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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
9
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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,
2
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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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
3
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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
4
Alabama Business
January 2008
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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]
Third Quarter 2007 • Volume 6, Number 3
The positive direction of the state’s economy is expected
to be the strongest contributor to growth during the
quarter. Alabama is continuing to attract large-scale
development projects, as well as other new industries
and expansions, and is beginning to see BRAC-related
relocations. Although sales remains the highest industry
indicator, panelists anticipate some slowing in sales
growth as consumers turn more cautious. Profits are also
expected to weaken, with rising wages and continued high
energy and material costs affecting gains. Hiring should
pick up slightly, while capital spending will be boosted by
nonresidential construction and by productivity-enhancing
investments.
National Economic Outlook
60
Q3 2007 compared to Q2 2007
50
Percent
42.7
40
31.7
30
23.7
20
10
1.3
0
0.6
Much Somewhat Remain Somewhat Much
Worse
Worse the Same Better
Better
Alabama
BLCI
THE OUTLOOK
100
National Economy
51.7
Alabama Economy
64.0
Industry Sales
59.6
Industry Profits
54.4
Industry Hiring
54.6
90
80
70
Index
Alabama’s BLCI Strengthens Panelists are feeling
more optimistic about the business environment in the
third quarter of 2007. The Alabama Business Leaders
Confidence Index® (BLCI) rose 0.8 points to 56.8 for the
highest reading of the last four quarters. Improved outlooks
for the national and state economies are largely responsible
for the BLCI gain. Each of these component indices moved
up 2.5 points on the third quarter forecast. Alabama business leaders remain much more upbeat about prospects
for the state’s economy; the gap between the U.S. and
Alabama outlooks is a substantial 12.3 points.
60
58.9
56.8
54.2 53.6 56.0
50
40
30
Capital Expenditures 56.7
20
BLCI
10
Index above 50 indicates expansion.
0
Q3 Q4
2006
Q1 Q2 Q3
2007
56.8
increase from previous quarter
decrease from previous quarter
Outlook for U.S. Economy Improves The outlook for the national
economy moved back into positive territory on the third quarter survey,
following two quarters with readings below 50 that indicated a mild
deterioration in economic conditions. At 51.7 the national economy
component index is up 2.5 points from last quarter and forecasts modest
growth. The 32.3 percent of panelists expecting U.S. economic
conditions to improve is above the 25 percent thinking conditions could
worsen. Forecasting group Global Insight anticipates third quarter GDP
growth of around 2.5 percent. Nationally, the housing sector is expected
to continue to decline, with its negative wealth effect impacting
consumers. But rising wages, low unemployment, and some moderation
in gas prices should help consumers pick up spending during the quarter.
An uptick in industrial production, strong export orders, and continued
strength in nonresidential construction will also contribute to GDP growth.
Lower core inflation is enabling the Federal Reserve to hold interest rates
steady at 5.25 percent.
Alabama Economic Outlook
Q3 2007 compared to Q2 2007
60
51.3
50
Percent
Expectations for Alabama Economy Continue to Rise The Alabama
component index climbed 2.5 points to 64.0 in the third quarter of 2007,
up more than 3 points from a year ago. Panelists are upbeat about the
direction of the state’s economy, with 58.3 percent forecasting improvement and only 8.8 percent thinking the economy could worsen during the
quarter. ThyssenKrupp AG’s May 2007 selection of a site near Mobile for
its $3.7 billion, 2,700-worker steelmaking complex is the latest major
industrial commitment. Higher U.S. spending for national defense and the
implementation of BRAC are among factors having a positive impact on
the economy. The state is continuing to add jobs, unemployment remains
about one percentage point below the U.S. rate, personal income is rising,
and home prices are holding up fairly well. BLCI panelists are also quite
aware of factors that could constrain growth and on a recent poll ranked
education quality and funding, workforce development and the lack of
qualified workers, and infrastructure/roads among the top five issues
facing the state in 2007.
