Is there a recession looming on the horizon for the U.S. economy, or is the Federal Reserve going to achieve a soft landing? Although some economic statistics point to a rapid deterioration—manu- facturing employment is declining and consumer spending is decreasing—on the other hand, services-related businesses continue to add jobs. In the fourth quarter of 2000, the U.S. economy grew by 1.4 percent, significantly below the 8.3 percent growth experienced in the fourth quarter of 1999. Compared to recent years, the U.S. economy will have slower growth, albeit still positive, during the first half of 2001. In the second half of 2001, the effects of interest rate cuts exercised by the Fed should begin to show up, curtailing the economy from spinning into a full-blown recession. The sectors showing significant weakness include manufacturing; consumer spending on big-ticket, interest-sensitive items like automobiles; and investment spending by businesses.
Manufacturing. During the second half of 2000, both industrial production and employment in manufacturing firms declined steadily, mainly due to inventory overhang and a sharp slowdown in domestic demand. From July 2000 to December 2000, manufacturing industries lost almost 250,000 jobs, a decline of 1.6 percent. The National Association of Purchasing Managers (NAPM) index has indicated for the last five months conditions very close to a recession in the manufacturing sector. The index fell to 43.7 in December; a reading of 42.5 to 42.8 is typically seen during recessions. Almost all basic industries, including steel, lumber, autos, machinery manufacturing, paper, and chemicals are showing weakness. A slowdown in these basic industries is also causing a slowdown in major Asian economies and the economies of other U.S. trading partners and affecting the markets for exports from the United States. The United States not only exports to these countries, but many intermediate products used in manufacturing are imported from these countries. Because of this slowdown in both domestic and international demand, manufacturing activity is not expected to improve in 2001. Manufacturing employment is expected to drop further, and industrial production is expected to increase only modestly.
Consumer Spending. After showing historically high readings during the two previous years, the index of consumer confidence fell sharply in December 2000 and again in January 2001. The drop in January was the largest single-month drop since the 1990-91 recession. Consumer spending, accounting for almost two-thirds of the U.S. economy and increasing at an average annual rate of 5.1 percent during the last three years, was up only around 3 percent in the fourth quarter. It is expected to increase by a 1.6 percent annualized rate in the first quarter of 2001. The most significant drop was experienced in consumer spending on durable goods. Expenditures on new automobiles declined by 20 percent in 2000Q4 and are expected to decline by 15 and 12 percent, respectively, during the first two quarters of 2001. Overall, consumer expenditures are expected to increase by 2.5 percent in 2001, but most of that spending will be on nondurable items and services. Household spending has been hurt by a fall in stock market valuations, higher energy prices, a significant increase in layoffs, and a slowdown in job growth.
Investment Spending. Together with consumer spending, investment spending also fell sharply in the fourth quarter of 2000. Growth in gross private domestic investment dropped from 13.4 percent in the first half of 2000 to a loss of 1 percent during the second half. Overall increases in investment spending are expected to slow from 10.5 percent in 2000 to approximately 3 percent in 2001. Capital spending in particular depends on future demand prospects. If the demand for products is expected to slow, businesses curtail future investments and depend mainly on current investments and inventories. Investment growth in equipment and software is expected to drop from 14.5 percent in 2000 to around 7 percent in 2000. Corporate spending increases on information processing equipment are expected to slow from over 25 percent in 2000 to 13.5 percent in 2001. Despite a decline in mortgage rates in recent months, single-unit housing sales will drop in 2001.
There are still some bright spots in the economy. Services-related businesses continue to add jobs, albeit at a slower pace than last year. And mortgage rates, presently around 7 percent, continue to drop gradually, thereby fueling an increase in mortgage refinancing. Mortgage refinancings in December 2000 and January 2001 surpassed the historic volumes of 1998 when the mortgage rate was slightly below 7 percent. Refinancing strengthens consumer balance sheets, adding to a homeowner’s disposable income. With high levels of consumer debt, any relief offered by lower mortgage payments could bolster consumers’ confidence in the economy. Interest rates on 3-month treasury bills are expected to average around 5.5 percent, while 30-year, long term treasury bonds are expected to average 5.6 percent.
Overall national economic growth is expected to be around 2.7 percent in 2001, significantly below the 5.0 percent rate in 2000 and 1999’s 4.2 percent rate. The unemployment rate is expected to increase from 4.0 percent in 2000 to 4.6 percent in 2001. The inflation rate is expected to average 2.5 percent in 2001, compared to last year’s 3.4 percent.
Employment. In 2001 Alabama’s employment will increase only 0.6 percent, with the unemployment rate inching up close to 5.0 percent during the first two quarters of 2001. The unemployment rate will probably decline to 4.8 percent by the year’s end. From December 1999 to December 2000, employment in Alabama increased a net of 1,400 jobs. Services-producing industries added 10,400 jobs, (“services-producing industries” include not only the services sector, but also government, trade, finance, real estate, transportation, communications, and utilities) while goods-producing businesses (mining, construction, manufacturing) lost jobs. Job losses in mining cancelled job gains in construction. Manufacturing industries lost 9,000 jobs—6,300 in durable goods and 2,700 in nondurable goods. Most lost job were concentrated in basic steel production, industrial machinery and equipment, and apparel and other textile products. Contributing factors included higher energy costs, global competition, overcapacity, a strong U.S. dollar, and a generally slowing economy. The tepid manufacturing climate is expected to continue through the year. During 2001 employment in the state’s manufacturing industries is expected to decline a little over 2 percent. Another 11,000 jobs will be lost.
However, the services sector in the state continues to add jobs. From December 1999 to December 2000, these businesses added 6,800 new jobs, and are expected to add about 5,500 net new jobs in 2001. The slowdown in consumer spending in the second half of 2000 was obvious in retail trade employment. From December 1999 to December 2000, retailing firms added 600 new jobs, significantly below the 8,000 jobs added during the same period the previous year. The outlook for employment in retailing is not expected to change much in 2001. Any increase in new jobs will probably not materialize until the fourth quarter of 2001. However, retailers could gain some relief if mortgage refinancing continues to be popular, thereby adding to consumers’ disposable income.
Tax Revenues. A slowdown in the state economy is very visible in tax revenue collections. During the first quarter of FY2000-2001, total state tax revenues increased by 0.6 percent, significantly below the 5.5 percent increase during the first quarter of last fiscal year. For the first quarter of FY2000-2001, individual income tax collections increased 2.7 percent, versus 8.4 percent the previous year. Corporate income tax receipts declined 42.2 percent, following a 37 percent decline the previous year. Slower consumer spending was also very much evident in sales tax collections. During the fourth quarter of 2000, sales tax revenues declined 0.7 percent. For the same period the previous year, sales taxes had increased 2.2 percent.
For the current fiscal year, total tax revenues are expected to increase 3.4 percent. Income tax revenues will increase 4.3 percent and sales tax revenues are forecasted to increase 2.5 percent.