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alabama.business
Center for Business and Economic Research, Culverhouse College of Commerce, The University of Alabama
Volume 78, Number 2
Second Quarter 2009
Economic Outlook:
Second Quarter 2009
began in December 2007, 5.1
million jobs have been lost,
including almost 3.3 million in
just the last five months.
United States
The U.S. economy is expected
to see a continuing steep
decline through at least the
middle of the year—economic
growth is forecasted to drop
by 6.6 percent in the first
quarter of 2009 and by 3.0
percent in the second quarter.
For all of 2009 the economy
will contract by 3.5 percent,
with the unemployment rate
reaching 10 percent by yearend, if not earlier. The federal
government’s actions to
increase demand and revive lending to both
consumers and businesses through the fiscal
stimulus package and the financial system
bailout will take time to have an impact and
will definitely require more funds. There is,
however, a good probability that GDP will
bottom out by fourth quarter 2009, with CPI
inflation remaining in negative territory at least
through the end of the year.
Overview. April marked the 17th month of
the recession that began in December 2007,
already the longest since the Great Depression.
Real Gross Domestic Product (GDP), the total
output of goods and services, decreased at an
annual rate of 6.3 percent in the fourth quarter
of 2008, the steepest drop since the 1982
recession. The economy took the biggest hits
in exports, retail sales, business purchases of
equipment and software, and home construction and sales.
Consumer spending fell 4.3 percent during the
fourth quarter, with reductions in expenditures
on both durable and nondurable goods. Nonresidential business spending dropped 21.7
percent. Residential fixed spending, which
includes home construction and sales, declined
22.8 percent. Builders are also cutting
spending on commercial construction and
other major projects. The sharp decline in the
fourth quarter was only partially offset by an
increase in federal government spending.
Nonfarm payroll employment shrank by
663,000 in March, with losses spread across
almost every sector. The U.S. unemployment
rate increased to 8.5 percent, up from 8.1
percent in February; 13.2 million workers were
unemployed in March. Since the recession
Alabama Forecast Tables
Available Quarterly
The Center for Business and Economic
Research is now making its detailed forecast
tables of Alabama output and employment
by sector available quarterly. Table releases
in January, April, July, and October are
generated by the Center’s Alabama
Econometric Model based on current
economic conditions and expectations.
To order the second quarter 2009 forecast
tables and pay by credit card call
205.348.6191 or send a check for $30
payable to The University of Alabama to:
Center for Business and Economic Research,
Box 870221, Tuscaloosa, AL 35487-0221.
Consumer Spending. Consumers continue
to cut back under the weight of rising
unemployment, falling home values, and
shrinking investment and retirement accounts.
Falling demand has forced firms to slash both
production and jobs, which further depresses
expenditures made by both businesses and
consumers—the negative forces continue to
feed on each other in a vicious cycle that has
deepened the recession. The wealth of
American families fell by 18 percent in 2008,
with the loss of almost $13 trillion in assets,
including both financial and real estate
investments. This is more than the $12.1
trillion in personal income earned in 2008.
Household wealth declined by $5.1 trillion just
in the fourth quarter of 2008 alone. The
Conference Board’s consumer confidence
survey slid to 25.0 in February, its lowest level
since monthly data was first collected in 1967.
Consumer spending on all goods and services
fell by 4.3 percent in the fourth quarter. Total
spending is estimated to drop by slightly over
1.0 percent for 2009, the first annual decline
since 1980 and the largest since 1942.
Consumer expenditures for durable goods
declined by 22.1 percent in the fourth quarter
of 2008. Spending on motor vehicles dropped
from $442 billion in fourth quarter 2007 to
$334 billion in fourth quarter 2008, a decline
of 25.0 percent. Purchases of furniture and
other household equipment also fell sharply.
Consumer spending on durable goods is
forecasted to decline by approximately 6
percent in 2009. Expenditures on nondurable
goods, such as food, clothing and shoes, fell
9.4 percent in fourth quarter 2008. The food
category saw the sharpest decline, with a
decrease of $43.3 billion from the third to
the fourth quarter. For 2009 expenditures
on nondurable goods are expected to drop
by 2.5 percent.
Consumer spending should gradually start to
recover by the mid-2009, depending on credit
flow and stability in the financial sector.
Consumers should also benefit from lower oil
and gas prices, which could reduce their energy
bills by $170 to $180 billion, or approximately
$1,500 to $1,600 per household annually.
Tax cuts, credits, and other income support
payments should inject over $100 billion in
2009 and approximately $135 billion in 2010,
helping boost consumer spending.
Nonresidential Business Spending.
