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A Little Silver in the Lining

Alabama’s economy is slowly digging its way out of the recession, with exports and tax receipts slightly rising in 2011.

With the coming of spring, most Alabamians were more than happy to see an end to the near record cold and snow of the not to be forgotten winter of 2011. It’s a metaphor that also can apply to the state’s economy, with the only major difference being the length of the winter. Like the rest of the country, Alabama has been digging out from under more than two years of recession.

In an effort to see how economic experts view Alabama prospects in their crystal balls, Business Alabama conducted an economic review that included economists from across the state, and attendance at the recent Moody’s Analytics executive briefing and outlook of economic prospects for the Southeast. And despite that old saw that says all the world’s economists laid end-to-end would not reach a conclusion, it turns out that the experts are close to unanimous in forecasting that the worst is over, with at least somewhat better economic weather ahead.

A recent briefing in Atlanta, Ga. drew economic and business leaders from across the Southeast, where Moody’s Analytics economist Mark Zandi, widely recognized for his stinging analysis of the recent mortgage meltdown, gave a generally positive forecast for the region, with some very complementary remarks for Alabama in particular. Mirroring the U.S. economy, Zandi predicted a nearly 4 percent rise in Alabama’s Gross Domestic Product, the total output of goods and services, following a rise of just over 2 percent in 2010. Job growth should increase by nearly 1 percent. While not exciting, that should be enough to slowly bring down unemployment, which in mid-April ranged from just under 7 percent to more than 12 percent throughout the state.

In Tuscaloosa, the Center for Business and Economic Research at the University of Alabama almost is as optimistic, predicting a 3.4 percent rise in GDP for the year. CBER forecasts a modest increase in employment for 2011, with the massive losses of more than 106,000 jobs in 2009 and 20,000 more losses in 2010 to be replaced by job growth of at least 13,000 in 2011.

One of Alabama’s top economic seers, Dr. Sam Addy keeps a watchful eye over the state economic prospects from his post as CBER director. While he generally echoes the cautiously optimistic outlook of Zandi and others, he does have some reservations. Alabama’s economy will continue its slow recovery through the rest of 2011 and into 2012. The CBER forecasts a slow, but steady rebound in most sectors of the state’s economy.

The economic slump was not as damaging to Alabama as it was to the rest of the country, and the state has recovered faster. Joblessness, as measured in October 2010, was 8.9 percent for Alabama versus 9.6 percent for the U.S. as a whole. Alabama median family income grew 1.7 percent in 2010, more than double the 0.7 percent rate for the U.S. as a whole. However, the medium household income of just over $54,000 still lags the U.S. average of $64,400.

And, after three years, business confidence is on the rise. The CBER’s quarterly Alabama Business Confidence Index (ABCI), showed a strong bounce for the first quarter of 2011 in business expectations for the next year. The reading of 55.8 was just a point lower than the third quarter 2007 pre-recession reading of 56.8, with most respondents expecting Alabama’s economy to improve in 2011 and for growth to exceed that of U.S. firms as a whole.

However, the uptick is business confidence may not necessarily translate to strong hiring. Compared to the fourth quarter 2010 survey, only 10 percent more businesses predicted increased hiring, with the majority holding the status quo. Alabama firms responding to the survey also forecast modest increases in capital spending.

One fly in the ointment, of course, is rapidly rising energy and food prices. With gasoline prices in mid-April bumping $4 per gallon, and further increases likely, consumers are likely to redirect some consumer spending to the higher cost of keeping the tank filled. However, Addy says this is not a major issue. “I’m not afraid of the rise in oil,” he says. “There would be some effect, but a $30 (per barrel) increase would reduce (state) GDP by only 0.6%. Oil as a percentage of (state) output is decreasing, and we are using it more efficiently. We’re becoming less and less exposed.”

The continued rise in oil prices, due to unrest in the Middle East and North Africa, has many economists concerned. “If oil goes to $125 per barrel, 2011 will feel a lot like 2010,” Zandi predicts, “and if we go to $150 per barrel, we’re back in recession.”

Manufacturing: a Mixed Picture

While Alabama’s economy largely mirrors that of the U.S., there are areas of significant difference, one of them being manufacturing. A sad, but well-known fact is the steady decline in manufacturing activity throughout the nation, although the recession cost Alabama a smaller percentage of manufacturing jobs than the U.S. as a whole.

Manufacturing is alive and well in Alabama, fueled by strong automotive, computer, electronics, and paper production. The CBER forecasts real output among Alabama manufacturers to rise 6.3 percent in 2011 as demand rises for Honda, Hyundai, Mercedes Benz and Toyota products produced in Alabama. Paper production, long a source of some of Alabama’s best jobs, should rise 3.9 percent in 2011.

That strong boost in auto production will have another benefit, Zandi says, citing the auto industry’s very high “multiplier effect,” or the amount of new jobs created in other industries as an industry expands. Increases in Alabama automotive output should boost employment among the many parts producers who moved to the state since 1995. And while there are some worries about how the recent Japanese tsunami may impact parts availability, Addy says it is too soon to judge the extent of that impact.

Of potentially bad news for Alabama and other Southeastern states, though, is the loss in business cost advantages the South has enjoyed for decades. Zandi points out that Midwest business costs have dropped almost to a par situation with Alabama’s business costs. While this will make industrial recruiting more difficult, the South still has an advantage in demographics, as population continues to grow faster than other areas of the U.S.

