EconSouth (Fourth Quarter 2003)


Economic Recovery Gains
Ground in the Southeast

Economic growth remained stronger in the Southeast than in the nation as a whole during 2003 as the recovery gained momentum. But the extent of the recovery varied across the region, and growth has yet to re-emerge in a few states.

Economic activity in Alabama continued to contract in many sectors during 2003. From the third quarter of 2002 through the third quarter of 2003, the state’s payrolls registered a 1 percent decline, slightly larger than 2002’s job losses.

Employment in the manufacturing sector continued to shrink overall during 2003, but the decline was smaller than in recent years. The auto industry gained jobs as expansions and relocations continued, but most nondurables industries continued to lose jobs, albeit at a slower pace than in the past few years. The single-family residential sector continued to grow because of low interest rates while the nonresidential sector was helped by some large expansions in manufacturing. The service sector remained weak in 2003 because of broad-based softness in the state’s health care industry and leisure and hospitality industries. Cutbacks also occurred in business services.

Future prospects for Alabama’s economy depend significantly on a turnaround in parts of the state’s large manufacturing sector. Manufacturing will continue to benefit from the auto industry’s strength, and other durables industries are likely to contribute to growth both in manufacturing and in nonresidential construction. Activity in housing markets generally will depend on interest rates but should see continued modest increases whereas the office sector is likely to remain subdued at best. Expectations for gains in the service sector in 2004 depend on the pace of the national recovery and on the state’s fiscal situation.

Manufacturing losses shrink
The manufacturing sector is key to Alabama’s economy, accounting for about 16 percent of jobs in the state. Manufacturing employment fell by about 4 percent — or 12,700 jobs — from the third quarter of 2002 through the third quarter of 2003, a marked improvement from the 6 percent decline in 2002 and 7.5 percent drop in 2001. Employment at durable goods manufacturing firms fell by around 4 percent during the 12-month period ending in the third quarter of 2003, about the same as in recent years. Nondurables manufacturers lost fewer jobs than in 2002.

Future prospects for Alabama’s economy depend significantly on a turnaround in parts of the state’s large manufacturing sector, which will continue to benefit from the auto industry’s strength.

Employment changes varied considerably across industries within the state’s manufacturing sector. In the primary metals industry, job losses were much smaller than the double-digit falloffs during both 2001 and 2002. Employment levels at iron and steel mills were about even with 2002 levels, but job losses continued at fabricated metals manufacturers. Employment declines at machinery manufacturers, computer and electronic equipment producers, textile and apparel mills, and pulp and paper mills were smaller than a year earlier. However, semiconductor producers and furniture manufacturers recorded more job losses than in 2002.

The state’s defense industry continued to witness gains from U.S. military buildup, but weakness in the commercial aviation market hurt parts of the state’s aerospace industry. For example, Teledyne Continental Motors Inc. reported that it is cutting 100 jobs at its aircraft engine plants in Mobile and Abbeville.

The state’s factory sector as a whole is likely to improve as the national recovery continues, but growth will vary across industries. The lumber and wood industry should continue to fare well as long as residential construction remains strong. The state’s primary metals industry will benefit from expansion in Alabama’s transportation equipment industry and possible new activity in the energy extraction industry, both in the state and elsewhere. For example, some firms expect to produce pipe for oil fields in the Middle East.

The transportation equipment industry will continue to gain strength from the recent expansions of the Mercedes plant in Vance, the Hyundai plant near Montgomery and the Honda plant in Lincoln as well as the ongoing relocation of component suppliers to the region. Nondurables producers, especially apparel and textile manufacturers, will continue to close plants as firms move production offshore. Most analysts expect strong growth in information technology equipment manufacturing nationally, so 2004 should be a good year for computer and electronic product manufacturers in the state.

Alabama Manufacturing and Total Nonfarm Employment
Source: Calculated by the Federal Reserve Bank of Atlanta using monthly Bureau of Labor Statistics data (not seasonally adjusted) provided by Haver Analytics. Data for 2003 are through the third quarter.

Real estate is robust
The single-family housing market reaped the benefits of low mortgage rates in 2003. As of the second quarter, sales of existing homes outpaced the average growth rate for the Southeast as a whole. Realtors in Birmingham in particular recorded a string of record-breaking months in 2003; through September, sales were up 19 percent.

New home construction has been particularly strong in Birmingham, Dothan and Tuscaloosa, and employment in the construction sector rose by over 2 percent. Single-family permits authorized through the third quarter of 2003 were up substantially from a year earlier, indicating the potential for another solid year ahead for the state’s single-family housing market.

The multifamily rental market was weak during 2003, but condominium activity was strong. Multifamily permits were up only about 3 percent for the year to date in September. Analysts attribute the sluggishness to the slowdown in apartment construction. Condominium sales along the Gulf Coast were up 45 percent from January through August on a year-over-year basis, according to the Baldwin County Realtors Association. Realtors reported that units were selling out very quickly even before construction began.

