EconSouth - Fourth Quarter 2007

The Southeastern Economy in 2008

Manufacturing Declines Modestly

Photo of manufacturing lineThe region's manufacturing sector was a mixed bag in 2007 as housing woes and foreign competition squeezed many producers. But defense- and energy-related manufacturers enjoyed a strong year.

Employment in Southeastern factories declined 1.7 percent from the third quarter of 2006 through the third quarter of 2007. Durable goods production, which includes industries such as aerospace, transportation equipment, machinery, metals, lumber and wood, furniture, and building products, posted an employment decline of just over 1 percent during that same period in the Southeast. The region's nondurable industries posted a 2.6 percent decline.

Employment was also down in nondurable goods manufacturing, which includes the labor-intensive apparel industry, the textile industry, and food production, as well as industries such as paper, chemicals, and printing.

Housing woes carry over
Important manufacturing industries linked to residential housing markets reported declining or weakening employment rolls in 2007. For example, wood product manufacturers in Mississippi and Alabama reported respective employment reductions of 2.5 percent and 6.2 percent from the third quarter of 2006 through the third quarter of 2007. Furniture manufacturers' payrolls shrank by 7 percent in Tennessee and by 4.4 percent in Mississippi. Textile employment in Georgia was down by more than 9 percent, in part because of weakness in residential carpet markets. Chemical producers that manufacture inputs for building products such as vinyl siding and roofing shingles reported a falloff in business activity as well.

Consumer Spending
Real Estate

Several other manufacturing industries shed jobs in 2007. Even employment in the region's vibrant automotive manufacturing industry could not sustain the pace of recent years in the face of anemic new car sales. For example, employment in Alabama's motor vehicle manufacturing segment actually declined by more than 2 percent in 2007 following double-digit advances in 2006. Sluggish demand led Hyundai Motor Co. to shut its auto plant in Alabama for 10 days during the fourth quarter. The 2007 paring back of operations at the General Motors (GM) plant in Doraville, Ga., decreased transportation equipment payrolls there, which are down more than 8 percent from a year ago. Last spring, GM's Saturn plant in Spring Hill, Tenn., laid off close to 2,400 workers for 18 months as the Saturn brand is phased out there. The plant will retool to produce other GM vehicles.

Defense building, energy provide good news
Some industries continued to expand. Aerospace product and parts manufacturing employment grew by more than 5 percent over the year from the third quarter of 2006 through the third quarter of 2007 in Florida and Alabama, thanks to strong demand from defense contractors. For example, ongoing strong military demand led Northrop Grumman Corp., one the largest defense contractors in Florida, to increase payrolls in the state by 18 percent in 2007, to almost 1,000 employees, at its laser-systems unit in Apopka.

Related Links
On the Web:
U.S. Census Bureau data on mining, manufacturing, and construction
Federal Reserve data on industrial production and capacity utilization

In Louisiana, large U.S. Department of Defense shipbuilding contracts helped stabilize employment, and producers of equipment to service the oil and gas industry reported increasing business on the strength of high oil prices.

New plants call the Southeast home
Major auto parts suppliers have announced their planned arrival to the region. Their activity will support the new Kia Motors plant that broke ground in Georgia in late summer 2007 and contribute to the ongoing expansion of the area's auto manufacturing industry.

Foreign investment and new industries will also stimulate the region's industrial sector. For example, ThyssenKrupp broke ground in November on its $3.7 billion steelmaking complex near Mobile, Ala. The German steelmaker, whose plant will employ 2,700, chose Alabama and the state's projected $811 million incentive package after a yearlong search. Once operational in March 2010, the new facility will process carbon and stainless steel for manufacturers in the United States and throughout North America. According to the firm, the plant will serve several industries including automotive, construction, and household appliances.

In addition, Chinese construction equipment maker Sany Heavy Industry Co. Ltd. is spending $30 million to build its first North American assembly plant in Peachtree City, Ga. Construction on the first phase of the project will begin in the first quarter of 2008. Initially, the plant will employ 200 people, with the potential to employ 600 people over the next 10 years.

