Current Economic Conditions and Outlook:
May 2001

United States

During the second half of 2000, we saw the economic slowdown coming. High energy prices, overcapacity and global competition in manufacturing, an inverted yield curve, high consumer debt, and declining stock prices were all screaming that the economic boom was over. It was the magnitude and the speed of the downturn that surprised both businesses and policy makers.

In CBER’s previous economic summary (January 2001), our forecast called for the U.S. economy to begin recovering by the second half of 2001. Unfortunately, that is no longer the outlook. A surge in manufacturing layoffs, deteriorating consumer confidence, higher energy prices, and other price increases are expected to keep economic growth at anemic levels at least through the third quarter of 2001. The weakest link, and probably a major cause of the economic slowdown, has been a significant decline in investment and capital spending, mainly due to deteriorating corporate profits and lack of demand.

At the end of 2000, corporate profits in manufacturing were down by 60 percent and profits for other nonfinancial firms were down 42 percent over the same period during the previous year. In March of this year, net new payroll employment declined by 86,000, pushing the national unemployment rate up to 4.3 percent. The inflation rate increased 4 percent in the first quarter of 2001 over the same period in 2000. Even the core consumer price index, which excludes food and energy prices due to their volatility, increased by 3.5 percent. In our opinion, these factors are red flags for consumer sentiment and confidence.

The effects of the Federal Reserve’s interest rate cuts in the first four months of 2001 will not be seen until late in the year. Corporate profits are still declining and increasing layoffs are having adverse effects on consumer confidence. There are no high expectations for consumer spending in the near future, even though further interest rate cuts are anticipated. Current employment conditions and future prospects of employment have a much greater short-term impact on consumer behavior than a reduction (or increase) in interest rates.

However, not all news is bad. Despite increased layoffs in manufacturing and some services businesses and a slowdown in new job creation, consumer spending on housing and automobiles held steady in the first quarter of 2001. The U.S. economic growth rate for the first quarter was 2.0 percent because of strong consumer spending levels. Gross domestic product (GDP) is expected to increase over the remaining three quarters, for a yearend growth rate of 1.7 percent. This is not as strong as the 5-plus percent growth experienced in 2000, but it is not negative growth.

Consumer Expenditures. Consumer purchases account for almost two-thirds of the U.S. economy. Consumer spending, mostly on durable goods, is expected to drop during the second quarter. Yet durable goods manufacturers are not the only ones who will be affected. Consumer purchases of nondurable goods and services, including food and energy, are also forecasted to drop in 2001. Spending on services such as transportation, housing and household operations, and medical care is not expected to decrease significantly. Even though consumers will be holding on to their wallets more tightly in 2001 than in 2000, overall consumer expenditures are expected to increase, not decrease. Total consumer spending is forecasted to increase by 2.4 percent for the remainder of this year.

Despite a drop in consumer spending, consumer debt levels are not expected to change much. At least through the end of this year, people will keep about 22 percent of their total disposable income tied up in consumer debt payments. Although consumers may not be going further into debt to boost current consumption, they could be using their credit to make purchases after being laid off or to service their previous debt. If consumers are faced with increased layoffs, tighter job prospects, higher energy prices, or high debt levels, they will continue to cut back on buying new things, at least through the next two quarters.

Investment Spending. We expect growth in gross private domestic spending to drop from its 10.5 percent increase in 2000 to a 1.2 percent decline in 2001. Capital, or investment, spending depends on future demand prospects, and it is expected to remain tepid in 2001, judging by current economic conditions. Businesses spent heavily on computer equipment and software in 2000, primarily because of uncertainties associated with "Y2K" programming changes from 1999 to 2000. But most businesses have yet to realize the full benefits associated with those purchases, including the productivity enhancements they were anticipating. They don’t expect to make the same kinds of capital investments in 2001 that they did in the last couple of years.

Another complicating factor for computer manufacturers is that because of the demise of numerous "dot.coms" there is a significant amount of almost new equipment on the market. Firms planning to upgrade their hardware and software can purchase it slightly used without spending nearly as much. In the first quarter of 2001, technology-related spending declined by 6.1 percent. This is certainly a change from the 31.4 percent annualized rate of growth in 2000.

