EconSouth (Fourth Quarter 2002)

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REGIONAL FOCUS


Southeastern Economy Still Feeling Recession’s Effects

The Southeastern economy continued to outperform the nation’s as the economic recovery gained traction in 2002. But the negative effects of the 2001–02 recession will continue to be felt in some areas of the Southeast, reflecting the region’s widely varied industry mix.

| Alabama | Florida | Georgia | Louisiana | Mississippi | Tennessee |

Alabama

Alabama’s economic performance depends largely on demand for its manufactured products. Although in 2002 the state’s manufacturing sector improved on 2001’s weak results, the return to growth has been sluggish. Manufacturing employment continued to decline throughout the year, and the sector remains under considerable pressure, especially the beleaguered apparel industry. A combination of continued weakness in manufacturing and lackluster employment gains in the state’s typically healthy service sector resulted in an overall disappointing performance in 2002. As in other areas of the Southeast, in Alabama, residential construction remained robust throughout 2002, but commercial and industrial markets weakened.

For 2003, a cyclically led improvement in the state’s manufacturing sector, continued vigor in residential real estate markets and a step-up in service industries should ensure that Alabama’s overall economic performance is positive in 2003.

Alabama Manufacturing Employment
Alabama Manufacturing Employment Chart
Source: Calculated by the Federal Reserve Bank of Atlanta using monthly Bureau of Labor Statistics data (not seasonally adjusted) provided by Regional Financial Associates. Data for 2002 are through the third quarter.

Manufacturing cycles toward upturn
The manufacturing sector, which accounts for approximately 18 percent of the state’s nonagricultural employment, lost almost 10,000 jobs from September 2001 to September 2002. This result, though disappointing, was less troubling than the loss of more than 20,000 jobs in 2001. Continued overcapacity in some industries and weaker demand in both domestic and international markets were behind most of the state’s manufacturing troubles in 2002.

Among the state’s durable goods producers, employment losses in the lumber and wood, electronic equipment, fabricated metals and machinery industries were partially offset by employment gains of more than 10 percent among producers of transportation equipment. This increase was related primarily to expansions in the state’s important vehicle production industry. In the nondurables sector, employment in Alabama’s large textile industry was relatively stable during 2002, and the industry likely ended the year with payrolls about even with 2001 levels. In the paper industry, payrolls have been relatively stable since the spring of 2002. The decline in the labor-intensive apparel industry continued unabated in 2002, with the loss of some 3,000 apparel jobs between September 2001 and September 2002 matching the decline over the previous 12 months.

The performance of the state’s manufacturing sector is likely to improve in 2003, but the gains may be modest overall. Demand for the nondomestic makes and models of vehicles produced in Alabama has grown steadily, and expansion in vehicle production will continue to boost the state’s economy. The state’s primary metals industry may receive help if activity in the nations’ energy extraction sector picks up and new drilling investments are made. Steel producers will continue to benefit from tariff protection, but metal fabricators will continue to suffer as a result of the higher prices. The state’s lumber and wood-products industry is not likely to receive much of a boost from residential construction activity in 2003, and the apparel industry is likely to experience more job losses as companies shut down or shift operations offshore.

Problems in Alabama’s high-tech manufacturing industries have persisted. Many high-tech equipment producers and service providers cut staff levels in 2002. This reduction was especially evident in the Huntsville area. Looking ahead, a sustained rebound in these industries will depend on a recovery in business investment although solid defense-related orders in 2003 should benefit some firms.

The state’s auto assembly industry is booming. Mercedes-Benz will use its Tuscaloosa County plant to build a new hybrid vehicle — a combination station wagon–touring car. Production there is scheduled to begin in 2004. Mercedes-Benz plans to double production capacity at this facility to 160,000 vehicles per year by the end of 2003. Investment in this effort will total $600 million, and total employment at the plant will more than double to 4,000. Hyundai plans to build a $1 billion plant near Montgomery that will employ 2,000 people plus numerous parts suppliers. Honda Motor Co. will add to payrolls at its Lincoln plant when it introduces a new assembly line in 2003 to increase production of the popular Odyssey minivan.

Regional Focus Callout

Residential building bolsters real estate
Alabama accounts for about 6 percent of the single-family housing permits issued in the Southeast. In 2002 permit growth across the state rose nearly 20 percent through the first three quarters compared to the same period in 2001. Similar strength was evident in the multifamily sector. Residential construction should remain solid in 2003, but renewed job growth will be an important factor in determining the overall vitality of the state’s residential real estate markets.

Nonresidential construction was weak in 2002, reflecting oversupply in some office markets and weak manufacturing activity. The rebound many analysts have predicted in business investment should help limit ongoing softness in industrial construction in the state, as will the planned development and expansion of several auto-producing plants. In addition, few office construction projects will come on line in the near term, and this abatement should boost absorption rates in the office market in the state as economic conditions improve.