Activity in the manufacturing industry bolstered nonresidential construction during 2003. A large tissue-paper plant was constructed in the northwest part of the state, and a number of large auto manufacturers and suppliers expanded their facilities during the year. More auto expansions and relocations announced for 2004 point to a positive outlook. The office market, however, was a drain on the nonresidential market in 2003, particularly in Birmingham, and is likely to remain relatively weak during 2004.

Service sector slumps
Employment in service industries displayed few signs of renewed growth during 2003. Even the state’s sizable health care industry cut payrolls. At Birmingham Hospital, for example, employment fell by more than 3 percent, according to one report. One of the state’s largest employers, HealthSouth, has been engulfed in a financial crisis that threatens the jobs of the company’s 3,500 workers in Birmingham. As is true across the nation, the outlook for the state’s health care industry is uncertain because of concern about rising health insurance rates and recent changes to the national Medicare program. State fiscal woes will also likely restrain activity in health care.

As in most other states, Alabama’s government experienced fiscal difficulties during 2003. A plan to make the state income tax structure more progressive and raise revenues by $1.2 billion was defeated by voters in September. In the short run, the state’s education budget faces cuts totaling over $260 million, and these cuts will likely lead to layoffs in educational services.

Other service industries, such as professional and business services and leisure and hospitality services, lost jobs or improved little over the year. The outlook for 2004, however, is for moderate improvement. As the national economic recovery continues, business services should show some growth, and the leisure and hospitality industry should improve as consumer spending gains further momentum. Retail sales during the first three quarters of 2003 were up modestly over year-earlier levels, generally in line with expectations. The outlook for retail sales should continue to brighten as the economic recovery gains strength.

Outlook for Southeastern Agriculture Improves

Good weather and improved market conditions made 2003 more successful than recent years for most farmers. Prospects for 2004 depend on these two factors remaining favorable, but other positive fundamentals should help next year’s outlook for poultry, citrus, cotton and greenhouse/nursery plants, the Southeast’s key crops.

Poultry producers look for export growth
Poultry is the Southeast’s leading income-producing farm industry. Producers are still recovering from a 20 percent plunge in cash receipts in 2002 stemming from low exports to Russia, the Southeast’s top export market, and from a price drop related to the corresponding oversupply. More recently, poultry producers have been encouraged by a U.S.-Russia agreement that guarantees U.S. producers 75 percent of Russian poultry imports and could secure U.S. exports to Russia for the next five years.

Citrus faces challenging market conditions
Citrus is the second-largest income-generating crop in the Southeast, accounting for nearly $1.4 billion in cash receipts in 2002 — 7 percent higher than in 2001. Industry prospects, as usual, depend on the size of crops in Florida and in Brazil, the world’s largest supplier of oranges. The U.S. Department of Agriculture recently estimated Florida’s orange crop at 252 million boxes, 24 percent higher than in 2002 and a new record.

This bumper crop does not bode well for prices, though, because demand is weak and orange juice inventories are high. But recent estimates indicate that the competing Brazilian orange crop could be at least 20 percent smaller than previously expected.

Cotton crop’s value grows
Cotton is a major crop in the Southeast, accounting for $1.2 billion in cash receipts in 2002. Crop yields were good in 2003 because of relatively favorable weather conditions and improved technologies to enhance soil quality.

The outlook for cotton was brightened in 2003 by higher worldwide demand in tandem with lower estimates for China’s crop. These two developments increased demand for U.S. exports and recently led to stronger futures prices.

Greenhouse-nurseries to get boost from improved economy
Greenhouse and nursery crops are the most rapidly growing segment of Southeastern agriculture. In 2002, the greenhouse and nursery industry produced nearly $2.5 billion in cash receipts, up 2 percent from the previous year. Between 1997 and 2002, the region’s nursery crop receipts grew at an average of 3 percent a year, contrasting with a 7.5 percent contraction of other regional crops such as cotton, citrus, soybeans and peanuts. Florida is the second-largest producer of horticulture plants in the nation and accounts for about two-thirds of the region’s nursery crops.

The outlook for greenhouse-nursery crops is bright. Continued economic recovery in 2004 should sustain the strong demand experienced in recent years.

The sun was indeed shining on Florida in 2003 as the employment growth rate rose from 0.5 percent in 2002 to 1.3 percent during the first three quarters of 2003. Much of this increase was due to growth in the state’s sizable leisure and hospitality sector, which expanded as the national recovery gained momentum and tourism rebounded from the Sept. 11, 2001, terrorist attacks. Several other service industries and strong housing markets also contributed to Florida’s strong economy in 2003.

The outlook for Florida is bright, and growth should be broad based. The tourism industry will likely continue to gain steam, and health care and housing markets should remain robust. Prospects for several other sectors, particularly business services, should improve as the national economy continues to grow.

