EconSouth (Fourth Quarter 2004)
Southeasts Economy on Stable Course
Economic trends in the nation will likely be mirrored in the Southeast in 2005. Several states face a number of challenges, but the region as a whole should sustain strong economic growth.
Employment in Alabama has been slow to recover from the 2001 recession. While some employment growth occurred in 2004, the overall pace remained sluggish. However, unlike most of the nation, Alabama experienced only muted declines in per capita income during the same time period. A plausible explanation for this difference is that the employment losses in Alabama were concentrated in relatively low-wage nondurable manufacturing jobs and that the loss in earned income was partially offset by an increase in transfer payments (that is, government payments for which no good or service is exchanged, such as health benefits and pensions) in 200103. Per capita income growth in Alabama was solid in 2004 although the level remains more than 15 percent lower than in the rest of the nation.
After several years of decline, the states manufacturing sector appears to have stabilized and is likely to expand in industries such as transportation equipment and metals. This trend, combined with ongoing growth in business-related services, should support a reasonably strong economy in Alabama in 2005.
Manufacturing outlook is mixed
Manufacturing plays a significant role in Alabamas economy. Alabamas manufacturing employment changed little in 2004, improving from the 5 percent declines in 2002 and 2003. The falloff in durable goods employment over the past several years subsided largely because of hiring by auto plants and parts suppliers as well as machinery and steel producers. The strong residential construction market provided a boost to manufacturers of lumber and wood products and furniture. Employment in the nondurable manufacturing sector, however, continued to decline as apparel mills experienced double-digit employment losses during 2004.
Industry executives in the states manufacturing sector are cautiously optimistic about prospects in 2005. The large auto plants and auto component suppliers will continue to provide an increasing share of Alabamas durable goods employment. If residential building slows as expected, growth in the lumber and wood and furniture industries will likely moderate. The outlook for the states apparel sector remains bleak because of continuing foreign competition and domestic operations moving offshore.
Real estate remains on firm ground
Reflecting the states relatively robust income growth in 2004, Alabamas single-family housing market showed continued strength in both existing home sales and new construction. As in the nation as a whole, some easing in residential sales and construction is expected in the state in 2005, but levels should remain solid.
Conversely, after a boost from manufacturing construction in 2003, nonresidential construction in the state declined during 2004. The office market in Birmingham was slow, and no significant speculative construction is expected in the year ahead. However, nonresidential repair and remodeling efforts, which got under way in late September after Hurricane Ivan damaged portions of south Alabama, should carry over and boost nonresidential construction in 2005.
Services and tourism expect modest growth
The professional and business services industry made small gains in employment (1.6 percent growth) in 2004 following little change during the previous year. This modest growth is likely to continue as the states economy expands.
The 2004 hurricane season dealt the coastal rental markets a significant blow, and rebuilding efforts should continue into 2005. But the leisure industry should be aided by the expansion of Birminghams airport. Birmingham area hotels are reportedly landing conventions and other events that were originally planned for Alabamas storm-damaged Gulf Coast area.
Florida has experienced more robust employment growth than the nation as a whole since the 2001 recession and has accounted for much of the overall job growth in the Southeast. But per capita income declined in the state for much of 2002 and the first half of 2003 and then experienced only modest growth in late 2003 and 2004.
A partial explanation for this pattern is that the job losses in Florida have occurred primarily in the higher-paying industries, such as durable goods manufacturing and information technology services. In addition, Florida experienced historically strong population growth during 2003 and 2004 even though employment grew less robustly than during the 1990s. Furthermore, much of the recent employment growth in Florida has been concentrated in relatively low-wage service jobs. Thus, while forecasters expect positive growth in per capita income in 2005, the growth rate is likely to be less than the growth rate for employment.
It is not clear what the overall economic effect of the 2004 hurricanes will be. While specific locales and industries may experience longer-term negative consequences, the aggregate impact on the state is likely to be neutral.
Services and tourism confront challenges
The estimated 4.5 percent growth in Floridas business services employment in 2004 is approximately a percentage point higher than in 2003. Employment in professional, scientific, and technical services-producing industries expanded particularly strongly in 2004, and nursing care facilities also experienced solid employment growth. The strong Florida economy should lead to continued job gains in the business services sector in 2005, while the states disproportionately older population will continue to place added demands on the states health care sector.