40
32.9
30
20
8.5
10
0
7.0
0.3
Much Somewhat Remain Somewhat Much
Worse
Worse the Same Better
Better
THE UNIVERSITY OF ALABAMA
Industry Sales
60
Percent
50
40.1
40
36.0
30
19.6
20
10
2.5
1.9
0
Strong Moderate
No
Moderate Strong
Decrease Decrease Change Increase Increase
30
52.8
Percent
50
40
32.7
30
20
9.1
10
1.9
2
2.8
1.3
0
Strong Moderate
No
Moderate Strong
Decrease Decrease Change Increase Increase
Industry Hiring Plans
Q3 2007 compared to Q2 2007
60
53.9
50
40
28.2
30
20
13.2
10
1.6
0
3.1
Strong Moderate
No
Moderate Strong
Decrease Decrease Change Increase Increase
Q3 2007 compared to Q2 2007
60
0
13.5
10
Profit Growth Weakens While the component index for profits remains in
positive territory at 54.4, it is down 1.5 points from the second quarter of
2007 and 5.1 points compared to the third quarter of 2006. The 38.5
percent of survey participants forecasting an increase in industry profits
during the third quarter of 2007 is the lowest share in BLCI survey history.
Profits should increase modestly overall, as a lesser 21.5 percent foresee a
decline. Low unemployment and relatively weak productivity gains are
helping push up wage rates as firms try to attract and retain workers, while
energy and other material costs are also cutting into profits. Alabama
corporate tax receipts are up just one percent in the current fiscal year
compared to the same period last year and were down 11.8 percent in the
second quarter compared to a year ago. Expectations for profit gains are
weakest in healthcare, manufacturing, and FIRE and well above average in
TIPU and professional, scientific, and technical services.
Pace of Hiring to Pick Up Hiring has been steady in Alabama in recent
months, with about 11,000 nonfarm jobs added from April through May.
Most new jobs have been in service-providing industries, notably leisure
and hospitality businesses and administrative and support services. BLCI
panelists expect hiring to pick up slightly in the third quarter—the component
index value of 54.6 is 0.6 points above last quarter’s reading. While about
31 percent of survey respondents see hiring increasing compared to almost
15 percent forecasting a decrease, most anticipate no change in hiring
plans. Finding qualified workers was the foremost industry concern of
Alabama BLCI panelists on a recent survey, emphasizing the importance
of training to assure that the workforce does not constrain development
efforts. Hiring plans are most robust among firms in professional, scientific,
and technical services and in TIPU, while retail businesses expect a modest
reduction in workers and manufacturing, healthcare, and wholesale trade
firms anticipate slight gains.
Industry Capital Expenditures
33.7
20
Percent
60
48.7
40
Industry Profits
Q3 2007 compared to Q2 2007
Q3 2007 compared to Q2 2007
50
Percent
Forecast for Sales Off Slightly The sales component index registered
59.6 for the third quarter of 2007, down 0.7 points from the previous
quarter and 2.6 points from a year ago. Alabama business leaders
anticipate a cautious consumer; about a third of panelists expect sales
to be flat—the highest percentage in almost six years of survey results.
Overall, sales should pick up modestly, with 51.5 percent of respondents
forecasting an increase in sales during the third quarter and only 14.8
percent expecting a decrease. Alabama’s second quarter sales tax
receipts were up 3.8 percent compared to a year ago. Lower gas prices
and rising wages should help the consumer this quarter, while weakness
in the housing market could negatively impact sales. Manufacturing firms
are the least optimistic about sales prospects, and expectations in FIRE
are two points below the overall component index. Panelists in TIPU and
in professional, scientific, and technical services have the most positive
outlooks for sales in the third quarter.