Services step up
Employment in Alabama’s service sector, which encompasses activities such as hotels, help supply, data processing and health care, contracted about 0.2 percent from the third quarter of 2001 through the third quarter of 2002 following an increase of 1.4 percent in the previous 12 months. Health care and related services employment increased in line with national trends, but other service industries saw employment levels decline.

Looking ahead to 2003, business services associated with the vehicle production industry should grow in tandem with the state’s expanding transportation equipment industry. Also, the health care industry is likely to continue to grow in line with national trends. Employment growth in other industries will depend on the pace of overall economic activity. The continued preference of leisure travelers to drive rather than fly to tourist destinations could boost areas like vacation destinations along the Gulf Coast.

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Florida

Employment in the Sunshine State for most of 2002 nearly matched year-earlier levels. For the 12 months from September 2001 to September 2002, Florida’s payrolls were up by about 0.3 percent compared with a 0.5 percent decline for the Southeast and a 0.8 percent decline for the nation as a whole for the same period. The state’s resorts and theme parks struggled to remain profitable in 2002 in the face of lower attendance, and as a result they trimmed operations and reduced staffing levels. Residential construction activity in the state led the region during 2002 as migration into the state continued to generate ample demand for single- and multifamily housing. But nonresidential construction has pulled back further in areas of the state that are struggling with excess office and hotel space.

Florida’s heavy reliance on business and leisure travel played an important role in lowering the state’s overall economic performance in 2002, and although prospects are encouraging for 2003, the recovery could be more moderate than usual.

Manufacturing has modest expectations
Although manufacturing employment makes up only about 6 percent of the state’s total employment, the more than 400,000 factory workers in Florida account for almost 20 percent of the Southeast’s total manufacturing jobs. From September 2001 to September 2002, the state’s manufacturing employment declined by a little over 4 percent. This drop is about the same rate as the nation’s as a whole and slightly better than 2001’s performance. Weak demand for goods caused job losses in both durable goods industries, such as general electronic equipment, information technology and industrial machinery, and nondurable goods industries, such as apparel and paper. In contrast, some local lumber and wood-products manufacturers added to payrolls, riding on the strength of the state’s residential housing markets.

Florida’s manufacturing sector will most likely see only modest growth in 2003. With residential building activity already at strong levels, there is little room for expansion in the lumber and building-products industry. Growth in Florida’s recreational boat production could slow further if consumers continue to pull back spending on luxury items. An improvement in the printing and publishing industry, with around 35 percent of the state’s nondurable manufacturing jobs, will depend on a strengthening in print media advertising. Although U.S. Department of Defense contracts will stimulate some factory production, especially in central Florida, continuing weakness in the high-tech sector may hamper a rebound in the electronic equipment industry. In addition, subdued capital spending plans are likely to hold back industrial machinery production in the state. In the nondurable sector, the paper industry will continue to struggle with overcapacity, and the state’s apparel industry will face ongoing competition from imports.

Florida Services Employment
Florida Services Employment Chart
Source: Calculated by the Federal Reserve Bank of Atlanta using monthly Bureau of Labor Statistics data (not seasonally adjusted) provided by Regional Financial Associates. Data for 2002 are through the third quarter.

Real estate sends mixed messages
Florida accounts for almost half the total housing permits issued in the Southeast. The state’s housing market experienced another strong year in 2002, underpinned by low interest rates and rapid in-migration. Many locations in the state during 2002 were described as seller’s markets, and home prices escalated because of supply shortages. During the third quarter of 2002, housing permits were about even with 2001 levels in Jacksonville and up modestly in Orlando. Somewhat stronger growth was experienced in Miami, Pensacola and Tampa. Demand should remain solid in Florida markets in 2003.

Multifamily housing permits in Florida, which account for nearly two-thirds of permit activity in the Southeast, got off to a slow start in 2002 but picked up noticeably as the year progressed. In the third quarter, permit issuance in the state was up about 12 percent from a year earlier compared to an almost 13 percent increase for the Southeast as a whole. The outlook for 2003 is mixed. Continued in-migration to the state will spur demand, but growth related to hotel expansion is likely to moderate substantially.

Nonresidential construction was negative for all of 2002 although the rate of decline moderated in the third quarter. Office markets suffered from weak demand and low levels of absorption as evidenced in the high third-quarter vacancy rates of almost 19 percent in Jacksonville, 14 percent in Miami, 15 percent in Orlando and 17 percent in Palm Beach. The increased availability of sublease space added to the already high vacancy rates and served to lower both rental rates and construction activity even further. Industrial markets fared somewhat better in 2002. In the third quarter, availability rates were about 8 percent for Jacksonville and Miami, 11 percent in Orlando and 5 percent in Palm Beach.

