U.S. and Alabama Economic Outlook
July 2001
United States

Is the U.S. economic slowdown reaching a bottom? Or is the economy in a prolonged period of mediocrity? An equally compelling argument can be made for either case. On one hand, consumer spending is still on track, housing markets are still buoyant, most manufacturing inventories are being worked off, oil prices are declining, and the Fed has instituted six interest rate cuts. All are signs that the economy may be about to turn the corner, if not in the third quarter as many had expected, then maybe in the fourth quarter or in the first quarter of 2002. On the other hand, industrial production is still declining, the manufacturing sector is still in a recession with layoffs and plant closings increasing at an alarming rate, and the outlook for both corporate earnings and profits looks bleak.

Gross domestic product growth has averaged around 1 percent for the first half of 2001, compared to about 5 percent in the first half of 2000. In the second quarter of 2001, the economy grew at a less than 1 percent annualized rate, the lowest rate of growth in eight years. Investment spending on plants and equipment dropped by 13.6 percent and spending for computers and software dropped 14.5 percent. This was the largest drop in equipment and software spending by businesses since 1982 when the economy was mired in a deep recession. These business spending reductions have been one of the major catalysts for the current downturn. As of June 2001, new orders for telecommunications equipment, one of the fastest growing segments of the economy until last year, were down 61.0 percent from June 2000. The industrial production index declined 0.6 percent in June, with the manufacturing capacity utilization rate falling to 77.0 percent, a level not seen in 18 years. Weakness in manufacturing was also evident in durable goods orders, which fell 2.0 percent in June. There was a decreased demand for computers, automobiles, and other electronic equipment. Manufacturing lost almost 350,000 jobs in the second quarter of 2001.

There are still two bright spots in the economy—consumer spending and housing, although both are weakening gradually. Consumer spending, which accounts for almost 68 percent of GDP, grew by 2.1 percent during the second quarter, below the first quarter’s growth. One of the reasons consumer spending has remained strong, despite a loss of almost 800,000 jobs over the last 12 months, has been rising home values. With low mortgage rates, most consumers are opting to either refinance their homes or take out home equity loans, thereby giving themselves additional disposable income. Residential housing prices have increased almost 4 percent in each of the last two years, thus providing homeowners additional equity. Investment spending on single-unit structures continues to increase, as does investment in multi-unit structures. However, at some point, it is possible that both consumer spending and the housing sector will lose their momentum as employment losses continue.

 


Employment. After increasing in the first quarter of 2001, employment declined 0.5 percent in the second quarter. Although most job losses have been in manufacturing thus far, they are now spilling over to other sectors of the economy. Employment in manufacturing industries dropped by over 5 percent in the first half of 2001, with employment in durable goods leading the decline.

International Trade. Manufacturing firms continue to face weakened demand both in domestic and overseas markets due, to some extent, to a strong U.S. dollar. However, the strong dollar has also kept inflationary pressures at bay and continues to finance the $400 billion trade deficit by attracting capital from abroad. With Japan mired in recession and European economies contemplating recession, demand for U.S. manufactured goods is expected to remain weak. If the dollar weakens, that would raise inflationary pressures in U.S. markets, and could conceivably put other world economies in a much deeper recession, since the United States imports a significant portion of the goods and services produced in other countries.

Outlook. The national economy is expected to remain weak at least through the third quarter. We should see a mild recovery in the fourth quarter, although its signs might not be very clear until the first or second quarter of 2002. Employment is expected to increase 0.5 percent in 2001, following the 2.0 percent increase experienced in 2000. Even after the economy begins to recover, some sectors will continue to lose jobs. Consumer spending will slow down to around 1 percent in the third quarter of 2001, with the rate of growth picking up slightly to 2.0 percent in the fourth quarter.