Services key to growth
Service industries are vital to Florida’s economy, accounting for 88 percent of jobs. Employment growth in Florida’s diverse service sector varied in 2003. Business support services, for instance, lost jobs during the first three quarters of 2003 as businesses retrenched. Computer system design and related service positions also declined over the year. Advertising services employment fell for the second year in a row as businesses cut back spending. Educational and health services, however, continued to add to employment rolls. Hospital employment remained stable in 2003 for the second consecutive year, and nursing care facilities continued to post strong employment growth.

During 2003, reports from Florida retailers diverged somewhat from those of retailers in the rest of the region. Tourist areas, particularly Orlando, experienced weaker sales than expected. Many merchants blamed lower amusement park attendance, shorter trips and reduced spending by out-of-towners. Retailers in other parts of the state generally experienced modest year-over-year gains. Auto dealers reported that sales were reasonably strong in Orlando and south Florida. Vehicle registrations in Florida were up sharply from the previous year’s weak performance largely because of increased fleet sales. Overall, employment in the retail sector declined slightly during the first three quarters of 2003. Sales of home furnishings and building material supplies, however, remained quite robust, and retail sales appeared to be improving overall as the year drew to a close.

Florida Leisure and Hospitality and
Total Nonfarm Employment
Source: Calculated by the Federal Reserve Bank of Atlanta using monthly Bureau of Labor Statistics data (not seasonally adjusted) provided by Haver Analytics. Data for 2003 are through the third quarter.

Florida’s service sector should continue to strengthen in 2004 as the economy and consumer sentiment rebound. Improving business activity will help business service industries expand, and aging baby boomers will continue to support the state’s large health care industry. Continued improvement in tourism should boost retail sales.

Florida’s tourism industry generally improved during 2003. Employment in the leisure and hospitality industry rose by over 2 percent from a year earlier as the sector began recovering from the national recession and the effects of the fallout from Sept. 11. Following a drop of almost 9 percent in 2002, jobs at amusement parks were up by nearly 4 percent through the third quarter of 2003. Employment in the hotel industry was up about 2 percent, led by a 5 percent increase in Orlando. But the city’s room rates are under pressure because the area added more than 5,000 rooms during the past two years. Miami experienced a moderate decline in hotel employment. Discounts and new attractions helped attendance at central Florida theme parks, but continuing weak international tourism and new hotel space coming online adversely affected Miami’s occupancy numbers. Florida’s important cruise ship industry posted strong bookings as some vacationers chose cruises as a safe, convenient alternative to flying overseas.

The new year should bring further improvement in the state’s leisure and hospitality industry, especially if consumers further loosen their purse strings as the national economic expansion continues. International tourism is unlikely to stage a strong rebound, however, given the relatively weak economies in foreign countries, a traditional source of many of Florida’s tourists. Walt Disney World closed its travel office in Brazil because the number of Brazilians visiting Orlando had fallen by more than 50 percent. Domestic tourism should pick up, particularly as attractions try to woo local residents with special discounts, but may not completely compensate for the drop-off of international visitors to Miami.

As business activity picks up nationally, convention center attendance will increase, boosting the Miami and Orlando economies. But Orlando’s newly expanded convention center — second only to Chicago’s in square footage — may be difficult to fill. The cruise industry should continue to post strong bookings as consumers seek a safe alternative to overseas vacations and as the port of Miami’s improvements add to its appeal as a cruise embarkation point.

Housing markets zoom
Housing markets were strong throughout much of Florida during 2003. Both domestic and international investors moved funds into the state’s real estate markets, particularly in central and south Florida. Home values experienced double-digit growth that was among the strongest in the nation. According to the Florida Association of Realtors, year-over-year existing home sales were up 24 percent in September, and home prices were up 13 percent. Construction was strong across most of the state. But many builders noted the scarcity of available land, and real estate agents often reported that low supplies of available properties constrained activity.

Florida’s single-family housing boom is likely to continue. Single-family permits authorized through the third quarter increased at a double-digit rate, boding well for 2004.

As in most of the Southeast, the apartment rental market was weak in most of Florida during 2003 as low interest rates pushed renters into homeownership. This trend led developers to take a more cautious approach, and multifamily permits were down about 3 percent through September. The apartment market remained tight in Miami, however, where vacancy rates were below 5 percent in the third quarter. Condominium sales were strong, particularly in coastal areas.

Nonresidential construction closely mirrored 2002 levels during the first half of 2003 but weakened somewhat during the third quarter. Office markets continued to suffer from weak demand and hence low levels of absorption. Major metropolitan areas had high office vacancy rates as of the third quarter, including 18 percent in Jacksonville, 16 percent in Miami and 17 percent in Tampa. Industrial markets fared better as vacancy rates for industrial space hovered around 8 percent in most cities.

The new year should bring further improvement in Florida’s leisure and hospitality industry, especially if consumers further loosen their purse strings as the national economic expansion continues. But international tourism is unlikely to stage a strong rebound.

The prospects for nonresidential activity depend heavily on the pace of economic recovery. It will take some time for many urban areas to work off excess supplies of office space, but industrial real estate markets enter 2004 with a slightly stronger outlook.