The outlook for nonresidential construction in 2003 is subdued. With considerable office space to absorb and hotel occupancy rates at lower than normal levels, most nonresidential construction will likely be in the retail and government sectors.

Services steam ahead
Growth in Florida’s large miscellaneous service sector slowed in both 2001 and 2002 after rising strongly through much of the 1990s. But in 2002 service employment improved gradually from 2001 levels, and in third quarter 2002 employment levels were about 1 percent higher than 12 months earlier. The miscellaneous service sector accounts for nearly 38 percent of all jobs in Florida, so sluggishness in this sector can have a significant impact in the state. Business services such as computer and personnel services grew by an anemic 2 percent from September 2001 to September 2002 while employment in recreation and amusement industries and at hotels and motels declined.

Through September 2002, the state registered 12 percent fewer automobiles than in 2001, reflecting substantial fleet reductions by car rental companies in the face of reduced air travel into the state. Tourism officials have been trying to capitalize on reduced air travel by aggressively marketing Florida as a drive-to destination instead. The state’s large health services industry, which employs some 630,000 people, posted steady employment growth of over 3 percent in 2002.

Florida’s service sector should pick up steam in 2003, especially the components related to tourism and recreation. However, the pace of the recovery will depend on consumer attitudes toward travel. Gradual improvement in business spending will boost Florida’s large business services industry while employment in the state’s health care sector will likely continue to grow at a faster rate than the nation’s because of the state’s large senior population.

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Picture of Now Hiring Sign

Employment Trends Reflect Diversity of Southeast Economy

Overall employment levels in the Southeast declined in 2002 as economic activity in the region remained sluggish. Job losses for the six states in the region tracked the pattern for the nation as a whole although the regional average job decline of around 0.7 percent was not as large as the drop in overall U.S. employment.

Every state in the region shed manufacturing jobs while employment gains in services decelerated markedly in 2002. Job losses were the most severe in Georgia, which saw an average employment decline of more than 2 percent during the year. Weakness in business service employment drove Georgia’s overall job level down although construction and manufacturing also lost jobs.

Employment levels in Florida, the region’s leading job-creating state over the past five years, displayed little growth in 2002. Weakness in amusement and recreation services employment was offset somewhat by gains in health service payrolls. Louisiana’s employment level was also flat for the year as factory job losses were offset by modest gains in services and stability in the oil and gas industry.

Led by continued reductions in manufacturing employment, Alabama’s payrolls fell by 1 percent in 2002, similar to the pace in 2001. Employment losses also continued in Tennessee and Mississippi in 2002 but at a slower pace than the previous year. Again, manufacturing job losses were largely responsible for the overall decline, but these states’ service sectors have displayed considerable resilience.


Total Nonfarm Employment in the Southeast and the United States
Total Nonfarm Employment Chart
Source: Calculated by the Federal Reserve Bank of Atlanta using annual Bureau of Labor Statistics data provided by Regional Financial Associates. 2002 data calculated with October 2001 and October 2002 data.

Georgia

The economic downturn of 2001 had a disproportionately large effect on Georgia’s economy, and the ramifications of this slowdown are still being felt as the state begins to recover. The Atlanta metropolitan area, which accounts for some 55 percent of employment in the state, was particularly affected by the downturn. As the home of over 70 percent of the state’s transportation, business and communication service jobs, Atlanta felt the brunt of heavy cuts in leisure travel and business spending as well as ongoing problems in the telecommunications industry. Atlanta experienced a 2.6 percent decline in payroll employment between September 2001 and September 2002.

But for the areas of Georgia outside Atlanta, the situation has been less severe, with September payrolls at about the same level as a year earlier. On a positive note, the situation in Atlanta since early 2002 has been relatively stable. The outlook for Georgia’s economy in 2003 will depend significantly on the prospects of a turnaround in Atlanta’s economy, and that recovery is likely to be muted.

Manufacturing sees challenges ahead
Although factories in Georgia did register a decline in employment during 2002, the percentage decline was less than that in 2001 and also considerably less than in the nation as a whole. Between September 2000 and September 2001, manufacturing employment in Georgia fell by about 6.5 percent. Georgia’s manufacturing employment fell by another 1.3 percent between September 2001 and September 2002 compared with an almost 5 percent decline nationally. Both the durable and nondurable sectors posted lower payrolls in Georgia. In the durable goods sector, the heaviest job losses were concentrated in the industrial machinery and high-tech industries, as firms cut back on equipment purchases, and in the lumber/sawmill industry, where stiff competition from imported lumber has kept prices very low. The pace of the decline in the nondurable sector has slowed notably from 2001 although layoffs continued unabated in the apparel and paper industries.

