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alabama.business
Center for Business and Economic Research, Culverhouse College of Commerce, The University of Alabama
Volume 75, Number 2
Economic Outlook:
2nd Quarter 2006
United States
Overview. During 2005 the United
States economy grew 3.5 percent.
Current estimates put first quarter 2006
growth at a strong 4.5 percent. In the
remainder of 2006, GDP gains should
slow somewhat because of rising energy
prices and interest rates. A 3.6 percent
increase in GDP is forecasted for the
second quarter, followed by 2.5 percent
in both the third and fourth quarters of
2006.
Consumer spending, which in 2005
accounted for almost 71 percent of the
growth in GDP, was also strong in the
first quarter of 2006. After rising 3.5
percent in 2005, consumer expenditures
rose 5.1 percent in the first quarter of
2006. Spending was particularly strong
on big ticket items, climbing almost 17.5
percent compared to a 16.6 percent
decline in the fourth quarter of 2005.
This remarkable growth is primarily
due to strong sales of light trucks, computers, furniture, and other household
equipment. Expenditures made on nondurable goods and on services increased
by 5.5 percent and 2.7 percent, respectively, in the first quarter.
Business spending on equipment and
software also increased sharply in the
first quarter. Spending on communications equipment jumped almost 47 percent, while expenditures for computers
and peripherals increased about 9 percent. However, spending on industrial
equipment was weak.
The manufacturing and construction
sectors continued to expand in March,
signaling a strong economy, despite
emerging signs of inflation driven by
higher oil prices. The Institute for
Second Quarter 2006
Supply Management’s manufacturing index registered 55.2
in March, compared to 56.7 in
February; an index of 50 or above
indicates expansion. Raw materials and energy prices, which
have risen sharply in recent
months, are of great concern to
the industrial sector. Significant
productivity growth in the
industrial sector should help
these firms register about a 5.5
percent increase in output for
the first quarter without much
change in their payroll
employment.
Gross Domestic Product
Annual Percent Change
Over Same Quarter Previous Year
6
5
4
3
2
1
0
-1
-2
Q1
1991
Q1
1994
Q1
1997
Q1
2000
Q1
2003
Q1
2006
Source: U.S. Department of Commerce, Global Insight, and Center for
Business and Economic Research, The University of Alabama.
Consumer Expenditures
While housing continued to see
strength in multifamily units,
construction of new homes fell
7.8 percent in March, the fourth
decline in the past six months.
A weakening housing market is
particularly noticeable in the new
home segment, where developers
are offering discounts and incentives to buyers. New home sales
most probably peaked in July
2005 and the used home sales
peak was probably in June 2005.
Both categories have been slowly
declining since then.
Annual Percent Change
Over Same Quarter Previous Year
6
5
4
3
2
1
0
-1
Q1
1991
Q1
1994
Q1
1997
Q1
2000
Q1
2003
Q1
2006
Source: U.S. Department of Commerce, Global Insight, and Center for
Business and Economic Research, The University of Alabama.
A big jump in gasoline prices pushed
inflation up at both the wholesale and
retail levels, but the core rate of
inflation, which excludes food and
energy, remained fairly tame. The core
rate was 1.7 percent for the past 12
months. Sharp increases in costs for
gasoline and other raw materials will
continue to move prices higher during
the remainder of 2006.
The U.S. trade deficit hit a record high of
$725.8 billion in 2005, up 17.5 percent
from the previous $617.6 billion record
set in 2004, making it the fourth
consecutive record-setting trade deficit.
There were sharp increases in imports of
both oil and consumer goods. The
expiration of international quotas on
textiles and apparel at the beginning of
In this issue:
Economic Outlook:
2nd Quarter 2006
1
Business Leaders
Confidence Index:
2nd Quarter 2006
5
Selected Indicators
9
A Good First Step for
Alabama Tax Reform:
More Steps Needed
10
2005 and a 39.4 percent increase in oil
imports are two primary reasons for the
sharp increase in the trade deficit in
2005. Imports rose 12.9 percent to a
new record of $2 trillion. The U.S.
deficit with China rose to $201.6 billion
in 2005—a 24.5 percent increase over
the previous record deficit of $161.9
billion in 2004—and is the highest ever
recorded with any country.
Good economic news is that payroll
employment has risen solidly for five
months. There are more jobs in construction, services, and government.
Construction added significant numbers
of employees over the winter, although
employment gains slowed in March.
Services added almost 178,000 jobs in
March, with strong payroll increases in
general merchandise stores, food
services and drinking places (including
restaurants), and professional and
business services. Sizeable gains were
also recorded in hotel employment and
health care. Government jobs have also
increased, primarily at the state and
local levels.
Despite job gains in other sectors, there
are fewer jobs in manufacturing. Manufacturing lost 5,000 jobs in March; the
sector has lost almost 56,000 jobs in
the last 12 months. Due to rapid
growth in productivity, the manufacturing sector is not expected to experience
any significant gains in payrolls. More
than four years after the last recession
ended in November 2001, the current
economic expansion remains the weakest in about four decades in terms of
2
Alabama Business
payroll employment gains, even counting
the jobless recovery of the early 1990s.