Highly capital-intensive industries dominate Alabama manufacturing, which leads to higher productivity. Simply put, Alabama industries produce more with fewer workers. As a result, employment in the manufacturing sector is expected to remain flat for 2011, with small increases forecast for 2012 and later.

Construction/Real Estate: The Glut is Still Here

Like the rest of the country, Alabama saw its housing sector crash in 2009 with no recovery in 2010. Alabama’s construction industry dropped another 1,700 jobs in 2010. The homebuilding and real estate industry is working through a glut of both new homes and foreclosures that must be reduced before homebuilding will return to normal.

Unfortunately, prospects are not much better for 2011. Figures from the Alabama Center for Real Estate (ACRE) show housing starts and building permits dropped more than 23 percent in 2010 with continued weak demand and lack of access to financing taking their toll. In 2010, residential sales were off 4.4 percent from the year earlier, with new homes sales down a whopping 13.4 percent. ACRE’s most recent construction report, for February 2011, shows construction permits declined more than 15 percent from February last year, although they were up 20.5 percent from January.

There are a few positive trends. As of early spring, Alabama’s average home price is up more than 10 percent from the same period in 2010, with 37,500 units listed versus 39,200 as of a year ago, a clear sign of market clearing. It’s a clear sign the state is working through its excess housing inventory, which real estate experts feel must occur before a real increase in construction can take place. ACRE estimated Alabama’s new construction inventory at approximately 2,400 units, a decline of 21 percent from February 2010. Birmingham and Mobile led the state with each reporting a 29 percent drop in supply.

However, housing watchers agree there is still more pain to come. An acknowledged housing expert who co-founded the Case-Shiller Index of housing prices, Zandi says the housing crisis has probably not yet peaked, and the approximately 4 million homes across the U.S. in some stage of foreclosure or short sell will be a drag on growth for months to come. He predicts housing prices will continue to fall about 5 percent more in 2011, for a total of 35 percent since the recession began. “We still have a very large portfolio of properties to be disposed of,” Zandi points out. “Policy makers are unsure just how to respond to this.”

Exports: On a Roll

One of the brightest spots in the state’s recovery has been the rise in exports. Fueled by strong demand for Alabama minerals and commodities, such as coal, steel and forest products, and helped by a weak dollar, Alabama exports rose 25.5 percent in 2010 to just short of 2008 levels, according to federal figures. Coal exports leaped by 65 percent, while exports of wood products grew more than 32 percent. Even more impressive were automotive exports, which rebounded more than 30 percent to $2.7 billion for the first three quarters of 2010. The CBER expects these welcome trends to continue in 2011, with another 8.3 percent increase in exports.

Much of that export activity passes through the Port of Mobile, which saw major increases in container and bulk cargo shipments in 2011. Alabama State Port Authority figures confirm the major jumps in coal, forest products and steel exports. The Port Authority has initiated a $355 million capital improvement program, which, says ASPA Vice President of Marketing Judith Adams, will expedite cargo through the port. “What we have been able to demonstrate is that when Alabama invests in the seaport, we have been able to give that back,” Adams says.

The hoped-for capital improvements are part of the Port Authority’s long-range plan. “We see these as things needed in the future to grow and support Alabama businesses. It’s a five to 10 year program,” says Port Authority CEO James Lyons.

Tourism: Trying to Recover

The Great Recession dealt a hammer blow to Alabama’s tourism industry, as thousands from across the state and elsewhere decided that paying the mortgage payment was more important than a trip to Gulf Shores or other state hot spots. Declines in business leisure spending removed even more tourism demand.

Tourism recovered somewhat in 2010, with a 1 percent overall increase, and should continue to increase, says the CBER. Parts of the tourism industry, such as lodging and food services, should rebound even better. As a labor-intensive industry, employment gains should keep pace.

But it was not a very good year overall, says Dr. Tom Chesnutt of the Auburn’s Economic and Community Development Institute, an Alabama tourism specialist. Part of the problem was the massive 2010 Deepwater Horizon oil spill, which clobbered Gulf Coast tourism prospects just as summer beach demand was building.

Chesnutt forecasts continued improvement for 2011. “As I talk around the state, everyone says hotel occupancy rates are up.” He is somewhat cautious about the effect of rising gasoline prices. “People don’t travel as far when gasoline gets expensive, but this may help Alabama. People may visit Gulf Shores rather than drive somewhere farther away,” he says.

State and Local Tax Receipts: On the Increase Again

Despite the glum headlines of the past two years, there is good news out there for state employees. Alabama’s state budget gap of roughly 10 percent is better than the 18-20 percent average for most of the Southeastern states, according to Moody’s Analytics figures.

Total tax receipts fell 2.5 percent in FY2010, which ended in September 2010. For FY 2011, CBER expects a substantial increase, depending on the pace of employment growth. CBER reports a rise of 6.3 percent in tax receipts for the first four months of FY2011 compared to the same period in FY2010. That should come as welcome relief to a state government strapped by continued proration, which will probably occur again for FY 2012, but not be as severe.

Mike Kelley is a freelance writer for Business Alabama. He lives in Huntsville.

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