Nonresidential business spending includes
expenditures made on structures as well as
equipment and software. Total nonresidential
business spending dropped by 21.7 percent in
fourth quarter 2008—spending on structures
fell 9.4 percent, while purchases of equipment
and software declined 28.1 percent. For 2009
as a whole, expenditures on equipment and
software are expected to decrease by 17.0
percent. The rate of decline should slow
markedly from around 30 percent in the first
quarter to a projected 9.2 percent in the
second quarter, and to 3.9 percent in the third.
Spending on computers and peripherals fell
38.7 percent in fourth quarter 2008 and is
forecasted to decline by almost 45 percent
in the first quarter of 2009. Overall, nonresidential investment will contract 19 to
20 percent this year as the oversupply of
commercial real estate, together with extremely
tight lending conditions for commercial loans
and falling commercial real estate prices,
continues to dampen spending.
Housing starts will most
likely hit bottom by mid- to
third quarter 2009; however,
existing home sales and
home prices are not expected
to bottom out until 2010.
Lower mortgage rate are not
likelt to stimulate home
sales, primarily because of
extremely tight lending
standards—lenders are
requiring much higher down
payments than they did at
the housing market peak.
Housing Markets. Residential fixed investment, which includes both home construction
and sales, dropped 22.8 percent in fourth
quarter 2008, the 12th consecutive quarter of
the contraction that began in fourth quarter
2005. The decline in residential investment is
expected to slow from around 36 percent in
the first quarter of 2009 to 30 percent in the
second quarter and 16 percent in the third.
Conditions in the housing markets have not
been this bad since the 1930s.
Employment. The economy
shed 663,000 jobs in March
2009, bringing to 5.1 million
the number of jobs lost since
the start of the current recession and pushing
the unemployment rate up to 8.5 percent.
Over the past 12 months, the number of
unemployed has risen by 5.3 million while
the unemployment rate has gone up 3.4
percentage points; half of these increases
occurred in the last four months.
The S&P/Case-Shiller 20-city Home Price Index
showed prices dropping 19 percent in January,
the largest decrease since the index was started
in 2000. New home construction slid to its
lowest level since 1959, falling 16.8 percent
from December 2008 to an annual rate of
466,000. Declining demand for housing, tight
credit conditions, and the large number of
properties in foreclosure all contributed to the
drop. Home prices are down 25 percent from
their peak and will continue to fall as the
economy slides into a deeper recession and the
number of unemployed rises. Housing starts
in January 2009 were 56.2 percent below yearago levels, at an annual pace of 347,000 units.
Manufacturing employment fell by 161,000
in March, with losses spread across every
industry. The largest declines were in fabricated metals (28,000), machinery manufacturing (27,000), and transportation equipment
(26,000). Over the past six months, the manufacturing sector has lost about 1.0 million
jobs. Construction employment fell by
126,000 in March, bringing total payroll losses
in the sector to 1.3 million since its peak in
January 2007. Employment in professional and
business services dropped by 133,000 in March
—most of the job cuts were in temporary help
services (72,000), which have laid off 767,000
workers since the recession began in December
2007. Retail employment fell by 48,000 in
March; from a peak in November 2007 retailing
jobs have declined at an average rate of 44,000
a month. The leisure and hospitality industry
has shed 351,000 jobs since
December 2007; 40,000 jobs
were cut in March alone.
Building permits, housing starts, existing home
sales, and new home sales all rebounded in
February from January record lows, as buyers
took advantage of discounted prices and low
interest rates. The National Association of
Realtors’ Affordability Index reached a record
monthly high in February, indicating that
housing is more affordable now than it has
been since the index was first published in
1971. Moreover, the American Recovery and
Reinvestment Act of 2009 allows buyers to
take a tax credit worth up to $8,000 on a
home purchase, providing they have not owned
a home within the last three years. Prices are
expected to continue to fall throughout the
year, with thousands of homes tied up in the
foreclosure process and not yet on the market
for sale.
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.
2
Alabama Business
The unemployment rate is
likely to rise above 10 percent
before we see any recovery in
job markets. The U.S.
economy will have to be well
on its way to recovery before
businesses begin to hire
again. Total job losses are
now expected to climb to
around 7 million since the
November 2007 employment
peak before a rebound gets
underway.
Alabama
Employment. During the 12-month period
ending in February 2009, the state lost a total
of 76,200 jobs, amounting to 3.8 percent of
nonagricultural employment. Goods producing industries saw payroll losses totaling
43,400, while service providing businesses lost
32,800 jobs. Alabama’s unemployment rate
rose to 8.4 percent in February 2009; the last
time the state’s unemployment rate was this
high was in January 1987 when it was 8.5
percent.
Thirty-seven of the state’s 67 counties reported
unemployment rates of 10 percent or higher in
February. Large job losses in textiles pushed
unemployment in Chambers County to 13.2
percent, the highest in the state; unemployment was lowest in Shelby County in the
Birmingham-Hoover metro area at 6.1 percent.