Outlook. Growth in U.S. Gross Domestic Product is forecasted to average 3.3
percent during 2006. Higher energy
prices and increased borrowing costs for
consumers will slow consumer spending
to about 3 percent for the remainder of
the year. Business spending is expected
to remain strong. Expenditures on
software, computers, and peripheral
equipment will increase this year.
The Federal Reserve will most likely
increase the federal funds rate to 5.0
percent in May, a 16th consecutive
increase in less than two years. But if
the economy, particularly the housing
market, begins to show weakness, the
Fed might consider pausing after the
May increase. Rising interest rates will
significantly affect
housing markets and
prices and make
mortgage refinancing
more difficult. The
10-year treasury
yield is expected to
rise from its current
level of around 5
percent to about 5.5
percent by year end.
The 30-year fixed
mortgage rate is
forecasted to be
around 6.8 percent
by the end of 2006.
The biggest risks include rising energy
prices, a sharp increase in borrowing
costs for both firms and consumers, and
a rapid decline in housing markets and
housing prices.
A rise in inflation, either due to energy
costs or raw material prices, will
definitely mean more interest rate hikes
by the Fed. Rising energy prices can also
start to derail industrial activity and,
more importantly, consumer spending.
Alabama
Review. Alabama’s economy has
showed strong payroll growth through
most of 2005 and thus far in 2006.
From February 2005 to February 2006,
Alabama gained 48,800 new jobs,
mostly in service businesses (32,700 of
the 48,800). Professional and business
services added 10,300 jobs to their
payrolls, primarily in administrative
support and related occupations (8,100).
Educational and health services also
gained 5,700 jobs, mostly in health care
and social assistance. Leisure and
hospitality firms added 6,900 new
workers to their payrolls, of which
4,700 were in food services and
drinking places.
Counter to the nationwide trend of
manufacturing job loss, the state gained
9,400 manufacturing jobs between February 2005 and February 2006. The
gains were not even across all manufacturing industries. Durable goods producing industries added 10,900 jobs,
while firms producing nondurable goods
lost 1,500 jobs. Not surprisingly, the
durable goods industry that added the
most jobs was transportation equipment
manufacturing (including both motor
vehicle manufacturing and aerospace
products and parts manufacturing) with
a gain of 9,100 net new jobs. Other
manufacturing industries that added
jobs include primary and fabricated
metals (1,500), computer and electronic
product manufacturing (900), wood
product manufacturing (500), and
machinery manufacturing (300).
Furniture manufacturing lost 900 jobs.
Almost all nondurable goods producing
industries, which include textiles and
apparel, paper products, plastic and
rubber products, and food manufacturing, saw losses in their payrolls.
Employment in information-related
industries remained flat during the
period. Wholesale trade added 1,600
to its payrolls, but retailers lost 200
jobs. Both food and beverage stores and
department stores lost jobs. The
government sector added 4,800 jobs,
mainly in state and local government
entities. Natural resources and mining
gained 700, and construction employment increased by 6,000.
Of the 48,800 jobs added during the
February 2005 to February 2006 period,
36,900 were located in the state’s
metropolitan areas that comprise 27
Alabama counties. The other 40
counties saw their payrolls rise by
11,900. Metropolitan areas that added
the most workers included BirminghamHoover (8,800); Huntsville (6,100);
Mobile (5,800); and Montgomery
(4,400).
Alabama Business
3
Alabama Nonagricultural Employment
Change in Number of Jobs
February 2005 to
February 2006
Total Nonagricultural
Natural Resources and Mining
Construction
Manufacturing
Durable Goods Manufacturing
Wood Products Manufacturing
Primary and Fabricated Metal Manufacturing
Machinery Manufacturing
Computers and Electronic Products Manufacturing
Electrical Equipment, Appliance and Component Mfg.
Transportation Equipment Manufacturing
Motor Vehicle Manufacturing
Furniture and Related Products Manufacturing
Nondurable Goods Manufacturing
Food Manufacturing
Textile Mills
Textile Product Mills
Apparel Manufacturing
Paper Manufacturing
Plastics and Rubber Product Manufacturing
Trade, Transportation and Utilities
Wholesale Trade
Retail Trade
Transportation, Warehousing and Utilities
Information
Telecommunications
Financial Activities
Professional and Business Services
Educational and Health Services
Leisure and Hospitality
Other Services
Government
Federal Government
State Government
State Education
Local Government
48,800
700
6,000
9,400
10,900
500
1,500
300
900
200
9,100
1,600
-900
-1,500
-200
-500
-400
-900
100
1,000
3,200
1,600
-200
1,800
0
100
1,300
10,300
5,700
6,900
500
4,800
700
2,000
2,000
2,100
Alabama’s Source for Data on the Web
The Center for Business and Economic Research can be
found on the web at http://cber.cba.ua.edu.