3.5
Capital Spending Expected to Rise An increase in business investment
is forecasted for the third quarter of 2007. The capital expenditures
component index is up 1.5 points to 56.7 and the 11 percent of panelists
expecting capital spending in their industry to decrease is the lowest in
more than a year. Over 36 percent of respondents forecast increased
investment this quarter, while most anticipate no change. Low
unemployment and rising wages are leading firms to make productivity
improvements in order to grow. Private nonresidential building has been
supporting the construction industry—nationally spending was up 2.7
percent in May for the fourth straight monthly gain. In Alabama new and
expanding manufacturing and service firms as well as public sector
projects should keep business-related construction strong. Every industry
in the state is expecting to see moderate growth in capital expenditures.
Strong Moderate
No
Moderate Strong
Decrease Decrease Change Increase Increase
Center for Business and Economic Research, The University of Alabama
Areas of highest cost
Topical Question Series: Strategic Cost Management
(Percent of panelists ranking #1)
This quarter’s topical question series focuses on strategies and
tactics Alabama businesses use to manage costs. In today’s
global environment, the issue of costs has evolved from a shortterm focus on simply reducing spending toward a long-range
strategic vision that strives to create a true competitive
advantage.
Workforce Often Largest Investment About 69 percent of
panelists completing the topical questions on the third quarter
BLCI survey ranked benefits and salaries as their area of highest
cost, and almost 18 percent ranked it second. Analysts suggest
that as much as 80 percent of a company’s worth is tied to its
workforce, making recruiting, training, and retaining employees
an important emphasis. Materials and supplies are also a major
expense, with almost 19 percent of respondents ranking this as
their highest cost and 28.3 percent listing it second. Energy and
transportation is the largest expense category for about 10
Areas in which firms reduce costs when necessary
(Percent of panelists ranking #1)
Raises/bonuses/
benefits
Across the board
Travel/expense
accounts
People
Marketing
Stretch payables
0%
29.8%
24.2%
17.4%
12.1%
10.9%
4.9%
5%
10% 15% 20% 25% 30% 35%
Cost Management Strategies Receive Regular Review The
majority of Alabama firms responding to the third quarter 2007
survey review their cost management strategy on a regular basis.
Most (52.8 percent) find a monthly schedule best for evaluating
cost efficiencies in the context of their business model and for
cost-focused planning. Just over 20 percent of panelists’ firms
review costs and/or areas in which to cut costs more often than
monthly, while about the same percentage conduct this review on
a quarterly or annual basis. Just 6.3 percent report no regular
cost review.
How ingrained is cost management
in your business and strategy?
Very ingrained 40.7%
Not ingrained at all 1.1%
Not very ingrained 7.7%
Somewhat ingrained 21.4%
Benefits/
salaries
69.2%
Materials/
supplies
Energy/
transportation
Equipment
18.9%
10.1%
1.0%
0% 10% 20% 30% 40% 50% 60% 70% 80%
percent of businesses surveyed and ranked second for 22.0
percent. While few spend heavily on equipment, 18.5 percent
rate it as their category of second highest expense. Other
expenses ranked first or second include marketing and
advertising, interest costs, continuing education and training,
insurance, information technology, and occupancy.
Firms Try to Shelter Personnel and Marketing Budgets When
it is necessary to cut costs, most Alabama businesses surveyed
try to hold onto their employees—just 12.1 percent rank people as
the first place they look for cost savings and another 13.6 percent
rank it second, while about 32 percent indicate that they would not
consider personnel cuts. Firms are most likely to look at cuts in
raises, bonuses, or benefits, with 29.8 percent ranking this as the
first area they would consider and another 21.1 percent likely to
make this their second choice for savings. Almost a quarter of
companies surveyed try first to spread the pain of cost reductions
across the board, although about 46 percent of panelists would
not use this approach. Travel and expense accounts are another
target, with 38.2 percent of respondents ranking this as one of
their top two areas for cost cutting. Firms try to protect expenses
critical to income production, such as marketing. And few
Alabama companies are likely to stretch payables.
How often do you review costs?