Georgia’s manufacturing sector faces many challenges for 2003. The apparel industry will likely continue to trim employment rolls in the face of cheaper imports. Slowing housing markets could adversely affect industries tied to the construction sector, such as the lumber and carpet industries. Similarly, a slowing in auto sales, especially domestic brands, may affect local assembly plants, and the ongoing presence of underutilized capacity will impede high-tech equipment producers.

More positively, for the nine months through September 2002, Georgia firms were awarded over $5 billion in new U.S. Department of Defense contracts. In addition, the U.S. Senate approved continued funding for the F/A-22 Raptor jet fighters to be produced in Marietta. Current plans call for the Air Force to receive 339 planes and to activate its first squadron in late 2005. So far 13 jets have been built, and the total program is estimated to cost about $67 billion. Also, DaimlerChrysler announced potential plans to build a plant near Savannah to manufacture large vans; the plant could employ over 3,000 workers and create many additional support jobs.

Georgia Services Employment
Georgia Services Employment Chart
Source: Calculated by the Federal Reserve Bank of Atlanta using monthly Bureau of Labor Statistics data (not seasonally adjusted) provided by Regional Financial Associates. Data for 2002 are through the third quarter.

Real estate keyed to housing
Housing is a major industry in Georgia, with the state accounting for almost 30 percent of the Southeast’s single-family residential housing permits issued over the past year. Despite substantial job losses in Atlanta, the important metro market moderated only slightly over the year. The most notable softness was evidenced in the high-end housing segment. Building activity remained robust in Atlanta, with permit issuance during the third quarter of 2002 about 14 percent higher than a year earlier and above the 11 percent pace of the Southeast as a whole. Similar strong growth was experienced in Macon and Savannah while permit issuance in Albany declined from year-earlier levels. A gradually improving employment situation will help support residential housing markets in Georgia in 2003.

Multifamily building permits in Georgia, which account for about a quarter of multifamily permits in the Southeast, have been modest through most of 2002 and weaker than in the rest of the Southeast. Apartment vacancy rates remained elevated in most areas, and price concessions have been prevalent. Without a sharp turnaround in job creation in the state, the outlook for multifamily construction is likely to be subdued.

Following the pattern for the Southeast, nonresidential construction was lower in 2002 in the face of low absorption and high vacancy rates. Weakness was especially pronounced in Atlanta’s office and industrial markets. The Atlanta office vacancy rate rose to around 20 percent in the third quarter of 2002, and industrial vacancy rates were close to 15 percent. The fall of the dot-com and telecommunication industries hit Atlanta especially hard, and it may take some time for the available office space to be absorbed. As a consequence, nonresidential construction activity will likely remain subdued in 2003.

Services feel the squeeze
Employment in the miscellaneous service sector in Georgia declined by about 1.5 percent between the third quarter of 2001 and thethird quarter of 2002 after having posted growth of close to 1 percent over the prior 12 months. The large business service sector, which includes advertising, personnel supply, data processing and the like, was hit especially hard (down by almost 7 percent over the year) as many companies trimmed payroll because of cuts in business spending and problems in the high-tech industry. The health care sector was one of the few stabilizing factors in Georgia during 2002, with some 10,000 medical jobs added over the past year.

Employment in the hotel and motel sector decreased by some 9 percent as firms cut back on business travel late in 2001. For 2002, hotel occupancy rates in Atlanta have been around 60 percent, compared with 65 percent in 2001. The reduced amount of air travel also severely affected the transportation services sector and the state’s important convention business.

For 2003, travel and tourism officials have expressed concern about growing competition for conventions in the face of cutbacks in corporate travel. For example, NetWorld, a large telecommunications tradeshow that typically draws around 50,000 attendees, will not be held in Atlanta in 2003. As a consequence of reduced visitor levels, the hotel industry is likely to continue to experience intense pressures in 2003, and occupancy rates are unlikely to improve substantially. Downsizing by the airline industry will also continue to adversely affect the state’s service sector as Delta Airlines and some other carriers further reduce staffing levels. One piece of good news for the local tourist industry over the longer term is that one of the largest aquariums ever built is planned for downtown Atlanta, and this addition will likely emerge as a major tourist attraction.

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Picture of Flowers

The Prospects for Southeastern Agriculture Are Clouded

Farmers in the Southeast face an unclear outlook for 2003. Depressed commodity prices and uncertainties abroad have constrained the region’s recent farm income growth. But the 2002 Farm Bill should provide a safety net to farmers while also setting new standards for production. Furthermore, new farming initiatives such as greenhouse-nursery production have gained importance as a newly diversified source of farm income.

Poultry — high in the pecking order
Poultry producers, the largest contributors to the Southeast’s farm economy, had nearly $6.5 billion in receipts in 2001. Exports of chicken broilers declined in 2002, driven by the Russian ban against U.S. poultry exports to Russia, the United States’ leading export market. However, the lifting of this ban in mid-2002, along with the opening of the Cuban market, brightens the outlook for 2003. New regional poultry shipments to Cuba reached $14 million through September 2002.