The Center posts news and announcements, as well as
articles presenting and interpreting socioeconomic data.
From Data and Maps, users can read, print, or download
current and historical data and maps on Alabama’s
population, employment, income, and other economic
indicators. An extensive list of other sources of data
provides users with links to a wealth of information.
Previous issues of Alabama Business can be downloaded.
Order forms for the Center’s publications are available at
http://cber.cba.ua.edu/publications.html.
Users can subscribe to CBER News Service on our
website. Subscribers will be notified when new items are
added to the site or when publications become available.
Source: Alabama Department of Industrial Relations.
Tax Revenues. Along with strong
employment growth, Alabama has seen
a significant increase in tax revenues.
For the first six months of the current
fiscal year, October 2005 to March 2006
inclusive, total state tax revenues are
over $4 billion, 9.5 percent (about $350
million) higher than was received in the
first six months of the previous fiscal
year. Sales tax revenues are up 10.4
percent to $973 million, almost $92
million higher. Corporate income tax
receipts totaled $205 million, an
increase of 16.9 percent or $39 million.
Individual income tax revenues have
risen roughly 7.9 percent to almost $1.5
billion, $107 million higher than revenue
for the same period last year. Appro-
4
Alabama Business
priations made to the Alabama
Education Trust Fund rose more than
$168 million to $2.4 billion, an increase of 7.3 percent. Appropriations
made to the state’s General Fund increased approximately $124 million,
a little more than 18 percent, to $805
million.
Outlook. In 2006 Alabama’s economy
is expected to grow roughly 3 to 3.5
percent. After a robust first half of the
year, higher energy prices and gradually
rising interest rates will begin to have an
impact on consumers and businesses,
particularly those in energy sensitive
sectors. Payroll employment is expected
to remain strong in automobile manu-
facturing. Within the services sector,
most of the job gains will be in eating
and drinking places, administrative
assistant and related clerical occupations, professional and business
services, and health care-related
occupations.
The state’s manufacturing sector output
is expected to grow about 5 percent,
largely due to the automotive industry
and aerospace and parts-related
industries. Manufacturing industries in
the state are forecasted to add almost
6,000 new jobs in 2006. Professional
and business services firms will add
nearly 8,000 workers to their payrolls;
most of the new jobs will be in
professional, scientific and technical
services and in administrative support
and related services. The leisure and
hospitality sector is also expected to
gain roughly 6,000 jobs, mainly in
restaurants. Health care and social
assistance services will also add about
5,000 jobs. As housing markets begin
to cool, payroll gains in constructionrelated industries are expected to be far
less than recorded for last year.
Ahmad Ijaz
[email protected]
Second Quarter 2006 • Volume 5, Number 2
The rising level of economic well-being among Alabama’s
residents is boosting consumer spending, as reflected by growth
in sales tax receipts. Strong demand for the products produced
and services offered by firms across the state is also contributing
to the BLCI panelists’ optimistic outlook for sales in the second
quarter of 2006. Other industry components of the BLCI moved
up this quarter as well. Profit growth should be reflected in
increasing capital expenditures for structures and for equipment
and software as companies expand and strive to remain
competitive. Moreover, business leaders expect the pace of
hiring to pick up this quarter.
National Economic Outlook
Q2 2006 compared to Q1 2006
50
44.4
Percent
40
36.8
30
20
13.8
10
3.9
1.0
0
Much
Worse
Somewhat Remain Somewhat
Worse the Same Better
Much
Better
100
National Economy
59.1
Alabama Economy
64.2
Industry Sales
65.1
Industry Profits
60.0
Industry Hiring
58.9
80
60
61.5 59.7
54.0
59.3 61.4
40
Capital Expenditures 61.0
20
BLCI
0
Q2 Q3 Q4 Q1 Q2
2005
2006
61.4
Index above 50 indicates expansion.
increase from previous quarter
decrease from previous quarter
U.S. Economic Growth Holds Steady Alabama panelists were right on
target with their predictions for slow growth in the U.S. economy in the fourth
quarter of 2005 and for a rebound in the first quarter of 2006. GDP growth
surged to around 4.5 percent during the first quarter, following a meager
fourth quarter increase of 1.7 percent. Strong consumer spending, growth in
corporate profits and business investment, and job gains helped propel the
U.S. economy early in 2006. This momentum should carry over into the
second quarter, with rebounding economies overseas contributing to U.S.
export growth as well. At 59.1, the second quarter national economic outlook
component index is slightly above the first quarter consensus. About 48
percent of Alabama business leaders surveyed expect the U.S. economy to
improve during the quarter, while around 15 percent think it could weaken.
Concerns about interest rates, energy prices, and a cooling housing market
remain.
