EconSouth (Fourth Quarter 2005)

Alabama Economy Weathers Storm

With 1.1 percent growth in total employment in 2005, employment in Alabama returned to pre-2001 recession levels of approximately two million workers. The bright spot in Alabama’s economy was manufacturing employment, which was up over 1 percent for the year; in comparison, the United States as a whole suffered slight job losses in manufacturing during 2005. The state’s increase was largely due to 4,600 new jobs in the transportation equipment industry. The performance of the state’s service sector was not as strong relative to the nation’s, however. The sector’s 1 percent growth lagged the national growth of 1.5 percent. The only service industry displaying strong momentum going into 2006 is the professional and business services employment category, which steadily increased employment in 2005 (see the chart).

Photo courtesy of Hyundai Motor Manufacturing Alabama LLC
The Hyundai auto plant in Montgomery strengthened Alabama’s manufacturing sector, adding high-paying jobs and giving a lift to related industries such as auto parts.

Although employment growth has been moderate, Alabama is displaying other positive economic signs. For instance, state tax revenues increased 10 percent, and real per capita income grew more than 3 percent. Additionally, the average number of unemployment claims filed continued its three-year decline although the pace of that decline slowed somewhat.

Looking ahead, the state should benefit from the hurricane reconstruction in Mississippi and Louisiana as government and relief agencies use Alabama as a staging area and as the state’s manufacturers increase production of building materials. Overall, the various economic indicators are consistent with Alabama continuing on its modest growth path in 2006.

Growth moderates in real estate and construction
Alabama’s housing industry experienced a strong 2005, in part the result of replacement activity related to the 2004 hurricanes. Real estate agents described home sales as strong and steady throughout most of the year. But families displaced by Hurricane Katrina drove up demand for homes and prices in some areas of the state. For example, in September sales in Mobile increased 75 percent and prices increased by over 15 percent relative to a year earlier. Overall, housing markets should moderate some in 2006, in line with higher mortgage rates and a slowdown in hurricane-related construction activity.

New commercial construction slowed in the first half of 2005 because of delays caused by repair work associated with the 2004 hurricanes. Post-Katrina, Mobile’s commercial market tightened appreciably as government and relief agencies quickly occupied much of the available office and industrial space in the city. The state has also experienced increased interest from firms wanting to relocate out of more hurricane-prone Gulf Coast areas. Both of these factors should stimulate construction activity in 2006 although the redirecting of resources to the rebuilding activity in Mississippi and Louisiana could cause some delays.

Alabama Employment Momentum by Industry
Note: This chart compares short-term and long-term employment growth to provide an overall picture of the state’s employment momentum by industry. The size of each circle is in proportion to that industry’s share of total employment in the state.
Source: Bureau of Labor Statistics data provided by Haver Analytics.

Service industries post steady gains
The overall service industry experienced lackluster growth of approximately 1 percent in 2005. A positive factor is professional and business services, which employ 13 percent of Alabama’s workforce and increased payrolls by more than 3 percent in the past year. Other service industries were less robust. Health service employment, which makes up 8 percent of total employment, grew approximately 2 percent during the same period, while leisure and hospitality grew 1 percent over 2004. Employment in the banking and real estate sector was stagnant (see the chart). Going forward, the state’s service sector should continue to post limited growth in 2006.

Manufacturing inches forward
Manufacturing employment, which accounts for almost 20 percent of Alabama’s private-sector employment—much higher than the national average—grew more than 1 percent in 2005, a marked improvement from flat employment the year before and the almost 5 percent decline in 2003.

Employment in durable goods manufacturing gained nearly 3 percent in 2005 although the growth slowed slightly in the second half of the year. The new Hyundai plant in Montgomery contributed to the continued expansion of the state’s high-paying transportation equipment industry and should also benefit the state’s primary metals industry. Furthermore, the state’s manufactured housing industry has received a boost from orders associated with hurricane relief efforts, suggesting that 2006 will be another solid year for the durable goods industry.

Employment levels in Alabama’s nondurable goods sector remained relatively stable during 2005, continuing the trend from 2004. An estimated 4.6 percent falloff in textile employment led to job losses over the year, but these were largely offset by gains in the plastics and rubber industry as well as in food processing. These trends are likely to extend into 2006.


Banking Remains a Pillar of the Southeast’s Economy

Strength and resilience characterized the financial performance of Southeastern banks in 2005. Banks reported strong earnings buoyed by loan volumes and remarkably good credit quality. The booming real estate market, rebuilding activity associated with the 2004 hurricanes, and deposit growth also propelled earnings. After a rebound in 2004, commercial and industrial loans from banks slowed in the first two quarters of 2005. Increased innovation in lending was also noted this year.

Hurricane Katrina disrupted banking activity in some parts of the region, but these disruptions were largely short-term. Katrina highlighted the efficacy of banks’ emergency preparedness and disaster recovery plans.

A surge in bankruptcy filings during the year most likely occurred in anticipation of a new, more stringent bankruptcy law that took effect in October.

With these developments as the backdrop, the outlook for 2006 is mixed, particularly in hurricane-affected areas. Demand for construction and development loans is expected to increase sharply as homes and businesses rebuild, particularly on the Mississippi and Alabama coasts, but demand in southeast Lousiana is likely to be modest until plans for rebuilding neighborhoods and levees are formalized. Although insurance settlements should swell bank deposits somewhat, this boost may be more limited in New Orleans, where flood damage from Hurricane Katrina was a primary culprit. Only an estimated 40 percent of homes in Orleans parish carried flood insurance, and many neighborhoods are abandoned or sparsely populated because of the severe flood damage to homes and firms. Demand for construction and development loans should pick up as homes and businesses rebuild.

In the rest of the region, competition among banks is likely to intensify as interest rates rise and the difference between deposit rates and lending rates narrows, putting pressure on profitability. The moderation in the real estate market might constrain bank earnings, but this drop-off could be countered by building activity and deposits in the hurricane-affected areas.

Credit quality conditions are unlikely to improve over the high levels seen in 2005, and some conditions could result in increased charge-offs in the coming year. Some risks associated with innovative loans, such as interest-only mortgages and other nontraditional mortgage loan products, could materialize as interest rates continue to rise in 2006. Although bankruptcy filings are generally expected to be lower nationwide, filings and related defaults will probably increase in the hurricane-affected areas of the Gulf Coast.

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