Economic Outlook
October 2000

United States

The country's economy is not growing as fast as it had been; preliminary estimates of GDP show 2.7 percent growth for the third quarter of 2000. The average annual rate of the previous three quarters had been 6.2 percent. Consumer spending, which has been an important engine for growth during last couple of years, shows no signs of slowing down. Despite high energy prices, high interest rates, and high levels of consumer debt, consumers keep spending. If consumer spending has not lessened, what precipitated the slowdown in GDP growth during the third quarter?

• Final sales dropped, and inventories increased from $42 million to $1.3 billion.

• Residential investment declined sharply, despite the fact that mortgage rate are edging downwards.

• Government spending declined.

Gross State Product
Annual Percent Change
(1996 Dollars)


Source: U.S. Department of Commerce and Center for Business
       and Economic Research, The University of Alabama

Although consumer spending and employment don't show signs of slowing down, some parts of the economy are weakening. Manufacturing has been hit by higher energy and transportation costs, high value of the U.S. dollar, global competition, overcapacity, and layoffs in some firms. Even though consumers are buying big ticket items, some retailers are seeing lower earnings. Due to the competitive nature of retailing, most retailers have been unable to pass higher transportation costs along to consumers.  

Consumer Debt
As Percent of Total Disposable Income
(Percent)

Source: U.S. Department of Commerce.

The employment cost index, a major indicator for wage inflation, is up by 4.3 percent this years versus 3.1 percent last year. Nevertheless, because of increases in productivity, inflation does not seem to be a threat. As long as productivity outpaces the increases in wage costs, inflation does not have a major effect on the economy.

The forecast for the fourth quarter calls for growth in GDP of 3.8 percent, with final GDP growth of around 4.3. That should be just slightly above the GDP growth rate for 1999. The 2000 inflation rate is expected to be around 3.4 percent, a significant increase over last year's 2.2 percent. Consumer spending is expected to be slightly below last year's level.

The risks for an economic slowdown are higher energy prices, high levels of consumer debt, and a weakening manufacturing sector. Although a strong U.S. dollar is a risk for exporters and manufacturing firms, it does have the beneficial effect of keeping prices of imported goods low. Cheap imported goods keep domestic inflation levels low, but those cheap imports also keep the U.S. trade deficit high.

Alabama

From August 1999 to August 2000, Alabama added approximately 20,600 new nonagricultural jobs. During this period, the fastest growing segment of the state's economy was the services sector, which added 8,500 new jobs. Retail trade added 5,800 new jobs, and wholesale trade gained 900, for a total gain in trade-related jobs of 6,700. The number of new retail jobs has been significantly below the number added previously. This is a trend to watch because most of Alabama's current economic expansion has been driven by consumer spending. In 1999, and during the first quarter of 2000, almost 50 percent of new jobs in Alabama were in retail trade. This reliance on retail trade makes Alabama's economy very vulnerable to any slowdown in consumer spending.

Alabama Total Nonagricultural Employment
Annual Change in Number of Jobs
(Thousands)

Source: Alabama Department of Industrial Relations and
 Center for Business and Economic Research
The University of Alabama.

High fuel prices result in high transportation costs for goods that need to be shipped. Higher energy prices have the same effect as a tax on consumers, eroding their purchasing power. Nationally, consumer debt is approximately 22 percent of disposable personal income. High interest rates further add to the cost of borrowing or financing through consumer installment loans.

Between August 1999 and August 2000, Alabama's manufacturing sector lost approximately 4,600 jobs. Although most of the job losses were concentrated in nondurable goods producing industries, firms producing durable goods also suffered. Most of the lost jobs in durable goods industries were in lumber and wood products (-1,400 jobs) and primary metals (-1,100 jobs). There are two factors working against the manufacturing sector. The first is the high value of the U.S. dollar, which makes imported goods very inexpensive. Domestic producers find it hard to compete on pricing. The other factor is overcapacity in automobiles, steel, and other fabricated metals products. Domestic overcapacity makes it difficult for Alabama firms to raise prices and compete with cheaper imports.

Alabama Manufacturing Employment
Annual Change in Number of Jobs
(Thousands)
,

Source: Alabama Department of Industrial Relations and
 Center for Business and Economic Research
The University of Alabama.

The strongest job growth in Alabama is in services- related businesses. From August 1999 to August 2000, services-related industries added 8,500 jobs. Most were in small business and technology related services. Health care services actually lost 200 jobs during this period.

During 2000, nonagricultural employment is expected to increase by 1.1 percent, adding 27,000 new jobs. However, job growth could significantly slow down next year. In 2001 the state is forecasted to add not much more than 18,000 new jobs. Most are expected to be in services, retail trade, and state and local government. A significant slowdown is expected in retail trade job growth next year.

Personal Income and Gross State Product. Personal income growth in Alabama has not kept pace with the United States or with other southeastern states. From the fourth quarter 1999 to the fourth quarter 2000, personal income in Alabama will increase by 4.2 percent, compared to 6.6 percent expected for the United States, and 5.9 percent for southeastern states.

Selected Southeastern States

States in the southeastern region, in this case Alabama, Florida, Georgia, North Carolina, South Carolina, and Tennessee, together are expected to add approximately 622,100 new jobs in 2000, an increase of 2.9 percent over 1999. The combined states' gross state product is expected to increase by 4.1 percent. For 2000, Georgia's GSP is expected to be the fastest growing, increasing almost 5 percent, followed by Florida at 4.7 percent and North Carolina at 4.5 percent. South Carolina and Tennessee are expected to grow at 3.7 percent and 3.5 percent respectively.

Almost 37 percent, or 232,000, of new jobs being added in these six states by year-end 2000 are expected to be in Florida. Manufacturing accounts for only a small portion of Florida's economy, approximately 8 percent. Most of Florida's new jobs will be in the financial sector, tourism and other services, construction, or retail trade. Florida's services sector accounts for almost 32 percent of the total jobs to be added in all southeastern states combined. Georgia is expected to add about 127,000 new jobs, a 3.2 percent increase over 1999. Job growth in North Carolina will increase by 1.8 percent, adding approximately 70,500 new jobs. South Carolina will add 30,000 and Tennessee approximately 35,000 jobs, an annual increase of 1.6 percent and 1.3 percent respectively.

Exports account for almost 9 percent of the economies of South and North Carolina and Tennessee. Their exporting makes them more vulnerable than Georgia and Alabama to the downside of international markets. If the U.S. dollar remains strong, that strength could have a negative effect on Florida's economy because Florida relies heavily on international tourism. A strong dollar makes it more expensive for international tourists to visit the United States.

Ahmad Ijaz