The University of Florida will build a cellulosic ethanol research and demonstration plant on Florida Crystals Corp.'s Okeelanta site. It will produce between 1 million and 2 million gallons of ethanol a year and will be the first plant of its kind in Florida. Range Fuels Inc. will construct a $225 million cellulosic ethanol plant in Soperton, Ga. The plant will be the first in the United States to manufacture this energy source for commercial use.

Looking ahead to 2008
The outlook remains strong for the region's defense-related industries in 2008. Shipbuilding contracts in Louisiana and Mississippi and aerospace contracts in Alabama, Tennessee, and Florida, for example, will continue to provide some stability to the manufacturing sector because many contracts are long term. In addition, Tennessee's Vought Aircraft Industries will add about 120 jobs to its Nashville plant because of a contract with the European company Airbus. The plant employs about 1,000 people and makes wing components for several airplane manufacturers.

Energy extractors and related firms, mainly clustered in Louisiana, will continue to benefit from strong energy demand. In Mississippi, PSL North America recently announced a new manufacturing plant that will produce steel pipe for use in natural gas pipelines. Continuing expansion of the industry and an aging infrastructure that needs replacing are stimulating strong demand for its product.

The depreciation of the U.S. dollar relative to other currencies suggests the region's manufacturers in industries such as aerospace products in Alabama, Florida, and Tennessee and machinery and scrap metal in Florida and Alabama will continue to enjoy strong demand for exports.

Lumber and building supply demand, as well as furniture and residential carpet production, may continue to post little growth if residential housing markets remain weak going into 2008. Georgia's important commercial carpet production segment, however, may get a boost from growth in the corporate office market.

Further layoffs could occur in the region's apparel manufacturing industry as companies shut down or move operations offshore to remain competitive. Apparel employment was down by double digits in Alabama as firms outsourced production and closed mills because of weak demand and foreign competition. The printing and publishing industry, which has significant payrolls in Tennessee and Florida, should continue to lose market share to electronic media.

Automaking Taps the Brakes
Producing cars has become a significant part of the region's economic success. The eight automobile manufacturing plants in the Southeast directly employ about 29,000 people and produce 24 vehicle models. An additional 78,000 jobs support those plants by manufacturing motor vehicle parts. These numbers make the auto industry one of the largest manufacturing employers in the Southeast.
Related Links
On the Web:
Automotive News
Automotive Digest

In 2007, high inventories and weaker demand, however, led to lower production through mid-October. Production in 2007 through November was down 12 percent in the Southeast from the same period in 2006.

Nationally, by comparison, vehicle assembly production was only 5 percent lower (see the chart). Only two Alabama assembly plants, Honda, in Lincoln, and Hyundai, in Montgomery, posted production increases as of October 2007 compared with 2006.
Vehicle Production in the Southeast by Manufacturer, 2006–07
Chart Vehicle Production in the Southeast
Note: Data compare Jan.–Oct. 2006 with Jan.–Oct. 2007.
Source: Automotive News

The inventory levels of most models produced in the Southeast exceeded the 60-day supply benchmark. Reduced production and higher inventories were a direct result of lower sales. Sales of vehicles assembled in the region fell 4.7 percent from the year ending November 2006. Nationally, the comparable performance for vehicle sales was a 2.4 percent decline. Mercedes and Hyundai were the only regional carmakers to post national sales gains during 2007.

Retail markets in Florida and some other areas in the region are likely to continue to underperform in 2008 because of more subdued consumer spending in an environment of extended housing market weakness. In addition, General Motors's 60-year old Doraville, Ga., plant will shut down in 2008. New assembly plants announced in Mississippi (Toyota Motor Co.) and Georgia (Kia Motors) will likely not completely offset recent job losses by General Motors and Ford Motor Co., which closed its Hapeville, Ga., plant in October 2006. The new plants in Mississippi and Georgia are scheduled to begin production in early 2010.