Momentum in Alabama’s Economy Continues to Build Propelled by
a strong transportation equipment manufacturing sector, including motor
vehicles, aerospace, and ships, and by growth in service industries,
Alabama’s economy expanded in the first quarter of 2006. Total nonagricultural employment in February 2006 was up 9,100 from January and
up 48,800 compared to a year ago. February’s unemployment rate of 3.6
percent was well below the nation’s 4.8 percent rate. Wages showed
robust increases as well, with a survey of 200 private firms across the
state by Birmingham human resources outsourcing firm Amsource finding
wage gains averaging 6.2 percent between March 2005 and March 2006.
Business leaders are optimistic about Alabama; the second quarter state
component index of 64.2 is up 1.5 points from the first quarter reading.
More than 59 percent expect Alabama’s economy to improve during the
quarter, while 34.5 percent anticipate a continuation of first quarter trends.
This marks the fourth consecutive quarter that panelists have expressed
greater confidence in the state than the national economy.
Alabama Economic Outlook
Q2 2006 compared to Q1 2006
60
55.1
50
40
Percent
60
THE OUTLOOK
Alabama
BLCI
Index
Alabama BLCI Forecasts Improvement Alabama business
leaders expressed growing confidence in the outlook for business
conditions in the second quarter of 2006. The Alabama Business
Leaders Confidence Index® (BLCI) came in at 61.4, up 2.1 points
from the first quarter reading and just shy of the 61.5 recorded
a year ago. A robust state economy and a strong outlook for
sales are the primary drivers of this optimism. Most sectors of
Alabama’s economy are stable or expanding and job growth is
spreading across much of the state. Workforce training initiatives
that will help provide the workers needed by new and expanding
businesses are offering opportunities to many Alabamians for
technical education and an improved standard of living.
34.5
30
20
10
6.0
0.3
0
Much
Worse
4.2
Somewhat Remain Somewhat Much
Worse the Same Better
Better
Center for Business and Economic Research, The University of Alabama
Q2 2006 compared to Q1 2006
49.4
50
Percent
40
30.0
30
20
14.1
10
4.4
2.1
No
Strong Moderate
Moderate Strong
Decrease Decrease Change Increase Increase
Q2 2006 compared to Q1 2006
60.3
60
50
40
30
20.6
20
11.0
6.8
10
1.3
0
Industry Profits
60
0
Industry Sales
Percent
Sales Outlook Strengthens The sales component index climbed 3.2
points to 65.1 this quarter. More than two-thirds of Alabama business
leaders expect sales in their industry to increase during the second
quarter of 2006, while only 12.3 percent forecast a decline. Job and
wage gains are boosting the disposable income of many Alabamians.
Sales tax revenues for the first quarter of 2006 were up 7.4 percent
compared to the same period in 2005. At the national level, the
Conference Board’s Consumer Confidence Index came in at 107.2 in
March for its highest level since May 2002, with consumers expressing
optimism about the next six months. Generally lean inventories as well
as order backlogs bode well for manufacturing sales. In particular,
strong first quarter sales were reported by Alabama’s automobile
manufacturers. Panelists in manufacturing, professional, scientific, and
technical services, wholesale trade, and transportation, information,
and public utilities (TIPU) indicated above average expectations for
second quarter sales growth.
No
Strong Moderate
Moderate Strong
Decrease Decrease Change Increase Increase
Corporate Profit Growth Supports Expansion At 60.0, the profits
component index is at the highest level of the last four quarters and 2.2
points above its first quarter 2006 value. Nationally, after-tax corporate
profits rose 34.5 percent in 2005, bolstered by continuing productivity
gains. Despite high prices for raw materials and energy, profits
continue to look strong early in 2006. In fact, with commodity prices
remaining high, firms may begin to gain pricing power. Almost 54
percent of Alabama business leaders responding to the second quarter
2006 survey expect profits in their industry to increase during the
quarter, although 16.2 percent forecast a decline. The upside for
profits could be highest in the construction and retail trade sectors,
while some weakening is likely in TIPU, and in the manufacturing and
finance, insurance, and real estate (FIRE) industries.
Industry Hiring Plans
60
Q2 2006 compared to Q1 2006
41.8
43.1
Percent
40
30
20
9.1
10
5.5
0.5
2
50
48.6
38.4
30
20
8.9
10
0.5
0
3.7
No
Strong Moderate
Moderate Strong
Decrease Decrease Change Increase Increase
Industry Capital Expenditures
50
0
Q2 2006 compared to Q1 2006
40
Percent
Pace of Hiring Expected to Pick Up About 42 percent of panelists
expect hiring in their industry to increase during the second quarter of
2006, compared to 37.2 percent last quarter. The differential between
the share of firms increasing and decreasing hiring rose markedly, from
24.1 percent in the first quarter to 32.6 percent in the second. At 58.9,
the second quarter hiring component index is the highest since the
fourth quarter of 2004 and is up 2.9 points from its first quarter value.