Weakness in manufacturing continues
Factory employers in Florida continued to cut jobs in 2003. Manufacturing employment was down over 4 percent from the third quarter of 2002 through the third quarter of 2003, following a 6.5 percent drop during 2002. In the durable goods sector, lumber andwood producers, computer and electronic manufacturers, semiconductor producers and boat builders cut payrolls. Among nondurables industries, textile mills reduced employment at double-digit rates, and paper manufacturers and printers trimmed jobs.

The new year may bring some improvement in Florida’s factory sector. Lumber mills may be helped by the tight supply conditions experienced toward the end of 2003, but the outlook depends on the performance of residential construction. High-tech producers, such as telecommunications equipment manufacturers, may continue to struggle with an oversupply, but increased consumer spending should boost demand for computers and electronic products.

Defense contracts will continue to stimulate that industry. For example, Northrop Grumman Corp. plans to design and develop a battlefield command aircraft at its facility in Melbourne. In addition, the possible resumption of the space shuttle program would ensure jobs for thousands of workers along Florida’s Space Coast.

Producers of nondurable goods such as textiles and apparel are unlikely to add to employment rolls because of continued fierce foreign competition, but paper and pulp manufacturers may get a boost as the national economic recovery gains momentum.

Bankers See Brighter Outlook in 2004

The banking environment is improving after nearly three years of flat commercial loan growth, rising credit defaults and declining interest margins. Although optimism has increased, 2004 will be another challenging year for the banking industry, marked by uncertainty about a resurgence of corporate spending, the effects of a weak labor market on consumers and the future path of interest rates.

Glimmers of a turnaround for commercial loans
Commercial loan volumes declined at many banks in 2001 and 2002 and showed inconsistent growth early in 2003. But recent reports from banks in the Southeast indicate that businesses are regaining their confidence and making plans to borrow. This renewed confidence has been most evident in service industries, but some manufacturers are showing an interest as well.

A gradual turnaround in corporate credit quality that began in mid-2002 promises an improved outlook. But competition remains stiff, and customers are frequently demanding concessions when they apply for new loans or renewals.

Consumer lending still shines
Consumer lending has remained strong in the Southeast despite the weak economy; low interest rates have generated record levels of mortgage, refinance and home equity loans and lines of credit. This boom has helped the industry remain at or near record profitability, but it has raised concerns about consumer staying power given high household debt levels. These concerns will continue to grow if the “jobless recovery” coming out of the 2001 recession persists through 2004.

Challenges ahead
The current interest rate environment is a challenge for banks. Low rates are pressuring net interest margins because banks have little room to cut deposit rates when loan rates fall. Meanwhile, rising rates could make debt service more difficult for marginal borrowers while also reducing the value of long-term bonds in banks’ investment portfolios. To the extent that higher rates reflect an improving economy, however, banks likely will welcome the change.

Generally, banks have performed better than most analysts expected given the difficult economic environment during the past three years. The outlook appears to be improving, but the challenges of increasing revenues, controlling expenses and maintaining credit quality in a highly competitive and still uncertain environment will keep bankers busy in 2004.

Georgia, the Southeastern state most negatively affected by the 2001 recession, reached firmer ground in 2003. Total nonfarm employment in the state was 1.7 percent higher in the third quarter of 2003 than in the third quarter of 2002. Professional and business services, after two years of job losses, registered job gains during 2003, including 7 percent (annualized) growth during the third quarter. Housing markets generally held steady while nonresidential construction and manufacturing continued to lag during 2003.

he improvement in the business and professional services sector bodes well for Georgia’s economy. With Atlanta, which accounts for 55 percent of the state’s employment, seemingly on the road to recovery, Georgia’s economy should continue its forward momentum in 2004.

Services boost state’s economy
The service sector, which accounts for 83 percent of the jobs in Georgia, contributed to 2003’s employment gains. Service employment growth varied by industry. From the third quarter of 2002 through the third quarter of 2003, professional and business services grew 4 percent, adding 20,000 workers, following declines during the previous two years. Jobs in temporary services rose by nearly 10 percent as employers uncertain about the strength of the recovery used temporary workers instead of hiring full-time employees. Educational and health services added moderately to employment rolls, as did hospitals. The situation for computer system design and related services and for scientific and technical consulting is stabilizing slowly. The outlook for these industries is heavily dependent on the pace of the economic recovery at both the local and national levels.

Georgia Professional and Business Services and
Total Nonfarm Employment
Source: Calculated by the Federal Reserve Bank of Atlanta using monthly Bureau of Labor Statistics data (not seasonally adjusted) provided by Haver Analytics. Data for 2003 are through the third quarter.

The leisure and hospitality industry experienced another difficult year. Employment in the hotel and food service industry declined during 2003 mainly because of low convention and business travel activity. Amusement parks and recreational facilities suffered from wet summer weather and the early start to the school year.