Florida citrus production drops
The Florida citrus industry generated approximately $4 billion in revenue in 2001 with the farmers receiving just over $1 billion in cash receipts. The state’s orange crop accounts for one-fifth of world production, second only to Brazil. Analysts estimate that overall orange production levels will drop approximately 15 percent in 2003. This decrease is at least partly attributable to overproduction in 2002 as well as the destruction caused by several diseases that have reduced production yields. Analysts predict that Brazilian production levels will rise significantly in 2003 and that the U.S. market may support a slight increase in prices.

Cotton faces snags
Although cotton is still the largest field crop in the Southeast, recent estimates indicate that cotton incomes dropped sharply in 2002 as prices plunged to the lowest level in 15 years. The outlook for 2003 is discouraging because of low prices, high inventory and low industrial utilization at home and abroad.

A fast-growing venture
The production of landscaping and garden plants is one of the nation’s fastest-growing income-producing agribusiness ventures. With nearly $14 billion in revenues nationwide in 2002, these products have surpassed U.S. soybean crop values. The Southeast’s estimated income from greenhouse-nursery operations approached $2.3 billion in 2001, with Florida accounting for approximately 65 percent of the revenues and Alabama, Georgia and Tennessee sharing the rest. The outlook is bright given the boom in residential landscaping businesses and the spread of retail garden specialty shops.

Louisiana

The makeup of Louisiana’s economy is unique within the Southeast: The state is one of the country’s largest sources of oil and natural gas, it has a relatively small manufacturing base that is heavily concentrated in supporting gas and oil production, and it has a significant reliance on service industries. These factors have been a mixed blessing for the state in 2002, and they will weigh on the outlook for 2003 as well.

While Louisiana’s economy was negatively affected by the national recession that began in 2001, it appears that the state weathered the downturn somewhat better than other parts of the Southeast and the nation did.

During the September 2001–September 2002 period, employment in the state declined by an estimated 0.4 percent compared with a 0.8 decline nationally. Nonetheless, Louisiana’s economy ended 2002 in a weaker position than in 2001. Soft oil market conditions kept oil prices in check during most of 2002, and the state’s large extraction industry has pulled back as a result. Although not as large as it once was, the extraction industry, currently employing some 50,000 workers, remains a significant determinant of the state’s economic prospects.

Regional Focus Callout

Manufacturing geared to energy outlook
Employment in Louisiana’s relatively small, but generally high-income, manufacturing sector fell by some 2 percent from September 2001 through September 2002 compared to a 1.4 percent drop over the previous 12 months. Manufacturing represents only about 9 percent of the state’s total payroll employment. Industries such as electronic equipment, transportation equipment, and building materials such as stone, clay and glass posted declining payrolls as the economy slowed. Louisiana’s large chemical industry lost 5 percent of its workforce between September 2001 and September 2002. Low chemical prices in the face of elevated prices for natural gas, which is a key input, caused chemical producers to become less competitive in international markets, and many producers scaled back production as a result.

Under one possible scenario, the outlook for the state’s manufacturing sector in 2003 is positive for those industries associated with energy extraction and with certain types of transportation equipment. A disruption in overseas oil supply because of military action in the Middle East would cause an increase in domestic oil field activity and spur oil field equipment fabrication. But in recent years oil producers have responded much more slowly to price increases than they have to decreases. Under this same scenario, additional U.S. Navy shipbuilding contracts would boost the state’s transportation equipment sector. But the likelihood of a continuation of high natural gas prices is likely to further adversely affect the state’s chemical and plastic producers.

Louisiana’s apparel industry, which has lost some 6,000 jobs over the last six years, will probably experience a further decline in 2003 in the face of continued foreign competition. Finally, growth in the lumber and wood industry will depend on increased demand for residential housing and a rebound in lumber prices. Continued technological advances will limit employment growth in the state’s paper industry, but the industry should recover some lost ground as demand for shipping materials increases.

Louisiana Mining Employment
Louisiana Mining Employment Chart
Source: Calculated by the Federal Reserve Bank of Atlanta using monthly Bureau of Labor Statistics data (not seasonally adjusted) provided by Regional Financial Associates. Data for 2002 are through the third quarter.

Real estate remains steady
Louisiana accounted for about 6 percent of the Southeast’s single-family housing permits issued during 2002, and the state’s housing markets strengthened, reflecting the reasonable economic performance overall. For each of the first three quarters of 2002, housing permits in the state increased at a double-digit pace that was faster than in the Southeast as a whole. Much of this growth was observed in the New Orleans area. In contrast, permit issuance and home sales were below year-ago levels in the Baton Rouge area during the third quarter of 2002. This decline probably reflects the weakness in Baton Rouge’s large petrochemical sector during the year. Nonetheless, the overall housing market in Louisiana should continue to grow at a solid pace in 2003.