Alabama continues to add jobs across most industry sectors and the
state’s strong economy favors further gains in the near term. Over 55
percent of construction respondents expect to add jobs during the
second quarter of 2006, while more than 46 percent of panelists in
retail trade and in other services expect hiring to increase. After recent
gains, job growth among manufacturing companies is likely to
moderate.
60
No
Strong Moderate
Moderate Strong
Decrease Decrease Change Increase Increase
Profits and Capacity Utilization Driving Capital Investment Close
to half of Alabama business leaders forecast an increase in capital
spending in their industry during the second quarter of 2006. The
capital expenditures component index value of 61.0 is up 2.6 points
from the first quarter and stands at the highest level since the fourth
quarter of 2004. With capacity utilization across the United States
running ahead of its long-term norm and companies having substantial
amounts of undistributed profits, business fixed investment is beginning
to pick up. Business spending on equipment and software is also
increasing as firms invest to stay competitive. Alabama could see the
strongest capital investment in the construction, retail and wholesale
trade, and TIPU sectors. Panelists in FIRE and in professional,
scientific, and technical services expect investment to be more limited.
Center for Business and Economic Research, The University of Alabama
Alabama’s Aging Workforce Brings Concerns and
Opportunities The dynamics of the labor force are changing as
the sizeable post-World War II generation, known as the “baby
boom,” begins to retire. Members of this group are between the
ages of 42 and 60 today. With the next generation smaller in
number, businesses may find themselves facing skilled labor
shortages as well as a loss of institutional knowledge from
growing retirements. Companies are beginning to realize that
trends favoring early retirement are better replaced by policies
encouraging the maturing workforce to remain on the job longer
and then phase into retirement. Firms are also taking steps to
pass along the knowledge of these experienced workers to their
younger counterparts.
According to the Alabama Department of Industrial Relations,
22.3 percent of the state’s workforce was between the ages
of 45 and 54 in 2004, while 15.1 percent was 55 or older.
Alabama’s mining and utilities industries are currently facing
the biggest crunch, with more than half of their employees 45
and older in 2004. In contrast, about 31 percent of workers in
arts, entertainment, and recreation, and in retail trade were
aged 45 and over.
Panelists Face Aging Workforce Concerns BLCI panelists
will be variously affected by the aging baby boom generation.
About 21 percent of survey respondents are facing a significant
challenge in the near future with 30 percent or more of their
workforce already in the age 55 and over category. Nearly one
in five firms surveyed currently have 20 to 29 percent of workers
in this age group—above the 15.1 percent statewide average.
Planning for an aging workforce will be less urgent for the 29
percent of panelists’ firms where less than 10 percent of workers
have reached age 55.
Impact of Retirement on Your Company
Already a problem
5.5%
No impact
26.1%
Will be a significant
problem
18.0%
Planning for Older Worker Retention
Company working on a plan
18.5%
Company has a plan
17.0%
Don’t know
7.6%
No plan under
development
56.9%
accumulated skills and knowledge that can be leveraged to
improve their competitive edge. Effectively confronting both the
challenges and opportunities requires planning. Seventeen
percent of Alabama business leaders responding to the second
quarter 2006 BLCI survey report that their firm has a plan in
place to retain older workers, while 18.5 percent are working
on a plan. But that leaves 56.9 percent who are not currently
developing policies that will keep older workers on the job longer.
This lack of planning is evident among firms nationwide,
according to a number of recent surveys.
Aging Workforce Strategies Encompass a Range of Issues
Workforce studies conducted recently in several states by AARP
have found the issue of retaining skilled employees to be of
primary importance to firms. BLCI panelists who have or are
working on a plan to retain older workers are first focused on
strategies to provide a lower stress work environment that will
make it attractive to stay. Over 69 percent offer flexible work
hours as part of their plan; and 66.2 percent provide for part-time
work. (Note that respondents could mark multiple choices.) A
job sharing arrangement may be harder to coordinate and is
offered in 13.2 percent of older worker retention strategies.
Employees who do retire may be given the opportunity to come
back to work as a consultant or temporary in over 45 percent of
the plans.
Employers are increasingly noting the diverse work styles of baby
boomers versus the generations of their children and their
grandchildren. Mentoring programs pairing older and younger
(continued on back page)
Will be a minor
problem
50.4%
How to Retain Older Workers?
69.1
Flexible work hours
Looking at the impact of retirements on their company over the
next 10 years, almost three-fourths of respondents have or
expect to have at least a minor problem. For 5.5 percent of
firms, this problem is already here. Eighteen percent expect
retirements will cause a significant problem during this time
period, while more than half anticipate dealing with a minor
problem. Just over 26 percent feel that retirements will not
impact their firm.