Floridas tourism and hospitality sector had finally made a comeback from the aftermath of Sept. 11 when it was severely affected by four hurricanes in the late summer of 2004. After posting only marginal gains in 2002 and 2003, employment in the sector advanced by 2.6 percent, or 24,000 workers, in 2004. Employment at amusement parks gained about 4 percent over the period, and hotel and motel payrolls were up by 1.3 percent. Attendance numbers were strong at the states many resorts and attractions, and the cruise ship industry posted strong revenues.
Although the hurricanes hit the state after the peak of the tourist season, damage to some resorts and infrastructure was extensive. Mandatory evacuations shut down tourism-related businesses and closed some for an extended period. The outlook for 2005 is positive although officials are concerned that travelers may reconsider booking a vacation or business meeting in the state during hurricane season.
Real estate shaken by Mother Nature
Florida accounted for much of the strength in the Southeasts single- and multifamily housing markets in 2004 despite delays in closings and development in the state because of the hurricanes. Florida should remain an attractive housing market in 2005, but construction may be constrained because of shortages in supplies and labor stemming from hurricane-related rebuilding.
Nonresidential construction in Florida remained at low levels during 2004, but vacancy rates have begun to stabilize in both the industrial and office markets. Retail construction was relatively robust. The four hurricanes damaged commercial structures throughout the state, and repair work will likely carry over into 2005.
Manufacturing gains continue
Floridas factory employment held steady in 2004 after three years of moderate employment losses. Employment in durable goods industriesincluding producers of computer and electronic equipment, semiconductors, and aerospace products and parts as well as boat and shipbuildersimproved over 2003 levels. These industries should continue to experience strong demand in 2005. New U.S. Department of Defense contracts will help the states military contractors, and the resumption of NASAs space shuttle program will ensure jobs for thousands of workers and suppliers.
Nondurable goods industries, such as paper and printing, textiles and apparel, chemicals, and plastics, which posted declining job rolls in 2004, will face ongoing challenges because of foreign competition in 2005.
The performance of the Southeastern agriculture sector was mixed in 2004. While domestic and foreign demand for the regions produce was healthy, production of certain crops was affected by four destructive hurricanes. Overall demand conditions should remain positive in 2005, and production in storm-affected crops should recover in the coming year.
Poultry. The performance and outlook for the Southeasts poultry industry is encouraging. Poultry is the regions leading income-producing agricultural product, accounting for over $7 billion in cash receipts. Domestic market conditions improved markedly in 2004, and the value of the Southeasts exports increased as well. Analysts anticipate continued demand from domestic and foreign markets for poultry products in 2005.
Cotton. In spite of losses associated with the hurricanes, yields remained high in the Southeasts $1.7 billion cotton industry. Prices declined in 2004, however. Shipments of cotton abroad continued, and analysts anticipate strong demand from China and India in 2005.
Citrus. Hurricanes also hammered the regions citrus-producing areas, and as a result the outlook for Floridas $1.6 billion citrus industry in 2005 is uncertain. The 2004 orange crop was the smallest in 11 years, an estimated 27 percent lower than 2003 production levels. Moreover, the U.S. Department of Agriculture estimates that the states 2004 grapefruit crop will be 63 percent less than 2003s production. Unfortunately for domestic growers, citrus juice price increases may be tempered by high current inventory levels and a bumper crop in Brazil. Thus, citrus faces daunting challenges in 2005.
Greenhouse-nursery. Greenhouse and nursery crops continued to be the fastest-growing segment of Southeastern agriculture, producing about $2.6 billion in cash receipts and accounting for approximately 18 percent of the regions farm income. The 2004 hurricanes hit key production areas in Florida with damages reportedly near $500 million. The outlook for the industry will depend on how quickly affected growers restore production levels.
Employment and earnings trends in Georgia tend to mirror those in the United States. As in the nation as a whole, employment and per capita income in Georgia were slow to recover from the 2001 recession. Both measures grew in 2004, with income growth slightly outpacing employment growth.