Travel and tourism officials remain concerned about attracting conventions to Atlanta despite the recent expansion of the Georgia World Congress Center. By some accounts, the number of conventions in Atlanta is expected to increase modestly during 2004, providing some relief to the large hotels that cater to conventions. Also, the G-8 Economic Summit, a gathering of representatives from some of the world’s major economies, will be held in Sea Island in June. Georgia’s governor expects the total economic benefit to the state to be $300 million to $500 million, including funds to upgrade roads and telecommunications along the coast.

Retail sales were mixed in Georgia in 2003, with discounters continuing to do better than department stores. Back-to-school sales were up significantly compared with 2002’s. Sales of high-end items were reportedly up notably in recent months. Retailers’ outlook for the holiday season was fairly optimistic, but most were not increasing orders. During 2004, retailers should experience moderate improvements in sales as consumers gain confidence in the expansion.

Real estate activity is mixed
Housing markets in Georgia were generally steady during 2003. Existing home sales were up slightly compared with the previous year’s while construction was flat. New home construction strength was noted in the Athens and Columbus markets, but activity in the large Atlanta market was more subdued. Real estate agents have noted that, within the Atlanta market, outlying areas were faring better than intown communities, where prices are typically much higher. Agents’ search for buyers of luxury homes in Atlanta continued. Construction employment surged during the year, fueled in part by homeowners paying for renovations with funds from refinancings. Single-family permits authorized through the third quarter were only about 1 percent above year-earlier levels, suggesting that 2004 will not be strong.

The multifamily housing sector was weak in 2003. As of September, multifamily permits were down sharply — almost 30 percent — year-to-date. The apartment vacancy rate in metro Atlanta stood at 9 percent in the third quarter, the highest vacancy rate in the Southeast, yet down from the 10 percent peak earlier in the year. Rental rates remained depressed, but signs were emerging that incentives were becoming less prevalent. The in-town Atlanta condominium market was slow during the first part of 2003 but was beginning to improve during the fall as the city’s economic recovery gained strength.

Nonresidential construction stabilized during 2003, but growth remained below year-earlier levels. Weakness in the Atlanta office and industrial real estate markets continued to be more pronounced than in other parts of the Southeast. Subleased space was a significant drag on markets. Atlanta’s office vacancy rate was almost 22 percent during the third quarter, and the industrial vacancy rate was almost 15 percent. Reports on leasing and absorption were more positive for the office sector than for the industrial sector. In the Atlanta industrial market, rents remained relatively low, and concessions and short-term lease agreements were common throughout the year. Improvements in the economy should carry over to commercial real estate during 2004 as projects and expansions on hold in 2003 move forward in the Atlanta area.

Manufacturing struggles again
Factory employment, which accounts for about 12 percent of Georgia’s jobs, fell for the fourth consecutive year. Manufacturing employment declined by more than 5 percent from the third quarter of 2002 through the third quarter of 2003.

Both the nondurable and durable goods sectors were hard hit in 2003. Employment at textile mills fell again as companies either moved overseas to take advantage of cheap foreign labor or closed down completely. Employment in the wood products industry experienced a double-digit percentage decline as several mills shut down. Even the transportation equipment industry posted job losses. Only the state’s large food processing industry was able to maintain stable employment levels during 2003.

The manufacturing outlook for 2004 is guarded. News that DaimlerChrysler will not build a truck assembly plant near Savannah was a disappointment. The plant was projected to employ 3,300 workers. Ford will reportedly build its Lincoln-brand sport wagon at the Hapeville plant beginning in 2006.

Improvement in the textile and apparel industries is unlikely given continuing import competition. Tightening supplies may help the lumber and wood industries for a while, but prospects depend on residential and nonresidential construction demand. Also, the state’s important carpet industry would be adversely affected if residential markets were to slow.

Military contracts will continue to help prop up the factory sector to some extent. For example, Lockheed Martin has a $3 billion contract to produce 20 fighter jets at its Marietta facility. Georgia recently became the fifth-highest ranking state for defense contracts in the United States.

After showing signs of stabilizing in early 2003, Louisiana’s economy failed to gather momentum as the year progressed. From the third quarter of 2002 through the third quarter of 2003, employment in the state fell by 0.3 percent following an almost 1 percent decline during 2002. Few sectors experienced growth in 2003, with slowdowns continuing in manufacturing and many service industries. Activity in most real estate markets was also sluggish.

Because Louisiana has large oil and natural gas reserves, the outlook for the state depends greatly on events in the Middle East and their effect on energy prices. But high energy prices are a double-edged sword because they negatively affect the states’ chemicals industry.

Activity in service-related industries is likely to pick up as the national economic recovery gains further momentum, but growth in the state may continue to lag much of the nation.