Still, Alabama’s unemployment rate was below
that of its neighboring states in February:
Florida saw unemployment of 9.4 percent,
Georgia was at 9.3 percent, and Mississippi
and Tennessee were both at 9.1 percent.
Alabama Nonagricultural Employment
Change in Number of Jobs
February 2008 to
February 2009
Total Nonagricultural
Natural Resources and Mining
Construction
Manufacturing
Durable Goods
Wood Products
Primary and Fabricated Metals
Machinery
Computers and Electronic Products
Electrical Equipment, Appliances and Components
Transportation Equipment
Motor Vehicles
Motor Vehicle Parts
Aerospace Products and Parts
Furniture and Related Products
Nondurable Goods
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 Activities
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 Government Education
Source: Alabama Department of Industrial Relations.
Educational and healthcare services and
government were the bright spots over the last
year, adding 2,800 and 400 workers, respectively, since February 2008. In healthcare,
physician’s offices added 1,600 workers while
nursing and residential care facilities gained
800. Leisure and hospitality employment
was flat. Every other sector of the economy
experienced a decline in payrolls. The drop
in employment was particularly sizeable in
construction, manufacturing, and professional
and business services.
From February 2008 to February 2009, the
construction sector shed 16,700 jobs while
manufacturing lost 26,700. Surprisingly,
durable goods manufacturing, which is
relatively more capital intensive, let 17,100
workers go while nondurable goods manufacturers lost 9,600 jobs. Payroll losses were
-76,200
0
-16,700
-26,700
-17,100
-3,100
-1,800
-1,100
-700
-500
-4,000
-700
-2,200
600
-2,300
-9,600
-1,300
-2,800
-1,800
-1,900
-800
-800
-14,100
-6,100
-7,000
-1,000
-1,100
100
-200
200
-400
-16,500
2,800
0
100
1,000
-4,100
400
600
300
100
-500
-1,800
spread across every manufacturing industry. Industries
shedding the largest number
of workers included: textiles
and apparel (6,500), wood
products manufacturing
(3,100), furniture and related
products manufacturing
(2,300), transportation equipment manufacturing (4,000), and primary and fabricated
metals (1,800).
Transportation equipment manufacturing,
which includes motor vehicles and parts as
well as aerospace products and parts, is facing
some of the toughest economic conditions in
decades. The same factors that caused home
sales and prices to go through the roof, i.e.
cheap credit, easy financing, excessive production, and enticing deals, were also at the root
of the high volume of car sales experienced
during the early and mid-2000s. With U.S.
light vehicle sales plunging from close to 17
million units per year in 2005 to 13.1 million
in 2008 and likely less than 10 million in 2009,
motor vehicle manufacturing firms have had to
reassess their strategies and production.
General Motor’s sales dropped 44.5 percent in
March 2009 from year ago levels, Ford was
down 41.3 percent, and Chrysler sales slid
39.3 percent.
Among auto manufacturers with a presence in
Alabama, Hyundai fared the best on a year over
basis in March, with sales of 40,721 vehicles
down just 5.0 percent. Mercedes-Benz USI
sold 15,602 vehicles during the month, 25.0
percent below a year ago. Honda’s March
2008 U.S. sales volume of 79,374 was down
34.2 percent over the year. Toyota, which
builds engines in the state, saw sales drop
39.0 percent. Kia Motors America, which is
close to completing a plant just over the
Alabama line in Georgia, reported March sales
down just 0.5 percent at 24,724 units.
While Alabama’s motor vehicle and parts
manufacturers are facing the same challenges
as their counterparts in other states, to some
extent they are in a better strategic position for
a rebound, primarily due to their product mix
and to newer and relatively more efficient
plants. Despite that, given the current economic environment, these plants and their
Alabama Business
3
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alabama.business
suppliers are in the process of cutting
production and payrolls. From
February 2008 to February 2009,
employment in motor vehicle and parts
manufacturing in the state declined by
2,900 workers as the industry adjusted
to shrinking demand, both in the
United States and abroad. Transportation equipment manufacturers
remain the state’s largest exporters
with 36 percent of the 2008 total.
However, the global nature of the
current recession resulted in a decline
in Alabama’s transportation equipment
exports from $5.9 billion in 2007 to
approximately $5.7 billion in 2008,
a drop of 4.0 percent.
of the previous fiscal year. Individual
income tax revenues have declined by
3.0 percent ($49 million) to approximately $1.6 billion.
For the first six months of the current
fiscal year, appropriations to the Alabama Education Trust Fund decreased
by approximately $115 million (4.2
percent) to slightly over $2.6 billion.
Appropriations to the state’s General
Fund declined by approximately $182
million to around $798 million, a drop
of 18.6 percent.