Other signs that the recovery in Georgia is gaining traction include the strong gain in state tax revenue in 2004 and the decline in the share of total personal income derived from transfer payments. With the states large manufacturing industry stabilizing, business services expanding, and real estate activity remaining at high levels, Georgias economy is on course for a stronger 2005.
Services and tourism eye more growth
Employment in most of Georgias service-producing industries increased in 2004. For instance, professional and business services added 6,300 jobs (a 1.6 percent growth rate) following three years of declining employment. Providers of temporary staffing services expanded employment by 3 percent in response to strong demand from businesses that are hesitant to add to permanent payrolls. Educational and health services added moderately to employment rolls, with hospital employment increasing a strong 3.5 percent. The growing economy should lead to continued strength in these industries in 2005.
An uptick in the states convention activity led to strong growth rates in the hotel industry. Convention activity is likely to continue to trend upward in 2005 as general business activity increases. Tourism should also be bolstered by Atlantas new multimillion-dollar aquarium scheduled to open in 2005.
Real estate activity cooling
Housing in Georgia experienced healthy gains in 2004, but some weakening was evident in the second half of the year. Although single-family building permits and the condominium market exhibited strong growth, existing home sales rose only modestly in 2004. Most forecasters expect continued moderation in Georgias housing market in 2005, which matches the national housing outlook.
Georgias commercial real estate market continued to struggle in 2004. Nonresidential construction rose moderately from weak levels in 2003, driven primarily by retail development associated with strong housing growth in the state. Atlanta office and industrial vacancy rates remained elevated. Few new office projects are scheduled to break ground in 2005, and a significant rebound is not expected for Atlantas office market during the year. But the outlook for the industrial market is more promising, as evidenced by the modest gains in build-to-suit activity in the second half of 2004.
Manufacturing holds firm
Employment levels in Georgias manufacturing sector stabilized in 2004 following four years of moderate job losses. Wood product manufacturing increased in response to the boom in residential building in the Southeast. Food processors also added to payrolls, but employment in the transportation equipment industry remained largely unchanged during the year. Several textile mills closed in the state as firms shut down or moved operations offshore.
The factory outlook is for more of the same in 2005. Remaining textile plants will likely continue to shed jobs because of foreign competition. The carpet production segment should remain solid but may moderate somewhat because of the expected slowing of residential building. The transportation equipment industry should continue to benefit from U.S. Department of Defense contracts, especially in the aerospace industry. In addition, auto parts suppliers for auto assemblers located in the Southeast, such as Honda and Hyundai, are planning to locate in Georgia.
Banks Face More Competition in 2005
Banks continue to perform well in the Southeast and nationally. In recent years, the banking industry has reported record or near-record quarterly earnings despite the 2001 recession and the subsequent slow recovery. More recently, the improved credit quality of bank assets has been the primary driver of the industrys earnings growth.
The recent performance of Southeastern banks reflects the positive, but mixed, economic picture. During 2004, large banking institutions based in the region had the strongest levels of commercial lending since the recession in 2001. Residential mortgages and home equity lines of credit also continued to grow for these large banks, but consumer loans declined.
Community banksthose with assets less than $1 billioncontinued to report stronger loan growth than their larger counterparts.
The expected scenario of higher but still accommodative interest rates and increased demand for commercial loans suggests that community banks will continue to experience strong loan growth in the near term. Close proximity to some of the nations fastest-growing communities will fuel the dominant forms of lendingnamely, construction and development lending and real estate lendingby the Southeasts community banks. Florida banks, in particular, should see a boost in loan growth related to reconstruction efforts following the four hurricanes in 2004.
Looking ahead, unless the economic expansion accelerates, bank net interest margins are likely to come under pressure as short-term interest rates increase. Intensified competition for commercial lending business will limit banks ability to raise loan yields. When combined with the fact that credit quality conditions are not likely to improve much beyond current levels, bank managers will be challenged to find ways to sustain earnings growth in the coming year.
Perhaps the best reflection of the competition banks face is the growth in merger and acquisition activity. In the four quarters ending Sept. 30, 2004, there were 272 mergers announced nationwide involving banks with assets totaling $887.3 billion. This number compares to 228 mergers involving banks with assets totaling $94.2 billion during the four quarters ending Sept. 30, 2003. Clearly, competition in the financial services industry will lead to continued consolidation in banking.