Manufacturing woes continue
Employment in Louisiana’s manufacturing sector fell 3 percent from the third quarter of 2002 through the third quarter of 2003, the fifth straight year of decline. Although only 8 percent of Louisiana’s workers are employed in manufacturing, the important petrochemical, chemical and energy extraction industries are high valueÐadded industries that pay above-average wages. Employment in the nondurable goods sector continued its downward trend. Chemical manufacturing, which accounts for about 30 percent of the state’s nondurables manufacturing employment, was especially hard hit, falling more than 4 percent from the third quarter of 2002 through the third quarter of 2003. The chemical industry was rocked by high prices for some inputs and weak demand. Prices for natural gas, an important input for the chemical industry, rose dramatically in the first part of the year, forcing closure or production slowdowns at several Louisiana plants. In addition, general industry consolidation led to the closing of some smaller facilities.

Service industries tied to Louisiana’s oil extraction industry may rebound slightly, depending on developments in the Middle East, but many of the office jobs in this industry have moved permanently to other states.

Despite high oil and gas prices, drilling activity in Louisiana stayed at relatively low levels in 2003. The average Louisiana rig count ranged between 154 and 158 for much of 2003 while the national rig count rose steadily. Drilling may improve marginally in the Gulf of Mexico as major oil companies divest leases and smaller independent firms take them over in the coming year.

Employment levels in durable goods manufacturing continued to decline during 2003 but at a slower rate than in recent years. One bright spot was increasing employment rolls at transportation equipment producers, especially shipbuilders. The outlook for the state’s manufacturing sector is positive for industries associated with the U.S. Navy and other military contractors.

Real estate enjoys modest growth
Louisiana single-family housing markets experienced modest growth during 2003. Existing home sales were similar to 2002 levels, and new home construction rose moderately. New home construction was strongest around Baton Rouge, Lafayette and Lake Charles. Construction had modest employment gains during the first three quarters of 2003, a marked improvement over the 5 percent decline in 2002. Single-family permits authorized through the third quarter of 2003 were up about 10 percent, signaling a healthy year ahead.

Multifamily permits were down sharply year-to-date as of September, but some anecdotal reports suggested that apartment markets were maintaining reasonable occupancy rates. The outlook for multifamily housing depends heavily on employment growth and the relative affordability of home ownership versus renting.

Louisiana Services and Total Nonfarm Employment
Source: Calculated by the Federal Reserve Bank of Atlanta using monthly Bureau of Labor Statistics data (not seasonally adjusted) provided by Haver Analytics. Data for 2003 are through the third quarter.

Nonresidential activity was modest at best during 2003. As of the third quarter, nonresidential construction was slightly lower than during the previous year. The pace of construction did quicken, however, during the second and third quarters. Baton Rouge and New Orleans experienced weak demand overall in 2003 although Baton Rouge’s office and industrial vacancy rates were among the lowest in the Southeast. The outlook for the state’s nonresidential markets is for slight improvement in 2004.

Service sector to remain slow
Activity in most segments of the service sector was slow during 2003, and total employment in service industries fell. Employment in firms providing professional and business services slumped by 4 percent. Many of the job losses were at firms with ties to the energy extraction industry. For example, Exxon-Mobile Corp. shut down its 380-person New Orleans headquarters, causing layoffs at related businesses. Architectural firms also cut back as the hotel building boom subsided, and employment services cut personnel at a double-digit rate as companies pared back operations in the slow economy.

The education and health care industries continued to expand. Employment at hospitals increased moderately, and employment at nursing care facilities grew for the sixth consecutive year. The state’s leisure and hospitality industry posted slight job gains during the first three quarters of the year. Reports suggest that revenues weakened during 2003, however. For example, attendance numbers for New Orleans’ Jazzfest were below expectations.

Because of the local and national economic slowdown, employment in the state’s gaming industry fell by 4 percent from 2001 to 2003 following double-digit growth in previous years. Revenues were down almost 5 percent for the state’s riverboat casinos. However, revenues at Harrah’s Casino in New Orleans recently improved, and elsewhere in the state most casinos registered year-over-year revenue gains.

The service sector outlook for Louisiana is mixed for 2004. Service industries tied to the oil extraction industry may rebound slightly, depending on developments in the Middle East, but many of the office jobs in this industry have moved permanently to other states. The health care segment will likely remain stable. Activity in the leisure and hospitality industry should increase in line with overall consumer spending, but hotels in the New Orleans area will likely continue to have relatively high vacancies. Unless business travel improves, hotel occupancy rates will remain lower than desired, and convention facilities will continue to be underutilized.

By the numbers, Mississippi’s economy was little changed during 2003. Nonagricultural employment declined slightly between the third quarter of 2002 and the third quarter of 2003. Employment in the manufacturing sector continued to fall, but job losses were smaller than in previous years. Other sectors of the state’s economy, including construction, trade, and state and local government, eked out job gains.

Mississippi’s economy seems poised to rebound in the near future. Vehicles began rolling off the assembly line at the Nissan plant in Canton, which will attract auto industry suppliers to the area and is expected to create thousands of jobs in the coming years. The state’s tourism industry has laid the groundwork for continued growth along the Gulf Coast. Much depends on the pace of the national economic recovery, but 2004 is likely to be better for Mississippi than recent years.