Service providing businesses, which
until recently were adding to their payrolls, are
also in the process of shedding workers. From
February 2008 to February 2009, service
sectors that lost the most jobs included:
wholesale trade (6,100), retail trade (7,000),
transportation and warehousing (1,300),
information (1,100), professional and business
services (16,500), and other services (4,100).
The negative impact of the prolonged recession
on business profits is reflected in the steep
decline in professional and business services
employment over the last year—12,700 of the
sector’s losses have been in administrative
support and waste management and remediation services, with 8,300 of these jobs lost
since the start of 2009. The effects of declining consumer and business spending are particularly apparent in the wholesale and retail trade
sectors; most of the jobs lost in wholesale
trade fell to durable goods merchandisers, while
retail job losses were largely associated with
motor vehicle and parts dealers and general
merchandise stores.
Recent Socioeconomic Data
2008
Personal Income
Alabama
$156.8 bil
United States
$12,086.5 bil
Per Capita Income
Alabama
$33,643
United States
$39,751
Population
Alabama
4,661,900
United States
304,059,724
Building Permits
Alabama
Single-family
10,470
Multi-family
3,782
OFHEO House Price Index (Q4)
Alabama
United States
Change
from 2007
4.6%
3.9%
3.8%
2.9%
0.8%
0.9%
-44.5%
-45.2%
1.7%
-4.5%
Source: Bureau of Economic Analysis, U.S. Census
Bureau, Office of Federal Housing Oversight.
4
Alabama Business
From February 2008 to February 2009,
Alabama’s 27 metro area counties lost
approximately 36,000 jobs, or almost 2.4
percent of their total nonagricultural employment. Each of the 11 metros posted a decline.
Job losses were worse than the metro average
in Birmingham-Hoover, where a decline of
15,600 jobs amounted to 3.0 percent of the
total. Manufacturing-heavy Decatur sustained
the highest percentage loss over the past year,
with a decrease of 2,700 jobs amounting to 4.6
percent of the year-ago total. Job losses were
also above average in Dothan (-3.1 percent)
and the Montgomery metro area (-2.5 percent).
In percentage terms, the Mobile metro fared
the best, dropping 1.1 percent of wage and
salary jobs (-2,100) through February 2009.
Huntsville shed 4,000 jobs during the year
(-1.9 percent), including 2,600 jobs lost in
manufacturing. Unemployment in every metro
was up at least 3.0 percentage points in
February 2009 compared to a year ago.
The most pronounced effects of the ongoing
recession are being felt in Alabama’s 40 nonmetro counties. These areas absorbed more
than half of the state’s job losses over the year
ending in February—the 40,200 jobs that
disappeared amounted to 8.5 percent of all
payroll jobs in these counties. Layoffs in wood
products, textiles, and apparel manufacturing
have hit these areas particularly hard.
Tax Revenues. State tax revenues continue
to reflect the weakness in the economy. For
the first six months of the current fiscal year,
which ends in September, state tax revenues
totaled $4.2 billion, down 3.6 percent or about
$157 million from the first six months of the
previous fiscal year. Sales tax revenues were
down 8.8 percent (about $88 million) to
almost $913 million. At $211 million, corporate income tax receipts are 21.7 percent
($59 million) lower than in the first six months
Outlook. Alabama’s economy is
expected to continue to weaken at least
through the first half of 2009. Real
GDP is forecasted to decline by 1.0 to
2.0 percent for all of 2009. Payroll employment
will drop across every sector of the economy.
The number of nonagricultural jobs is now
expected to decline by 2.0 to 3.0 percent
during the year. The unemployment rate will
rise throughout 2009, with a possible peak at
year-end or in the first quarter of 2010; it will
be next year before we see any significant
improvement in payrolls.
The state is facing the same challenges as
the rest of the nation, despite the fact that
Alabama’s economy fell into recession much
later than the U.S. economy. Slowdowns in
both consumer spending and business
spending, together with tightened lending
conditions and a weak housing sector will
continue to negatively impact the state’s
economy throughout 2009. Manufacturing,
retail and wholesale trade, residential and
commercial construction, and professional and
business services will be particularly hurt by
the downturn.
Alabama’s at least $3.0 billion in fiscal
stimulus and stabilization funding allocated by
the American Recovery and Reinvestment Act
of 2009 should begin to gradually revive the
state’s economy by mid- to third quarter 2009.
The goal of the stimulus package is to provide
maximum boost to the economy in the short
run without damaging its long term growth
prospects. Major areas of funding include:
support for consumer spending through
personal tax cuts and transfer payments,
including depreciation allowances on new
business investments; increases in amounts
transferred to state and local governments to
prevent further cuts in their spending; and an
increase in infrastructure spending channeled
through the state.
Samuel Addy, Ph.D
[email protected]
Ahmad Ijaz
[email protected]