Weekly 19.6%
No regular review 6.3%
Daily 0.7%
Annually 4.9%
Monthly 52.8%
Quarterly 15.7%
Culture of Cost Management Ingrained in Business Strategy
A comprehensive approach that is regularly monitored and
revised as needed is essential to effectively managing costs.
The majority of companies that responded to this quarter’s topical
questions are firmly vested in the process of cost management,
with 69.8 percent saying that it is very ingrained or ingrained in
their business and strategy. Another 21.4 percent indicated that
structured cost management is somewhat ingrained in their
business model. Only 8.8 percent replied that it is not very
ingrained or not ingrained at all.
Ingrained 29.1%
Center for Business and Economic Research, The University of Alabama
3
Alabama Firms Have Varied Strategies for Driving Out Costs
Many panelists responded to an open-ended question concerning
strategies used to productively drive costs out of their system.
Several identified better use of technology, implementation of
new technology, or automation as key directions. Communication
with and input from employees are noted as important aspects of
a cost management strategy. Consolidation of offices, tasks, or
processes can help drive out costs. Businesses look for
efficiencies, such as better plant flow, combining trips, or using
online training, that can result in cost savings. In the personnel
area, firms strive for fully utilized, productive employees who
understand the importance of their contribution; they may offer
education and training for their employees or work to retain
experienced personnel. Companies are looking for new and
better ways to get the job done and strive to be lean and to
eliminate redundancies. Regular review and rebidding of
contracts, tight inventory control, monitoring of the cost of goods,
and outsourcing to obtain a cheaper cost are among processes
used. Benchmarking, both against the best years of their own
company and against other firms in the industry, can help focus
the cost management strategy. Involving an outside facilitator in
the process enables a business to look objectively at costs.
Component Index by Area, Q3 2007
Q3 2007
National Economy
51.7
Alabama Economy
Industry Sales
Alabama
Change from Q2 2007
Birmingham
MSA
Huntsville
Mobile
Montgomery
2.5
50.9
55.6
53.8
48.7
64.0
2.5
60.6
66.9
73.8
60.9
59.6
-0.7
59.7
63.3
61.1
58.3
Industry Profits
54.4
-1.5
56.4
58.1
56.2
51.3
Industry Hiring
54.6
0.6
54.2
63.3
57.8
53.2
Capital Expenditures
56.7
1.5
57.7
57.8
59.6
55.8
BLCI
56.8
0.8
56.6
60.8
60.4
54.7
Alabama BLCI by Component and Area Expectations for the
national and Alabama economies both moved up 2.5 points on
the third quarter 2007 survey, bringing the national index back
into positive territory. The gap between these two component
indices remained a sizeable 12.3 points, with panelists much
more optimistic about prospects for the state’s economy this
quarter. All four industry variables continue to forecast moderate
improvement, although expectations for both sales and profits
decreased. Sales and capital spending should be the strongest
contributors to growth during the third quarter.
turning up. Although auto manufacturing-related and retail
development is ongoing, Montgomery area panelists are the least
optimistic and are particularly concerned about the course of the
national economy and about prospects for company profits.
65
64.0
State
60
Panelists in the Huntsville metro area tallied the most positive
business sentiment for the third quarter, with an area BLCI of
60.8 that was 4.0 points above the statewide number. National
defense-related activity, including BRAC developments are likely
contributing to Huntsville’s most optimistic outlooks for the
national economy and for industry sales, profits, and hiring
among the four largest metro areas. As they look ahead toward
work beginning on the massive ThyssenKrupp steel plant, Mobile
respondents are almost as upbeat, with a metro BLCI of 60.4 and
the most positive outlooks for both the Alabama economy and
capital expenditures.
Birmingham business leaders surveyed are feeling more positive
in the third quarter, with the metro area BLCI 1.8 points above
the second quarter reading and every component of the index
U.S. and Alabama Economies
National and State Expectations
70
55
National
50
51.7
45
Q1
Q2 Q3 Q4
2005
Q1 Q2 Q3 Q4
2006
Q1 Q2 Q3
2007
Thank you to the Alabama business leaders who completed
the third quarter 2007 BLCI survey. Please join us in
September for the fourth quarter 2007 survey at
www.blci.com/alabama.