Manufacturing loses ground
There was little good news for the state’s manufacturing sector during 2003. Factory employment in Mississippi fell by nearly 5 percent from the third quarter of 2002 through the third quarter of 2003, but job losses were smaller than those posted in 2002 and 2001. The job losses were broad based across both durable and nondurable goods industries. For the eighth consecutive year, the apparel industry experienced double-digit declines as plants shut their doors or moved operations to lower-wage countries overseas. Over the past eight years, apparel industry job cuts totaled 23,000.

If consumer spending picks up steam and business travel revives, Mississippi’s leisure and hospitality industry should rebound, boosting recent gaming projects along the Gulf Coast.

Several other industries also experienced job losses in 2003. Furniture makers, computer and electronic manufacturers, electrical equipment manufacturers and machinery producers all reported declining employment rolls. The paper industry also registered sizable job losses during 2003, and Georgia-Pacific announced plans to close its particleboard facility in Oxford and lay off 170 employees. Chemical companies in the state were hurt by low prices for the fertilizers they produce combined with high input prices for natural gas. The positive news was that the transportation equipment industry added to payrolls, in part because of U.S. Navy shipbuilding contracts along the Gulf Coast.

The outlook for the state’s manufacturers is more promising than it has been for several years. U.S. Navy contracts will continue to positively affect the state’s shipyards. For example, Northrop Grumman Ship Systems is undergoing a $344 million expansion of its facilities in Gulfport and Pascagoula, which could create as many as 2,000 new jobs. In addition, the Middle East–based Future Pipe Group recently announced plans to build a $7.5 million plant to manufacture fiberglass pipe in Mississippi. Perhaps most importantly, Nissan’s new plant in Canton and auto suppliers locating in the state will eventually provide thousands of jobs for Mississippians.

Real estate markets mixed
Single-family housing markets in Mississippi generally remained healthy during 2003. The state as a whole experienced steady levels of activity, with existing home sales similar to the previous year’s levels. New home construction strengthened during the third quarter. Activity in 2003 was especially strong around Jackson whereas the Biloxi-Gulfport area experienced more modest levels of growth. Housing permits picked up in the second half of the year, suggesting that 2004 may be a good year for Mississippi housing markets. Construction employment rose through the third quarter of the year.

Mississippi Manufacturing and
Total Nonfarm Employment
Source: Calculated by the Federal Reserve Bank of Atlanta using monthly Bureau of Labor Statistics data (not seasonally adjusted) provided by Haver Analytics. Data for 2003 are through the third quarter.

As in many other parts of the Southeast, multifamily markets were weak in 2003 in large part because low interest rates made single-family housing relatively attractive. As of September, multifamily permits were down sharply year-to-date relative to the previous year. Reports indicate that vacancy rates are near 10 percent in the Gulf Coast market although newer complexes are faring somewhat better.

Nonresidential construction continued to decline during 2003, with both office and industrial activity dropping in most areas as the state’s economy remained weak. However, commercial real estate markets along the Gulf Coast were generally described as steady and balanced. The outlook for the nonresidential sector crucially depends on economic growth picking up across the state during the next year. Manufacturing-related construction along the Mississippi Gulf Coast should improve because of expansions at the Stennis Space Center and Northrop Grumman/Litton Industries. In addition, several hotel expansions are under way in the Biloxi area.

Service sector retrenches
Activity was slow in most of Mississippi’s service sector during 2003. Employment growth in professional and businesses services tapered off as businesses retrenched in the slow economy. Education services posted declining employment rolls for the first time in three years. Even the health care segment and the leisure and hospitality industry registered declines in 2003 although there was a marginal employment increase in the gambling industry. Tourism along the Mississippi Gulf Coast remained blunted by the soft economy, but new attractions and a strong showing in late summer raised expectations that 2003 would be better than expected. Employment in the hotel industry slumped for the second year in a row as consumers and business continued to minimize travel.

Retailers have been doing relatively well in Mississippi. For example, a discount retailer reported that sales have strengthened in recent months. Sales have grown recently at high single-digit rates compared with low single-digit rates during the first six months of 2003.

The outlook for the state’s service industries is generally positive. If consumer spending picks up steam and business travel revives, the leisure and hospitality industry should rebound, boosting recent gaming projects along the Gulf Coast. The Mississippi Gaming Commission recently approved sites for new casinos in Greenville and Biloxi. The state’s many drive-to destinations are a boon given the concerns of some vacationers over airline travel.

Tennessee posted no net gains in total employment from the third quarter of 2002 through the third quarter of 2003. Although the state failed to add jobs in 2003, its economy performed better than in 2001 and 2002, when employment declined. The state’s manufacturing sector continued to be battered, but job losses were smaller than in recent years. Most service industries, including business services and leisure and hospitality, posted gains. In addition, the housing market remained strong, with record sales in some markets.

The outlook for 2004 is generally positive for Tennessee. Vehicle manufacturers and industrial equipment producers are likely to contribute to the economy, and housing markets should continue to perform well. Key nonresidential markets will probably pick up, and the service sector will continue to boost the economy.