The pace of nonresidential construction in Louisiana generally held steady during 2002 and by the third quarter was slightly below year-earlier levels. The New Orleans office market experienced little growth during 2002 with the vacancy rate increasing to almost 17 percent in the third quarter. By comparison, the city’s industrial vacancy rate remained low at close to 8 percent. In Baton Rouge, the third quarter 2002 office vacancy rate was relatively low at 10 percent, and the industrial vacancy rate was 9 percent. Expansion in New Orleans’ hotel sector should continue in 2003. This development, together with re-fitting of the Avondale shipyard, will support construction activity in the city, but office vacancy rates in New Orleans will probably remain elevated. In Baton Rouge, strong foreign competition will likely limit expansions to chemical plants in 2003, thus holding back overall nonresidential construction there.

Services are sluggish
Service employment in Louisiana remained flat during 2002 compared to 1.2 percent growth in 2001. Business service employment slumped 2.8 percent in the face of excess supply, especially in call centers and temporary workers. The hotel and motel industry posted virtually no growth between September 2001 and September 2002 compared to a more than 5 percent increase during the previous 12 months. However, most of the decline occurred shortly after the Sept. 11, 2001, terrorist attacks, and employment in the hotel sector has been relatively stable since then.

The service sector outlook is mixed for 2003. The demand for business services may be sluggish, and there are some concerns regarding an oversupply of hotels, especially in the New Orleans area. Reports suggest that fewer business conventions are scheduled to take place in New Orleans in 2003 compared to 2002. The casino industry, however, expects solid growth in 2003 and 2004. Harrah’s casino in New Orleans will likely build a 400-plus-room hotel next to its land-based casino, and other casinos in the state are planning expansions as well.

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Picture of Coins

Southeastern States Face Budget Balancing Acts

Southeastern states confronted serious fiscal challenges in 2002. State governments experienced very weak sales revenue growth, and low employment levels curtailed income tax growth (see the charts).

Individual Income Tax Revenue Growth
Individual Income Tax Revenue Growth Chart
Note: Florida and Tennessee do not have a state income tax. Data for Louisiana are through the first quarter of 2002.
Sources: Alabama, Georgia and Louisiana Departments of Revenue; Mississippi State Tax Commission
Sales Tax Revenue Growth
Sales Tax Revenue Growth
Note: Data for Louisiana are through the first quarter of 2002.
Sources: Alabama, Florida, Georgia, Louisiana and Tennessee Departments of Revenue; Mississippi State Tax Commission

At the same time revenues declined, demand for state government resources rose as increasing unemployment led to rising benefit outlays. Additionally, rapidly increasing health care costs for Medicaid beneficiaries put a further strain on budgets.

Balancing budgets is proving to be difficult as well. States across the Southeast have cut spending, implemented expenditure freezes and raised college tuitions. Further measures undertaken to boost state revenues include the elimination of a corporate tax loophole in Alabama, the elimination of a sales tax holiday in Florida and an increase in the sales tax in Tennessee. States have covered budget shortfalls by dipping into both reserves and special funds such as education monies in Alabama, an environmental protection fund in Florida and tobacco settlement resources in Mississippi.

Achieving balanced budgets in 2003 will be a challenge. A large obstacle will be Medicaid expenditures. Increases in the utilization of health care services and pharmaceuticals, as well as growing enrollments in Medicaid and the Children’s Health Insurance program, will lead to significant increases in health care expenses. While these increases were not unexpected, governments will nonetheless face difficulties paying for these programs.

Mississippi

For most of 2002, the number of jobs in Mississippi has tracked close to year-earlier levels as the state’s economy has stabilized. Because Mississippi employs a greater share of its workforce in manufacturing than the average for the Southeast or the nation, the state’s economic performance is significantly influenced by the industrial sector. Manufacturing job losses continued in 2002 although at a much reduced pace from 2001. New auto plants and defense-related production will likely add to payrolls in 2003, but some of the state’s labor-intensive manufacturing industries will probably continue to move jobs offshore.

Strong local and national housing markets led to employment gains in construction and supported job growth for some lumber and furniture-producing firms. A more moderate growth rate in single-family residential construction, however, may temper activity for these firms in 2003. The economy of the Jackson metropolitan area has performed somewhat better than that of the state as a whole in 2002. Growth in the city’s service sector is likely to remain solid in 2003 as well. The gaming and tourism sectors helped support Mississippi’s economy in 2002 although this maturing industry will probably not be the most significant source of additional new growth in 2003.

Mississippi Manufacturing Employment
Mississippi Manufacturing Employment Chart
Source: Calculated by the Federal Reserve Bank of Atlanta using monthly Bureau of Labor Statistics data (not seasonally adjusted) provided by Regional Financial Associates. Data for 2002 are through the third quarter.