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.
ab_q3_2007.qxp
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Page 5
Selected Economic Indicators
United States
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
Alabama
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
2005/Q4 2006/Q1
11,163.8
3.1
4.5
3.8
1.98
3.750
2.3
7.8
134.7
1.8
5.0
11,316.4
3.7
4.6
4.4
1.99
3.695
2.3
3.0
135.4
2.1
4.7
2005/Q4 2006/Q1
2006/Q2 2006/Q3 2006/Q4 2007/Q1 2007/Q2
11,388.1
3.5
5.1
4.7
2.02
3.987
2.0
-9.0
135.9
1.9
4.6
11,443.5
3.0
4.9
4.9
2.03
3.357
1.8
-18.8
136.4
1.7
4.7
11,513.0
3.1
4.6
4.9
2.02
1.950
1.7
-27.1
137.0
1.7
4.5
11,531.7 11,618.5
1.9
2.0
4.7
4.8
5.0
4.8
2.04
2.07
2.427
2.695
1.6
1.6
-31.7
-20.4
137.4
137.8
1.5
1.4
4.5
4.5
2006/Q2 2006/Q3 2006/Q4 2007/Q1
1,971.8
2.4
1,958.5
2.4
1,986.5
2.0
1,983.6
1.8
2,000.8
1.5
1,985.7
1.4
302.8
2.5
304.3
3.9
305.5
2.3
302.8
0.8
299.6
-1.0
300.3
-1.3
183.9
6.6
186.0
7.8
188.0
5.6
187.8
4.2
188.5
2.5
188.4
1.3
118.9
-3.3
118.3
-1.8
117.6
-2.6
115.0
-4.2
111.2
-6.5
111.9
-5.5
79.7
1.5
241.1
1.3
3.5
17.8
40.5
1,903.1
8.0
764.0
5.1
494.7
13.4
80.0
2.5
234.0
0.7
3.8
21.6
40.6
2,126.2
10.2
899.9
12.4
478.5
7.4
81.1
2.7
233.9
-0.4
3.4
17.8
41.4
2,365.9
10.0
1229.2
12.9
498.9
6.7
81.8
2.9
234.1
-0.3
3.8
20.0
41.2
1,963.7
10.3
854.9
11.5
496.5
8.6
82.3
3.3
241.1
0.0
3.4
21.7
40.6
2,029.2
6.6
879.7
15.2
503.3
1.7
82.5
3.1
235.4
0.6
3.7
26.0
40.1
2,206.5
3.8
932.5
3.6
496.1
3.7
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
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A Look into Alabama’s
Iron and Steel Industry
Brief Industry Overview
The iron and steel industry operates in a highly
cyclical and competitive environment, with
demand dependent on both global and national
economies. Iron and steel mills comprise
integrated producers that manufacture or buy
pig iron for processing in a basic oxygen
furnace and mini-mills which convert scrap
metal in an electric arc furnace (EAF).
Foundries make metal mold or die castings from
molten metal which are then subject to further
manufacturing. Capital requirements are very
high in the integrated mills and all mills are
greatly affected by commodity prices.
Technology has improved product quality and
enabled U.S. producers to cut the number of
man-hours required to produce a ton of steel
by as much as 90 percent over the last 25 to
30 years. Environmental regulations are also a
major focus and cost.
Alabama’s Steel Industry
Industry beginnings. The iron and steel
industry has a storied history in Alabama.