Manufacturing woes ease
The falloff in Tennessee’s factory employment slowed during 2003. Following two years of declines of nearly 7 percent, manufacturing employment fell by only about 3 percent from the third quarter of 2002 through the third quarter of 2003. The decline in the state’s important durables sector was less pronounced than in the previous two years partly because of expansion in the state’s vehicle production industry. While employment in many durables manufacturing industries such as wood products, machinery, computer and electronic products, electrical equipment and furniture declined, the transportation equipment and motor vehicle parts industries posted gains as new plants came on line or existing plants expanded.

Nondurables manufacturing employment continued to shrink, especially in the textile and apparel industries, where employment fell at double-digit rates from the third quarter of 2002 through the third quarter of 2003. Employment at the state’s textile mills is about 55 percent of what it was in 1998, and since then apparel industry employment has shrunk 30 percent — over 21,000 jobs. Creekwood Inc. announced plans to eliminate jobs at its clothing factory in Columbia and shift sewing operations to India. In contrast, the food processing industry, which employs around 36,000 workers in the state, had relatively stable employment levels during 2003.

The new year should bring improvement to certain manufacturing industries in the state. Producers of machinery and other equipment will benefit from stronger spending on capital equipment as the national economy expands. The vehicle production sector will continue to stimulate Tennessee’s economy. Nissan North America is expected to spend $250 million to expand its Smyrna and Decherd plants so that production of the Pathfinder SUV can be relocated from Japan to Tennessee. The move will create 800 jobs directly at the Nissan plants and another 700 jobs for suppliers for both plants. In addition, Bridgestone plans to build an $11 million parts plant in Dickson to supply shock-absorbent pads and interior cushions for Honda, Toyota and Nissan vehicles, and Bodine Aluminum — a subsidiary of Toyota — began construction in November in Jackson on a $124 million plant to manufacture engine blocks.

High demand for religious and music publications should continue to drive the state’s printing and publishing industry. Foreign competition will likely continue to batter the textile and apparel industry until only the most efficient producers and those with a competitive niche remain within the state.

Tennessee Manufacturing and
Total Nonfarm Employment
Source: Calculated by the Federal Reserve Bank of Atlanta using monthly Bureau of Labor Statistics data (not seasonally adjusted) provided by Haver Analytics. Data for 2003 are through the third quarter.

Housing markets forge ahead
The state’s single-family housing markets received a boost from low mortgage rates during 2003. Construction continued at moderate levels while existing home sales were up at a double-digit rate. Real estate agents in Nashville reported a record-breaking pace during the fall, with sales growing 23 percent in September and up almost 11 percent year-to-date. Many Tennessee homebuilders said growth in new home sales and construction was moderate during the third quarter although a few voiced concerns about pressures to keep prices low. Permit activity was fairly strong by mid-2003, suggesting another healthy year ahead.

As was true across the Southeast, multifamily rental markets in Tennessee softened during the past year. As of September, multifamily permits were down sharply compared with 2002’s levels. Occupancy rates remained below historical levels in Nashville, and discounts were prevalent across the area.

Nonresidential construction activity in Tennessee was uneven in 2003. Activity declined during the first quarter, turned positive in the second quarter and slowed again during the third quarter. The Nashville office vacancy rate during the second quarter of 2003 was steady at 16 percent while the industrial vacancy rate rose slightly to around 15 percent. Announced large corporate relocations, including Louisiana-Pacific and Caremark Rx, to the Nashville area in 2004 should boost both office and industrial markets.

Service sector grows
Most industries in the state’s service sector posted job gains during 2003. Educational and health services employment was up by over 3 percent; employment growth in professional and business services slowed from the previous year but was still positive overall. Verizon opened a call center in Murfreesboro, and a credit card processing company expanded operations in Knoxville. Employment at both hospitals and nursing care facilities also rose.

Although employment growth at hotels continued to decline in the aftermath of the recession and the Sept. 11 attacks, the amusement and recreation industry and restaurants added jobs during 2003. The state’s many drive-to attractions, such as those in Nashville, Rock City and Pigeon Forge, proved popular among vacationers reluctant to fly to more distant locales.

Unlike most states, Tennessee enjoyed a healthy fiscal situation in 2003. As of September, state tax collections were up over 8 percent on a year-over-year basis. Importantly, TennCare, the state’s $7.1 billion health insurance program for the poor, elderly and disabled, was reportedly financially sound and expected to stay within budget.

The outlook for the state’s service industries in 2004 is for moderate growth as the national economy expands. Health services are likely to continue to add jobs because of continuing demand from the aging population. Business services will pick up in line with renewed business activity, as will the convention business and business-related travel. The state’s tourist destinations should continue to attract good numbers of vacationers as drive-to destinations remain popular.

This article was written by Madeline Zavodny, David Avery, Elena Casal, Whitney Mancuso, Navnita Sarma and Gustavo Uceda of the Atlanta Fed research department’s regional research group.

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