Most Companies Not Yet Organizing to Retain Older Workers
The maturing workforce may present companies with the need to
implement strategies to keep employees on the job longer. But it
also gives firms the opportunity to capitalize on a wealth of
Part-time work
66.2
Mentoring younger workers
56.6
45.6
Hiring retirees as consultants/temps
Continuous skills training
30.9
Phased retirement
Incentives to delay retirement
Job sharing
28.7
25.7
13.2
0 10 20 30 40 50 60 70 80
Percent
Center for Business and Economic Research, The University of Alabama
3
(continued from page 3)
Alabama’s Metro Areas Are Engines of Growth BLCI
indices for Alabama’s four largest metro areas all forecast
expanding economies in the second quarter of 2006. Panelists
in Mobile have the most optimistic outlook, garnering an index
of 63.4, two points above the statewide average. The second
quarter Huntsville MSA index of 63.2 is up almost five points
from its first quarter value. Both Mobile and Huntsville reported
above average hiring expectations. National defense-related
activities may be contributing to strong expectations for growth
in sales and profits in Huntsville, while robust capital spending
is helping propel Mobile. In the Birmingham-Hoover and
Montgomery MSAs, expectations for capital spending growth
are among indicators below the statewide index value.
workers can serve to pass on valuable knowledge and skills,
while reducing tensions brought on by different approaches to
work. A sizeable 56.6 percent of companies represented by
second quarter BLCI panelists seek to capitalize on a
mentoring relationship in their older worker retention plans.
While fewer than a third of existing or proposed plans provide
continuous skills training, that emphasis may grow as
companies recognize the importance of maintaining and
upgrading skills to ensure a productive mature workforce.
Component Index by Area, Q2 2006
Q2 2006
Alabama
Change from Q1
Birmingham
MSA
Huntsville
Mobile
Montgomery
National Economy
59.1
0.2
57.7
59.7
61.8
62.5
Alabama Economy
64.2
1.5
61.8
68.8
67.0
67.9
Industry Sales
65.1
3.2
65.3
68.1
62.7
66.1
Industry Profits
60.0
2.2
60.7
63.2
60.4
56.6
Industry Hiring
58.9
2.9
59.2
61.1
62.3
54.8
Capital Expenditures
61.0
2.6
59.5
58.3
66.0
56.6
BLCI
61.4
2.1
60.7
63.2
63.4
60.7
Distribution of Alabama BLCI Panelists by Industry, Q2 2006
A Look Into the BLCI Almost 400
Alabama business leaders completed
the second quarter 2006 survey online
during the month of March. Panelists
came from all of the broad industry
groupings in the state, with the largest
contingents in the manufacturing,
finance and insurance, and
professional, technical, and business
services sectors.
Many thanks to all of our panel
members for making this survey a
useful and reliable indicator. Your
continued participation is very important.
Please join us in June for our Third
Quarter 2006 Survey.
0.3
Agriculture/Forestry/Fishing
1.3
Mining
Public Administration
3.1
Other Services
10.7
6.3
Health and Social Assistance Services
12.0
Professional/Scientific/Technical Services
13.1
Finance and Insurance
7.3
Real Estate
9.1
Transportation/Information/Public Utilities
7.8
Retail Trade
6.5
Wholesale Trade
7.0
Construction
15.4
Manufacturing
0
5
10
15
Percent of Panelists
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.
20
Selected Economic Indicators
United States
2004/Q3 2004/Q4
2005/Q1 2005/Q2 2005/Q3 2005/Q4 2006/Q1
Gross Domestic Product (billions)
Percent Change
10-Year Treasury Bond Rate
3-Month Treasury Bill Rate
Consumer Price Index
Inflation Rate
Housing Starts (millions)
Percent Change
Nonfarm Payrolls (millions)
Percent Change
Unemployment Rate
10,808.9
3.8
4.3
1.5
1.894
2.7
2.1
4.1
131.6
1.4
5.4
10,999.3
3.6
4.3
2.5
1.922
3.0
2.2
8.0
132.7
1.6
5.2
Alabama
2004/Q3 2004/Q4
Total Nonagricultural
Employment (thousands)
Percent Change
Manufacturing
Employment (thousands)
Percent Change
Durable Goods Manufacturing
Employment (thousands)
Percent Change
Nondurable Goods Manufacturing
Employment (thousands)
Percent Change
Wholesale Trade
Employment (thousands)
Percent Change
Retail Trade Employment (thousands)
Percent Change
Alabama Unemployment Rate
Initial Benefit Claims (thousands)
Manufacturing Weekly Hours
Total Tax Revenues (millions)
Percent Change
Total Income Tax Revenues (millions)
Percent Change
Total Sales Tax Revenues (millions)
Percent Change
10,897.1
3.8
4.2
2.0
1.911
3.3
2.1
-2.3
132.2
1.6
5.4
11,089.2
3.6
4.2
2.9
1.940
3.0
2.2
5.9
133.2
1.5
5.1
11,202.3
3.6
4.2
3.4
1.966
3.8
2.2
6.1
133.7
1.6
5.0
11,248.3 11,371.9
3.2