With ample supplies of iron ore, coal, and
limestone, north Alabama, particularly the
Birmingham area, was well-positioned to be a
center for iron and steel manufacturing. The
industry began to flourish around Birmingham
in the late 1800s, with southern investors and
northern bankers coming together to finance
the large capital investments required, while
northern and midwestern engineers provided
technological expertise. The largest blast
furnace complexes were owned by the
Tennessee Coal, Iron, and Railroad Company
and the Sloss-Sheffield Steel
Alabama Iron and Steel Industry 2006
and Iron Company. Industry
development brought new rail
Business sales
lines to Birmingham and
Employment
(millions)
enabled the rapid post-Civil
Iron and Steel Mills
4,760
$1,390
War growth that earned it the
Ferroalloy Manufacturers
285
$77
“Magic City” label and
Iron and Steel Foundries
5,460
$640
spawned the cities of
Bessemer and Fairfield. Cast
Total
10,505
$2,107
iron production flourished as
well, with the raw materials in Source: Dun & Bradstreet.
the area good for certain types
ease of transportation of scrap metal rather
of pipe—American Cast Iron Pipe Company
than on availability of basic raw materials.
(ACIPCO) was founded in Birmingham in 1905. Still, the earliest mini-mills were located in
Ultimately, however, the phosphorus content
the Birmingham area. Birmingham Steel was
of the iron supply limited the area’s ability to
incorporated by AEA Investors in 1983 and
produce high-quality steel products, although
began operation with the acquisition of
it was ideal for foundry pig iron, to the extent
Birmingham Bolt Company’s rebar and
that in 1940 Birmingham provided 40 percent
merchant product mini-mills. Nucor bought
of the U.S. supply. Early iron and steel
its Birmingham operations after bankruptcy
production also spread northeast to Gadsden,
in 2002; Nucor-Birmingham has capacity for
where Gulf States Steel began integrated steel
600,000 tons of carbon steel reinforcing bars
mill operations around 1904.
used in the construction industry annually.
Steel Mill Developments. The integrated
steel mill founded in 1886 by the Tennessee
Coal, Iron, and Railroad Company was acquired
by Pittsburgh-based U.S. Steel in 1909 and
continues operation today as U.S. SteelFairfield Works. It is the state’s largest iron
and steel mill with about 2,200 workers and a
capacity of 2.4 million tons of raw steel and
640,000 tons of seamless tubular products
annually. Gulf States Steel in Gadsden declared
bankruptcy and closed in August 2000, idling
about 1,700 employees. Despite local
attempts to restore some operations,
purchasers of the site dismantled the mill and
shipped the equipment to a buyer in China.
With the growing use of EAF technology to
produce steel in a mini-mill environment,
location of a plant became more dependent on
Also in 1983 CMC Steel Alabama became the
second steel mini-mill for the Commercial
Metals Group, producing structural steel
materials in Birmingham; the plant’s workforce
in 2006 numbered about 400.
Tuscaloosa Steel was created in 1984 as a joint
venture of Tippins, O’Neal Steel, ACIPCO, and
British Steel. British Steel (now Corus) became
the sole owner in 1991. Initially the plant
used imported steel slabs, but the addition
of an electric arc furnace in 1996 expanded
capabilities and boosted capacity to 0.8 million
tons annually. Corus Tuscaloosa was
purchased by Nucor Steel in July 2004 and
employed 345 in 2006. Trico Steel, a joint
venture of LTV, Corus, and Sumitomo Metals
Industries, constructed a $465 million plant in
Decatur that became operational in 1997, with
United States Iron and Steel Industry Statistics
(Million metric tons of metal)
Pig iron production
Steel production
Steel mill product shipments
Imports of steel mill products
Exports of steel mill products
Apparent steel consumption**
Producer price index for steel
mill products (1982=100)
Total employment
Iron and steel mills
Iron and steel foundries
Net import reliance***
2000
2001
2002
2003
2004
2005
2006*
% Change
2000-06
47.9
102.0
99.0
34.4
5.9
120
42.1
90.1
89.7
27.3
5.6
107
40.2
91.6
90.7
29.6
5.4
107
40.6
93.7
96.1
21.0
2.5
107
42.3
99.7
101.0
32.5
7.2
117
37.2
94.9
95.2
29.1
8.5
109
39.3
96.4
102.0
46.6
9.8
130
-18.0%
-5.5%
3.0%
35.5%
66.1%
8.3%
108.4
101.3
104.8
109.5
147.2
161.3
180.5
66.5%
151,000
125,000
18%
141,000
117,000
16%
124,000
116,000
15%
127,000
116,000
10%
123,000
116,000
14%
122,000
115,000
15%
122,000
115,000
21%
-19.2%
-8.0%
16.7%
* estimated.
