alabama have historically
risen at a pace below the national average.
Over the 10 years from the third quarter
of 1997 through the third quarter of 2007,
the OFHEO (Office of Federal Housing
Enterprise Oversight) House Price Index
shows Alabama’s house prices increasing
60.3 percent compared to a U.S. average
100.8 percent gain. House prices held up
much better in the state than the nation
during the year ending in the third quarter
of 2007—the state’s index increased by
5.3 percent, while the U.S. index rose only
1.8 percent.
Although the state’s economy is not
immune to national economic conditions
and the slump in housing markets is being
felt in Alabama, the effect will be more
moderate than the severe downturn in
many parts of the nation. Home sales
were down just 5 percent for 2007,
according to the Alabama Center for Real
Estate, with 57,083 units sold—the third
highest recorded annual total. However,
building permits for single-family homes
totaled 16,793 in 2007, down 5,703
(-25.4 percent) from 2006. While the
housing inventory was declining at yearend, the December inventory to sales ratio
of 11.1 months remained well above the
2002 through 2006 average of 6.5 months
supply.
Outlook. The state’s economy is forecasted to grow by 2.2 percent in 2008,
close to the pace of 2007. Nonfarm employment is expected to increase by 1.0
percent, with the addition of approximately 21,000 jobs. In terms of payroll
employment, the fastest growing segments of the state’s economy are
OFHEO House Price Index
through Q3 2007
(Percent Change)
1-year 10-year
United States
Alabama
Anniston-Oxford
Auburn-Opelika
Birmingham-Hoover
Decatur
Dothan
Florence-Muscle Shoals
Gadsden
Huntsville
Mobile
Montgomery
Tuscaloosa
1.8
5.3
5.9
6.1
3.0
7.2
10.3
4.9
5.1
6.6
5.8
5.6
3.8
100.8
60.3
59.9
72.1
59.1
49.5
58.4
38.4
54.9
54.7
72.6
45.2
53.8
Source: Office of Federal Housing Enterprise Oversight.
expected to be motor vehicle and motor
vehicle parts manufacturing (11.8 percent
increase in jobs); other transportation
equipment manufacturing (3.9 percent);
professional and business services (1.9
percent); educational and health services
(1.4 percent); and leisure and hospitality
services (1.3 percent).
The Alabama economy will face the same
challenges as the rest of the nation in
2008—high energy prices, a credit crunch,
more cautious consumer and business
spending, and the housing market
recession. It should, however, weather
these challenges better than many state
economies. Recent diversification, continuing job gains, and ongoing industry
recruitment and workforce development
will complement more solid fundamentals
in housing and credit conditions than are
seen in many states. Cuts in short term
interest rates should take upward pressure
off long term rates, and provide some
stability in the state’s financial and
housing markets.
Ahmad Ijaz
[email protected]
Samuel Addy
[email protected]
Articles reflect the opinions of the authors but
not necessarily those of the staff of the Center,
the faculty of the Culverhouse College of
Commerce, or the administrative officials of
The University of Alabama.
Alabama Business
7
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About Alabama
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Around 67,000 Alabama businesses received
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Data can be mined for detailed rankings—did
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value of shipments of reproducing magnetic
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second in total value at $667.5 million? We
also were first in manufactured value of
asphalt shingle and coating materials and of
perishable prepared foods per capita!
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Copies of this publication as well as other socioeconomic data resources are
available on the Center website: http://cber.cba.ua.edu
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