3.4
4.5
4.6
3.8
4.4
1.982
1.992
3.7
3.6
2.3
2.3
6.6
3.6
134.2
134.8
1.4
1.6
4.9
4.8
2005/Q1 2005/Q2 2005/Q3 2005/Q4 2006/Q1
1,905.9
1.9
1,923.9
1.9
1,913.0
2.1
1,933.6
1.6
1,929.1
1.2
1,952.2
1.5
1,950.2
1.9
292.3
0.3
293.6
1.4
293.3
2.2
297.1
2.1
296.5
1.4
298.1
1.5
301.6
2.8
168.9
3.3
170.2
3.7
170.8
3.9
173.9
3.7
173.7
2.9
176.6
3.8
182.6
6.9
123.5
-3.4
123.4
-1.7
122.5
-0.1
123.3
0.0
122.8
-0.6
121.5
-1.5
119.0
-2.9
78.2
1.7
230.8
0.8
5.6
23.0
39.3
1,617.0
8.1
653.1
1.9
427.9
8.5
78.5
1.2
237.1
0.7
5.4
21.7
40.6
1,761.5
16.2
727.0
13.0
436.3
2.7
78.4
2.1
233.0
1.4
5.2
22.2
41.5
1,929.9
9.9
800.3
11.1
445.6
7.8
79.8
2.1
234.6
1.4
4.2
18.6
40.6
2,150.8
13.7
1,088.8
16.3
467.7
7.1
80.1
2.4
234.1
1.4
4.2
23.2
40.2
1,780.0
10.1
766.7
17.4
457.2
6.8
80.3
2.3
239.3
0.9
3.7
17.8
41.3
1,903.1
8.0
764.0
5.1
494.7
13.4
79.6
1.6
232.6
-0.2
4.1
23.1
40.4
2,126.2
10.2
899.9
12.4
478.5
7.4
Note: All percent changes indicate change over the same period of the previous year.
Source: U.S. Bureau of Labor Statistics, U.S. Department of Commerce, Alabama Department of Industrial Relations,
Alabama Department of Revenue, and Center for Business and Economic Research, The University of Alabama.
Alabama Business is a quarterly publication of
the Center for Business and Economic Research,
Culverhouse College of Commerce, The
University of Alabama. 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.
All correspondence should be addressed to:
Editor, Alabama Business, Center for Business
and Economic Research, Box 870221,
Tuscaloosa, Alabama 35487-0221.
Copies of this publication as well as other socioeconomic data resources are available on the
Center website: http://cber.cba.ua.edu
Alabama Business
9
A Good First Step
for Alabama Tax
Reform: More Steps
Needed
for the top 40 percent. Figure 2 shows
that the state tax structure has become
more regressive over time; the poor pay
even more taxes as a share of their
income while the rich pay less. To some
people, this regressive nature has
provided the rationale for labeling the
state tax structure immoral.
Governor Bob Riley and the Alabama
legislature have taken a good first step
toward tax reform in the state. By
raising the threshold at which a lowincome family of four begins to pay
income taxes to $12,500, the Governor
and the legislature have taken a step
forward and made the state tax structure slightly less unfair and regressive.
Unlike the Bush tax cuts, which mainly
benefit the wealthy, this tax break is
praiseworthy in that it is designed to
help low-income taxpayers. However,
no mechanism was put in place to pay
for the tax break and that reduces
adequacy of tax revenues.
The Public Affairs Research Council of
Alabama (PARCA) has documented two
other problems with Alabama taxes—
that they are neither adequate nor
efficient. Tax revenues are adequate
when the state has enough money to
provide the optimal level of public
services such as public safety, schools
and quality education, public health,
and prisons. Proration is a consequence
of inadequate tax revenues.
Even with the new law, Alabama’s tax
structure remains disproportionately
burdensome to the poor because the
new threshold is still low. Families are
required to pay income tax on below
poverty level incomes. The U.S. Census
Bureau set the official poverty level for
a family of four with two children at
$19,806 in 2005. Alabama taxes are
also regressive because of the high
dependence on sales and excise taxes,
especially when applied to groceries.
The share of income that state and local
taxes constitute is highest for the state’s
poorest and drops quickly with rising
income so that those who can afford to
pay more actually pay much less (Figure
1). Our “graduated” income tax rate
schedule has essentially become a flat
tax because the rate does not adjust
over time with some index such as
inflation.
Alabama’s tax laws hit low- and middleincome families much harder than they
do the wealthy, and this is worsened as
the income gap widens. Figure 1 also
shows that even if the poorest 20
percent of non-elderly Alabama taxpayers paid no state income taxes at all
in 2002, sales and property taxes would
have made up a higher share of their
income than all state taxes constituted
10
Alabama Business
Tax structure efficiency has to do with
balance among revenue sources,
flexibility of revenue distribution and
use (the earmarking issue), and general
management of tax revenues to avoid
waste and promote best use. Flexibility
is an asset in decision making, but
earmarking can reduce that flexibility.