** apparent steel consumption = steel mill product shipments + imports - exports - semifinished imports +/- stock changes.
*** as a percentage of apparent consumption.
Source: U.S. Geological Survey.
10
Alabama Business
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Page 7
300 employees and capacity of about 1.9
million tons of finished sheet steel per year.
However, Trico filed for bankruptcy four years
later and in 2002 Charlotte-based Nucor
purchased the assets for over $116 million.
Now Nucor Steel-Decatur LLC, the mill was
upgraded and employs more than 600. The
plant was named Alabama’s large Manufacturer
of the Year in 2007. Nucor also purchased the
adjacent former Worthington Industries cold
rolling mill in 2004. IPSCO’s $425 million
Mobile Steelworks mini-mill began production
in April 2001, making discrete plate and hot
rolled coil for machinery, rail car, ship, bridge,
and other industrial products; capacity is 1.25
million tons per year. IPSCO was recently
acquired by a Canadian subsidiary of Swedish
company SSAB.
Foundry Developments. Birmingham’s iron
and steel production continues to have a
strong foundry emphasis. American Cast Iron
Pipe maintains the headquarters it set up in
Birmingham in 1905 and employs about 2,400
at its steel pipe and ductile iron pipe
operations there. The 2,100 acre site with
almost 60 acres of plant is the world’s largest
iron pipe casting plant. U.S. Pipe’s Bessemer
operation, founded as the Howard-Harrison
Iron Company in 1889, is one of the original
plants acquired by the company incorporated
in 1899 as the United States Cast Iron Pipe
and Foundry Company. U.S. Pipe was acquired
by Jim Walter Corporation in 1969. The
Bessemer plant employed over 300 in 2006.
Another 200 employees work at the company’s
Anniston plant. Jim Walter was renamed
Walter Industries in 1988; a subsidiary, Mueller
Water Products, operates a plant employing
around 600 in Albertville manufacturing fire
hydrants. Birmingham’s Sloss Industries, with
its roots dating from 1882, also falls under the
Walter umbrella and produced 400,000 tons of
furnace and foundry coke in 2006.
The Birmingham-based McWane Corporation
was incorporated as McWane Cast Iron Pipe in
1921 by former
American Cast Iron
Pipe Company
president, J. R.
McWane. The
company’s cast
iron pipe
operations in
Birmingham
employed about
300 in 2006.
M and H Valve
Company, with
cast iron valve
operations in
Anniston since
1925, was acquired
by McWane in the
1980s and employed almost 440 in 2006. Also headquartered in Birmingham, Citation began
operation in 1974 with the purchase of Jones
Foundry Company in Bessemer. Through
acquisition, Citation also has metal components foundries in Brewton, Marion, and
Columbiana and employs more than 1,200
at its Alabama foundry operations.
Looking to the Future. Although Alabama is
not among the largest iron and steel producing
states, the industry is a significant part of the
state’s economy. In 2006 Alabama’s iron and
steel industry had sales totaling more than
$2.1 billion from approximately 47 iron and
steel mill operations, four ferroalloy manufacturers, and around 37 foundries. About 18
plants in the state that purchase iron and steel
to manufacture pipes and tubes, rolled steel
shapes, and steel wire provide a market for
some of the iron and steel. Largest among
these companies are Hanna Steel, Southland
Tube, and Tubular Products. Alabama’s
industrial consumer base for steel products has
grown markedly over the last decade with the
state’s burgeoning auto industry and a strong
commercial construction sector. The National
Alabama Corporation railcar manufacturing
plant to be built in the Florence-Muscle Shoals
area will also be a heavy consumer of steel.