The forecast for manufacturing does not look promising. Manufacturing employment is expected to decline by 3.3 percent in the third quarter followed by a 2.0 percent decline in the fourth quarter. It will be the second or third quarter of 2002 before employment in manufacturing firms shows signs of growth. Motor vehicle and parts manufacturers and telecommunications-related industries have suffered the sharpest employment declines; almost all manufacturing industries are expected to suffer job losses. As inventories level off and the effects of interest rate cuts become evident, both industrial production and capital investment on plant and equipment will begin recovering by the end of the year. But we don’t expect any significant increases in employment.

The unemployment rate will continue to rise as layoffs increase, reaching 5.0 percent by year’s end. Employment generally lags a rebound in the economy. For example, during the 1990-91 recession, even though the economic recovery began in April of 1991, employment in some sectors continued to decline.

 

Alabama

Employment. The slow economy is also being felt in Alabama. From June 2000 to June 2001, the state lost 14,500 jobs. Every sector of the state’s economy, except the services sector, suffered job losses, and manufacturing industries experienced the brunt. As of June 2001, manufacturing industries in the state had lost approximately 18,000 jobs. Most durable goods job losses were concentrated in lumber and wood products, primary and fabricated metals, and industrial machinery and equipment, with the industry groups losing 2,000, 4,100 and 2,300 jobs, respectively. Within nondurable goods manufacturing firms, textile mills lost 4,100 jobs and apparel manufacturers lost 1,700.

Conversely, there have been significant increases in trade-related jobs because most economic growth in recent years has depended on high levels of consumer spending. As a result, trade has been one of Alabama’s growing sectors. However, as consumer spending has gradually declined, employment in the state’s trade sector has also slowed down. The services sector, the fastest growing segment of the state’s economy, added 2,600 jobs from June 2000 to June 2001. Even that substantial number of jobs was fewer than the same time a year ago when the services sector added 9,800 net new jobs. As of June 2001, construction-related employment increased by 1,800 over the previous 12 months. During the same period last year, construction jobs had increased by 6,500.

Between June 2000 and June 2001, the only metro areas that experienced any gains in net new jobs were Birmingham and Huntsville, with 1,500 and 2,100 jobs, respectively. Even in these two metro areas, job growth has significantly slowed down compared to last year. Over the previous twelve-month period ending in June 2000, Birmingham and Huntsville had added 11,700 and 3,200 jobs, respectively. As of June 2001, almost all job growth in the Birmingham metro area was accounted for by services (800 jobs) and state and local government (1,700), while manufacturing lost 900 and trade lost 800 jobs. In the Huntsville metro area, the strongest job growth was experienced by the services sector (1,300) and, surprisingly, the trade sector (600 jobs), despite slowing consumer spending. Manufacturing firms lost 700 jobs.

 

Tax Revenues. Like many other states, Alabama is currently experiencing a shortfall in tax receipts as a consequence of the slowing economy. During the first three quarters of the current fiscal year, state tax revenues dropped $55 million, a decline of 1.2 percent over the same period of the previous fiscal year. While individual income tax revenues increased $4.3 million (less than one quarter of one percent), corporate income tax receipts dropped $58 million (an almost 30 percent decline). Signs of weakening consumer spending were also evident in sales tax receipts, which dropped $19 million, a 1.7 percent decline over the previous fiscal year.

Outlook. The outlook for Alabama calls for slow growth for the remainder of the year. The total gross state product is expected to increase by 1.1 percent, compared to around 3.7 percent growth last year. Employment will increase very little. The state will add about 5,700 net new jobs, a significant slowdown from last year when the state added close to 15,000 new jobs. Almost all job growth is expected to be in the services sector. Manufacturing is expected to lose another net 15,000 jobs. Trade-related businesses will add 1,500 new jobs, if the economy begins its recovery by the fourth quarter of 2001. Most job growth will be in the larger metro areas of the state; rural areas will continue to struggle with economic development and growth issues. Rural Alabama, faced with a sharp increase in job losses, particularly in textiles and apparel industries, is in desperate need of new economic development projects providing employment opportunities. As of June 2001, Alabama’s rural counties had lost almost 10,000 jobs over the last 12 months, with 15 rural counties now posting unemployment rates in double digits.

Ahmad Ijaz