Manufacturing outlook is improving
The decline in Mississippi factory employment moderated in 2002. Total manufacturing employment declined approximately 1.6 percent between September 2001 and September 2002 compared to a drop of almost 9 percent over the prior 12 months. Both the durable and nondurable sectors posted job losses between September 2001 and September 2002. Apparel employment fell by 7 percent from a year earlier as companies either shut factories because of foreign competition or moved production overseas. The apparel segment has seen a reduction of nearly 10,000 jobs in Mississippi since 1998. The shuttering of the Burlington Industries Stonewall plant, for example, eliminated 850 jobs. Job losses were also posted in the transportation equipment and electronic equipment industries. The lumber and wood industry added to employment rolls mainly because of the national strength in residential construction markets, and employment in the furniture-producing sector grew in line with the strong nationwide housing market and the associated demand for home furnishings.

The state’s factory outlook is improving. In 2003, job gains in the automotive and shipbuilding sectors should help offset continuing job losses in the apparel industry. Nissan is planning one of the largest plant start-ups in the history of the U.S. automobile industry with its $1.5 billion plant in Canton, which is scheduled for completion by mid-2003. The plant, which will assemble a variety of cars, light trucks and minivans, and numerous parts suppliers that are moving into the area to support the plant are targeted to employ a workforce of more than 5,000. Northrop Grumman’s shipbuilding operations in Pascagoula and Gulfport will benefit from work on a new class of U.S. Navy destroyers and planned work on a new amphibious transport ship in 2003.

Less positively, furniture producers are vulnerable to a slowdown in the single-family residential home market, and chemical producers face uncertainty in energy markets that could cause their input prices to rise.

Regional Focus Callout

Real estate sees modest growth
Mississippi accounts for only about 3 percent of single-family housing permits in the Southeast. Like other areas in the region and in the nation as a whole, single-family housing construction in Mississippi has been quite strong. In 2002 permit growth rose more than 13 percent in the third quarter of the year compared to the same period in 2001. Housing markets were particularly robust along the coast while growth was somewhat more uneven in the Jackson area. The housing market in southern Mississippi should continue to grow in 2003 in line with a modest rebound in employment and income growth.

Multifamily permits were down by over 5 percent in the third quarter of 2002 compared to the same period in 2001. Much of the demand for multifamily facilities has been driven by the casinos along the Gulf Coast, and as casino growth slows, so will the demand for new apartments.

Construction of the new Nissan plant in Canton ramped into full gear in 2002, creating growth in the state’s construction payrolls. But office construction remains subdued. The Jackson office market was softer than in 2001, and rental rates in the city declined accordingly. Office markets will probably continue to struggle in 2003, but industrial construction associated with the auto plant will support modest growth during the year.

Subdued expectations for services
Mississippi’s service sector employment grew a modest 0.8 percent for the September 2001–September 2002 period. Most of the increase was in health services, where employment was up by nearly 2 percent during that time. The health services industry should continue to grow at a steady pace in 2003 as well. Employment in the hotel and motel industry fell by about 4 percent in 2002 following a 3 percent decline in 2001. This drop was in marked contrast to growth of more than 20 percent in the sector in 1999 and 13 percent in 1998, a result of the boost that new casinos and resorts gave to employment.

The state’s service industry is likely to remain under pressure in 2003 because of a slower pace of consumer spending than in the late 1990s and a more subdued outlook for new tourist development projects. However, Mississippi Gulf Coast casinos continue to be the bright spot in the state’s tourism outlook. Gaming revenues in coastal counties was at or above year-earlier levels for most of 2002, and this trend should persist into 2003 as well. The national decline in leisure-related air travel has not had as large an impact on Mississippi because the vast majority of its Gulf coast gaming visitors arrive by car or charter bus.

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Tennessee

Tennessee posted solid employment and income growth through most of the late 1990s, but the state’s economic situation deteriorated substantially in 2000 and 2001. On a year-over-year basis, employment growth improved by at least 2 percent in each year from 1997 to 1999, but by the end of 2000 growth had slowed to around 0.5 percent. By the end of 2001, employment was declining at about a 0.8 percent annual pace. Since that time, the employment situation has improved modestly, and through most of 2002 employment in the state has tracked close to year-earlier levels. Metropolitan areas, such as Nashville and Knoxville, have outperformed the state and the Southeast as a whole in 2002.

The state’s manufacturing sector has been recovering at about the same pace as in the rest of the Southeast, but Tennessee’s tourism sector seems to have performed better than in many other areas of the region and the nation in 2002. For most of 2002, the Nashville hotel occupancy rate was close to 2001 levels, and revenues were down by much less than comparable national levels. In part this performance reflects the fact that Tennessee remains primarily a drive-to tourist destination and thus has been less affected by the decline in business travel than some other parts of the region have. The outlook for Tennessee’s economy in 2003 is positive, especially if it is able to sustain the solid growth in the service sector that it seems to have achieved during 2001 and 2002.