Overall Outlook for 2001. Job layoffs will continue, particularly among manufacturers. The unemployment rate will increase throughout 2001. By the end of 2001, manufacturing businesses are expected to lose approximately 400,000 jobs; almost 300,000 will be in durable goods industries. The strongest sector will be services-related businesses, which will gain almost 700,000 new jobs. Throughout all its sectors, the U.S. economy is expected to create almost 800,000 new jobs in 2001, significantly below the 2.6 million net new jobs created in 2000. However, with an effective monetary policy, the economy should see signs of improvement by the end of 2001.


Alabama

Employment. As with the national economy, Alabama’s economy has slowed down significantly compared to last year. From March 2000 to March 2001, employment in Alabama increased a net of 4,600 jobs, compared to a gain of 37,700 jobs for the period from March 1999 to March 2000. There is an important perspective to these numbers. Between March 2000 and March 2001, approximately 14,000 jobs were gained in five of the state’s metropolitan areas. The only metro areas that had a net gain in jobs during this period were Birmingham (4,700); Decatur (800); Huntsville (3,400); Mobile (3,900); and Montgomery (1,200). For the state overall to have had a net gain of only 4,600 jobs, the remaining six metro areas and the nonmetro counties had to have a combined net loss of 9,400 jobs. The remaining metro areas had net job losses of almost 6,000 and the nonmetro counties lost 3,400 jobs. As of March 2001, the unemployment rate for Alabama had increased to 5.4 percent, versus 4.2 percent in March 2000.

Statewide, services producing industries added 13,600 jobs. (Services producing industries include the services sector, government, trade, finance, insurance, real estate, transportation, communications, and utilities.) Goods producing sectors (including mining, construction, and manufacturing) lost 9,000 net jobs. Manufacturing industries, accounting for almost 18 percent of the state’s total nonagricultural employment, lost 10,500 jobs from March 2000 to March 2001. Most of the jobs lost in manufacturing were in industries producing durable goods, primarily steel and lumber products, which lost 1,400 and 2,400 jobs, respectively. The manufacturing sector in the state is expected to remain weak through the year because of falling demand in both domestic and overseas markets.

Consumer spending was strong during the last two years, and retailing was one of the fastest growing sectors in the state. However, there has been a marked decline in retail spending in recent months. Retailers added about 4,300 jobs from March 2000 to March 2001, compared to 10,300 jobs added from March 1999 to March 2000. Among retailing businesses, apparel and accessory stores are experi- encing the most weakness. Mortgage refinancing has added some dollars every month to the pocketbooks of Alabama homeowners, but most of that extra disposable income is probably going to pay down credit card debt rather than being spent on new consumer goods.

The services sector is also experiencing some weakness. Service businesses continue to add jobs, although fewer than last year. Even though the services sector in the state is not growing as fast as last year, it is still the fastest growing segment of the state’s economy. From March 2000 to March 2001, there were almost 9,000 more service workers in Alabama than in the previous year.

After seeing substantial growth in recent years, the state’s construction sector is showing some weaknesses. From March 2000 to March 2001, construction-related businesses added about 2,000 net new jobs. The Birmingham and Mobile metro areas accounted for almost 95 percent of those jobs.s

Tax Revenues. The State of Alabama is experiencing considerable weakness in its tax receipts. During the first half of the current fiscal year (October 2000 to March 2001), total state tax revenues dropped 3.5 percent, compared to a gain of 8.1 percent during the same period for the previous fiscal year. In the first half of the fiscal year, individual income tax receipts increased by 1.9 percent, compared to a 7.9 percent increase experienced in the first half of the previous fiscal year. Corporate income taxes dropped 37.1 percent, versus a decline of 33 percent last fiscal year. Sales tax revenues, an important gauge of consumer spending, declined by 2.1 percent in the first half of the current fiscal year.



 


Outlook for 2001. The outlook for Alabama calls for slow growth for the remainder of the year. The total gross state product is expected to grow by about 1.5 percent in 2001, compared to 3.7 percent last year. For the year as a whole, there will be approximately 11,000 new jobs in nonagricultural industries. Most of these jobs, about 9,000, will be in services. Manufacturing industries will lose approximately 10,500 jobs, while retailing will add about 2,000 new jobs. The state’s overall economic growth is expected to remain tepid through the remainder of the year. The strongest sectors of the economy, services and retailing, are concentrated in Alabama’s metropolitan areas. Not surprisingly, the metro areas are economically out-performing the non-metro counties and will continue to do so.

Ahmad Ijaz