As oil and gas prices move up and down, so does per capita income in Louisiana. When oil prices peaked just before the 2001 recession and again in 2003, per capita income in the state increased as well. However, the oil industry has not had a similar influence on employment in the state because energy production and exploration have not expanded much in response to the price increases.
While repair work to oil and gas infrastructure in the aftermath of Hurricane Ivan is boosting employment in the short term, the longer-term outlook for Louisiana remains tied to renewed oil and gas exploration and the continued strength in the states hospitality industry.
Manufacturings mixed prospects
Employment in the states factory sector was little changed in 2004good news after five previous years of declines. Nearly all of the improvement was posted in the durable goods sector. High valueadded nondurable industries such as chemical manufacturing, however, posted further employment declines because of foreign competition, sluggish demand, and high input prices.
The outlook for Louisianas manufacturing sector in 2005 is positive for those industries associated with military contractors. Navy shipbuilding contracts will continue to provide a stabilizing influence since many contracts are long term. Hurricane damage to the oil and natural gas pipelines has caused high levels of shutdowns in production in both industries. (See Hurricanes Raise Questions About Floridas Outlook, on page 22, for more details.)
Steady times for real estate
The single-family housing market in Louisiana was generally steady in 2004, reflecting the subdued employment growth in the state. Existing home sales were down slightly from 2003 levels while building permits were up. Given the tepid employment outlook, no significant changes in the states housing market are expected in 2005.
Nonresidential construction improved slightly over its weak performance in 2003. Office and industrial markets remained steady overall while the retail segment showed some improvement. Expansion is likely to remain restrained in 2005.
Strength remains in services and tourism
Professional and business services employment in Louisiana was little changed in 2003 and 2004 while services linked to the energy extraction industry stabilized after cutbacks in 2003. Education, employment, and hospital services all added to payrolls although employment growth at hospitals slowed relative to 2003. Overall, the states leisure and hospitality industry posted little growth, but hotel and motel and food services employment did expand. Employment in the states gambling industries continued its three-year downturn.
The outlook for both services and tourism in the state is mostly positive for 2005. Revenues are up for New Orleanss Harrahs Casino, one of the citys largest employers. However, there is concern that unless business travel improves, hotel occupancy rates will remain lower than desired and convention facilities in New Orleans will be underutilized. Service industries tied to the oil extraction industry may rebound depending on the path of oil and gas prices and the extent of the impact of 2004s hurricanes on pipeline infrastructure in the Gulf.
Mississippi endured a long period of declining employment beginning before the 2001 recession and continuing through the end of 2003. Despite this lackluster employment picture, the growth in per capita income in the state remained largely positive. In fact, per capita income in Mississippi has steadily increased relative to the rest of the nation since 2000.
However, per capita income in Mississippi is still approximately 25 percent less than per capita income for the United States as a whole. In addition, the share of income in Mississippi that is attributed to transfer payments has continued to rise, reaching historically high levels of almost 22 percent of total income in 2004. This increase in transfer payments is likely a primary explanation for the relative stability of per capita income in the state since the 2001 recession. The improving employment situation in many of the states key industries should lead to steady growth in 2005.
Times are mixed for manufacturing
Mississippis manufacturing employment picked up notably in 2004 after four years of losses. Durable goods industries, such as vehicle production, boat- and shipbuilding, and furniture manufacturing, posted job increases. Computer and electronic product manufacturers also expanded payrolls following three years of decline, and power transformer manufacturers faced increased demand for electrical equipment in the wake of the hurricanes. But many other industries continued to pare job rolls. For instance, both paper and chemical manufacturers posted double-digit job declines because of overcapacity and growing imports.
The outlook for Mississippis factory sector in 2005 varies by industry. Department of Defense shipbuilding contracts and further growth in the vehicle and vehicle parts industries will keep the transportation equipment industry strong in 2005. Growth in the furniture and lumber industry will be closely tied to residential construction activity in the region, and furniture producers are likely to face strong foreign competition.