The state’s solid base in the industry has
helped attract new iron and steel producing
companies and expansions of existing firms.
Current development includes ongoing
construction of Nucor’s $167 million sheet
steel galvanizing facility in Decatur. With
capacity for about 500,000 tons annually, the
plant will employ about 100 at completion in
mid-2008 and utilize another 100 contract
workers. In May 2007 U.S. Pipe announced
that it will invest $45 million in a new, stateof-the art ductile iron pipe plant adjacent to its
existing facility in Bessemer. The operation
could be online early in 2009 with close to 100
jobs; it is the first new ductile iron pipe plant
built in the United States in over 55 years.
Alabama’s steel pipe production capacity will
expand with construction of a Berg Spiral Pipe
Corporation plant in Mobile. A venture of
Panama City-based Berg Steel Pipe, the $75
million facility will employ more than 100
making spiral pipe used by the oil and gas
industry. The state’s growing steel industry is
bringing a related business to Millport in Lamar
County—Steel Dust Recycling expects to
recycle 110,000 tons per year of steel mill
dust. The plant should be operational in the
second quarter of 2008 and employ 40.
Alabama’s iron and steel industry will see
significant expansion with the state’s most
recent economic development recruitment
success—the massive $3.7 billion plant to be
built by German steelmaker ThyssenKrupp AG
in northern Mobile County. Slated for
completion in 2010 with employment of
2,700, the plant will manufacture and process
carbon and stainless steel for high-end
manufacturers, including the automotive,
construction, utility, appliance, and machinery
manufacturing industries. Steel slabs will be
imported for further processing from a
ThyssenKrupp plant under construction in
Brazil. The Alabama plant is expected to have
a capacity of 4.1 million tons of carbon steel
products annually. Location of the plant in the
United States gives a boost to the country’s
steel industry outlook—until recently industry
analysts had thought a project of this
magnitude unlikely for the foreseeable future.
Carolyn Trent
[email protected]
(Visit cber.cba.ua.edu for an accompanying summary
of the U.S. and global iron and steel industries.)
World Production of Iron
and Steel 2006
(Million metric tons of metal, estimated)
Pig
Iron
Raw
Steel
United States
Brazil
China
France
Germany
Italy
Japan
Republic of Korea
Russia
Ukraine
United Kingdom
Other countries
39
35
380
14
29
12
83
28
52
32
10
144
96
32
420
20
45
29
114
48
70
40
14
272
World Total
858
1,200
Source: U.S. Geological Survey, Mineral
Commodity Summaries.
Alabama Business
11
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cber.cba.ua.edu
alabama.business
The Center for
What’s your perspective
on business?
Business and
Every quarter the Alabama Business Leaders Confidence Index®
(BLCI) sums up the views of business leaders across the state to
provide a unique perspective on the latest business trends.
Economic Research
gratefully
We’d like your perspective, too. Just visit www.blci.com/alabama/
to register as a BLCI survey panelist. It only takes a few minutes.
You’ll be notified by email when the next survey opens. As a
panelist, you’ll also receive an exclusive preview of survey results
before they’re released to the general public.
acknowledges
the financial
The BLCI is a collaborative effort between Compass Bank and The
University of Alabama’s Center for Business and Economic Research
to provide local and relevant information to Alabama businesses.
Your participation will help make the BLCI an even better economic
resource. Please join today!
support of
Compass Bank.
The University of Alabama
Center for Business and Economic Research
Box 870221
Tuscaloosa, Alabama 35487-0221
Nonprofit Organization
U.S. Postage Paid
Tuscaloosa, AL 35401
Permit No. 16
Address service requested.
THE UNIVERSITY OF
Alabama Business is sponsored in part by
Compass On Business, a partnership between
Compass Bank and The University of Alabama.
ALABAMA
CENTER FOR BUSINESS &
ECONOMIC RESEARCH