Tennessee Manufacturing Employment
Tennessee Manufacturing Employment Chart
Source: Calculated by the Federal Reserve Bank of Atlanta using monthly Bureau of Labor Statistics data (not seasonally adjusted) provided by Regional Financial Associates. Data for 2002 are through the third quarter.

Manufacturing expects mixed performance
Employment at Tennessee’s factories declined about 2 percent from the third quarter of 2001 through the third quarter of 2002, a performance that compares favorably with the more than 6 percent decline during the previous 12 months and the almost 5 percent decline for the nation as a whole in 2002. With the second-largest number of factory workers among the six Southeastern states, Tennessee’s manufacturing payroll is mainly concentrated in durable manufacturing, which was especially hard hit by the recession. In 2002, industrial machinery and transportation equipment producers trimmed their payrolls as they cut back on investment in capital equipment. The lumber and wood industry was able to sustain payrolls at moderate levels over the year because of the continued strength in the residential construction industry whereas primary metals producers continued to downsize. Weakness again appeared in the state’s apparel industry although the employment decline slowed from the double-digit pace of previous years. Apparel employment in the state has fallen some 45 percent since 1998, resulting in the elimination of 14,000 jobs.

The outlook for Tennessee’s manufacturers is cloudy. The decline in apparel employment will likely slow further because most of the weaker firms have already shut down. The transportation equipment sector will continue to get a boost from ongoing projects. Workers at Nissan’s plant in Smyrna have been working nine-hour shifts and overtime to keep up with demand since the redesigned Altima was introduced in 2001. Nissan sold more of the Smyrna-made Altimas in the first nine months of 2002 than it did in all of 2001. The company also plans to produce Maxima sedans at the plant starting in 2003. The potential for further expansions into the state by foreign-based automobile companies is also encouraging.

Growing demand for religious and music publications is likely to continue to support the state’s printing and publishing industry although technological advances may limit employment growth in this industry. The state’s important computer hardware industry is likely to see modest growth in 2003 as spending by businesses and consumers picks up.

Real estate has solid prospects
Tennessee accounts for about 11 percent of the Southeast’s single-family housing permits. During 2002, the state experienced a moderate rate of home building, with house price increases roughly in line with income growth. By the third quarter of 2002, permit growth in the state was increasing at about a 12 percent annual pace, close to the pace of the Southeast as a whole. Building activity in Knoxville softened somewhat during 2002 while activity in Nashville improved from earlier in the year. Based on employment trends, the single-family housing market in Tennessee will likely continue to grow at a solid pace in 2003. In contrast, multifamily construction continued to soften. Multifamily permit issuance in the third quarter of 2002 was up by a little more than 2 percent from a year earlier and well off the 13 percent growth experienced in the Southeast overall.

Nonresidential construction has steadily improved from the weak levels experienced earlier in 2002. In Nashville, office vacancy rates improved modestly from elevated levels in the third quarter of 2001. Overall construction activity increased slightly in the third quarter of 2002, led primarily by new manufacturing-related construction. Construction employment in the state tracked close to year-earlier levels through most of 2002 while Nashville experienced modest growth. The industrial vacancy rate in Nashville during the third quarter of 2002 was about 13 percent. Most of the empty space was warehouse space and included the recently closed distribution centers for two national retail chains.

Services should sustain growth
Employment in Tennessee’s miscellaneous service sector increased by about 2 percent between September 2001 and September 2002, a slight improvement over the 1.4 percent increase during the previous 12 months. Over half of the miscellaneous service jobs in Tennessee are accounted for by health services and business services. Health services employment increased about 1.6 percent in 2002 following a 2.8 percent increase the previous year.

Bucking the national trend, business service employment in Tennessee increased by 1.4 percent in 2002 after a 4.5 percent decline in 2001. Nationally, business service employment was down by over 1 percent. Other services such as hotel and motel services and especially amusement and recreation services added moderately to employment rolls in 2002. Traffic at tourist destinations such as Nashville and Pigeon Forge held up better over the year than fly-to tourist destinations in other parts of the region.

In 2003 the state’s service sector should continue to hold its own as national economic activity picks up. The business services sector may be supported by growth in demand for help supply, advertising and computer services. Health services are likely to continue to post moderate growth. Although reduced business travel will continue to adversely affect convention business, Tennessee’s tourist destinations should continue to attract patrons because of the ready accessibility of the state by automobile.

This article was written by John Robertson, David Avery, Michael Chriszt, Whitney Mancuso, Melinda Pitts, Navnita Sarma and Gustavo Uceda of the Atlanta Fed research department’s regional research group.

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