Real estate remains healthy
A modest improvement in employment levels, combined with low interest rates, resulted in a stable single-family housing market in Mississippi in 2004. Both existing home sales and construction were higher than in 2003. The states housing market should remain healthy in the coming year, supported by further improvements in employment and income levels.
After experiencing modest improvements in 2003, nonresidential construction activity slowed in 2004, reflecting in part the maturation of the states casino industry. In 2005, further expansion in industries such as shipbuilding and automobile production should lead to modest gains in nonresidential construction.
Services and tourism are cautiously upbeat
The performance of service industries in the state was mixed in 2004. Professional and business service employment improved as businesses, especially those tied to vehicle production, continued to expand. The health care industry posted moderate employment increases, particularly for nursing and residential care facilities. But employment in the gambling industry and related services slumped in 2004 as consumers and businesses cut back on travel to the states coastal areas. The downturn was particularly severe during the hurricane season.
The outlook for the states business service industries in 2005 is generally upbeat, but there are a few concerns. While the states drive-to tourist destinations are likely to remain an attractive option for those wishing to avoid air travel and high gasoline prices, rapid development in recent years may restrain growth in the states tourist-related businesses in 2005.
As did most of the Southeast, Tennessee suffered significant employment declines in recent years as a result of the 2001 recession. Tennessee enjoyed a relatively quick recovery from the recessions trough, however, as employment reached positive growth levels by the end of 2002. Even as the state experienced net employment losses, per capita income continued to grow throughout the recession and the recovery. A partial explanation of this trend is that the jobs lost during the recession were low-wage jobs and the increase in transfer payments worked to offset the loss in wages.
The stability of income in Tennessee is also reflected in the strong growth in sales tax revenues. Following a 2002 tax increase, sales tax revenues continue to bolster Tennessees revenue as strong retail spending has broadly maintained the pace of the 1990s.
Ongoing strength in the states nonbusiness services industries such as education, health care, and leisure and hospitality, combined with renewed stability in the states large manufacturing sector, should help ensure a bright outlook for Tennessees economy in 2005.
Manufacturing maintains footing
After three years of declines, the states manufacturing employment was virtually unchanged in 2004. The double-digit employment declines in the apparel sector finally subsided as employment steadied. After moderate declines in 2003, employment in the printing industry also stabilized. The durable goods manufacturing industries, such as machinery and computer and electronic product manufacturers, posted increasing payrolls in 2004 following declines in the previous year. The transportation equipment component also registered job gains related to the expansion of existing plants and the creation of new plants in the auto assembly and auto parts industry.
The current expansion in the transportation industry in Tennessee should continue into 2005. The states printing and publishing businesses are also likely to benefit from the increasing demand for religious and music publications. But employment in the states textile and apparel industry should continue to struggle as a result of intense foreign competition.
Strength ahead for real estate
Although Tennessees single-family housing market experienced strong growth in 2004, both existing home sales and new home construction witnessed easing in the third quarter. The single-family housing market should remain robust.
The news in the commercial real estate market is encouraging. Nashvilles office and industrial vacancy rates improved, and further improvement is expected in 2005. But construction remained at relatively low levels, similar to those experienced in 2003, and the outlook for 2005 is for only modest increases.
Services and tourism gain jobs
The states service sector posted mostly positive results in 2004. Professional and business service employment was relatively stable in 2004; this performance was a marked improvement over notable job losses in 2003. Educational and health services continued to post job increases whereas employment at hospitals held steady over the year. The leisure and hospitality industry expanded employment rolls, and employment at hotels and motels continued to rebound from the Sept. 11, 2001, terrorist attacks.
The states service industries performance should improve moderately in 2005. Health services will likely continue to grow along with the states aging population, and business services should expand with the overall economy. The states tourist destinations should boost employment, driven in part by the expansion of Dollywood, the number one paid attraction in Tennessee, and the onging popularity of Opryland in Nashville.
David Avery, Michael Chriszt, Sarah Dougherty, Whitney Mancuso, Melinda Pitts, John Robertson, Navnita Sarma, and Gustavo Uceda of the Atlanta Fed research departments regional research group contributed to the article. Carl Hudson of the Atlanta Feds Supervision and Regulation Department also contributed.
Illustrations by Jay Rogers