To improve the efficiency of the tax
system, the current high level of earmarking would have to be adjusted
downward. This will make the system
more flexible while allowing for some
earmarking. Reducing state government
waste increases efficiency and actions
have been taken in recent years to do
that.
Why Reform Is Needed. A regressive
tax system can make the state unattractive to some people and may be
partly responsible for Alabama’s low
population and labor force growth rates.
Such low growth rates can delay or limit
progress. A better balance among
sources of tax revenues and a more
flexible management of the revenues
will facilitate provision of public
services. Adequate tax revenues are
needed to provide the proper level of
public services. Newspapers frequently
give accounts of insufficient public
services such as underperforming
schools, not enough state troopers,
crowded prisons, and understaffed
forensic labs lacking state-of-the-art
equipment. One gets what one pays
for: so long as taxes are inadequate,
public services will continue to be
insufficient and suboptimal.
A well-functioning society consumes
optimal amounts of both private and
public goods and services. By shortchanging ourselves on the public end,
we waste or overspend on the private
end and our total consumption is
suboptimal. So we are all adversely
affected, directly or indirectly, when
the system is not functioning well.
Similarly, we all benefit, directly or
indirectly, when the system is doing
well; a rising tide lifts all boats.
A consequence of having underperforming schools is an inadequately
trained workforce. Workforce skills and
productivity are important to employers;
an ill-prepared workforce will slow
economic development. Having better
schools and providing better education
would provide high-quality workers and
could enable some people to participate
in and increase the state’s labor force.
This would grow the state economy and
increase revenues.
It is important to have private schools
in the mix of educational opportunities.
However, the problem of having underperforming public schools is not solved
by sending some children to private
schools. One has to wonder about the
quality of private schools that are
compared to underperforming public
schools. On the other hand, if public
schools provide good education, then
the quality of private schools would be
beyond question because they have to
be better.
History suggests a high likelihood that
the legislature will take a piecemeal
approach to addressing the regressivity,
adequacy, and efficiency problems with
the state tax system. A comprehensive
approach would be better for the state.
The 2003 attempt suggests that to be
successful, the package must be simpler
and all the stakeholders must be at one
table. We do not have to look far for
solutions. There are lots of ideas in two
reports of the early 1990s from the
Alabama Commission on Tax and Fiscal
Policy Reform (ACTFPR) and the Tax
Reform Task Force (TRTF).
Addressing Regressivity.
We need to create a fair tax
structure, one that considers
the taxpayer burden across
all revenue sources. Since
the federal income tax is
progressive, a flat state
tax structure might be
acceptable (although the
moral argument calls for a
progressive tax system).
As noted earlier, the new
income threshold is still low.
Perhaps the federal level,
together with its annual
adjustments can be adopted
and applied to all Alabama
taxpayers, not just lowincome earners. Without
indexed adjustments, the
tax structure will become
more regressive over time.
Other suggestions that
would help make the state
tax system fairer include
eliminating sales taxes on
groceries, abolishing the
federal tax deduction, and
designing and adopting
more progressive income
and property tax schedules.
Figure 1. Alabama State and Local Taxes in 2002
as Shares of Family Income for Non-Elderly Taxpayers
Source: Who Pays: A Distributional Analysis of the Tax Systems in All 50 States, Institute on Taxation and
Economic Policy (ITEP), January 2003.
Figure 2. Change in Tax Share of Income, 1989-2002
Addressing Inadequacy.
Since revenues are inadequate, taxes will have
to be raised. The TRTF
suggested raising the state
property tax rate from 6.5
Source: Institute on Taxation and Economic Policy, January 2003.
mills to 14 mills and tacking
on an extra 10 mills for
schools. These suggestions
taxpayers what they get in return for
attractive to live in Alabama. Compretackle both adequacy and efficiency to
paying taxes. This can be done with an
hensive tax reform will go a long way
some degree and have the potential to
annual report that is published on the
toward boosting economic development.
raise several hundred million dollars. A
Governor’s website and probably in
truly progressive income tax schedule
newspapers as well. Simplicity and
Samuel Addy, Ph.D.
that has higher than current rates for
transparency should be additional goals
[email protected]
higher income taxpayers and a high
of any tax reform because they facilitate
threshold would address both adequacy
efficiency. A transparent system will
and regressivity.
enable taxpayers to see when more or
less taxes are needed.
Addressing Inefficiency. Figure 1 also
shows that property taxes are clearly
Maintaining Momentum. Alabama
not in balance with income and sales
has made great strides in economic
taxes. A better balance requires raising
development in recent years. Maintainproperty taxes, which would partially
ing this momentum will require preaddress the adequacy issue as noted in
paring and growing our workforce. This
the preceding paragraph. The level of
means having a public education system
earmarking needs to be reduced. We
and offering public services that make it
also need to better communicate to
Alabama Business
11
cber.cba.ua.edu
alabama.business
The Center for
Business and
Economic Research
gratefully
acknowledges
the financial
support of
Compass Bank.
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