2007 Industry Outlook
The director of the Selig Center for Economic Research at the University of Georgia’s Terry College of Business reports on prospects for some key Georgia industries.
Pulp And Paper
Support for already-high pulp and paper prices will come from the declining value of the dollar, which will restrict these imports into the American market and stimulate exports. Increased exports to China also are expected to keep pulp prices from declining too much. Nonetheless, there are reasons to be circumspect about prospects for price increases: chronic global overcapacity, recent mill closings, relatively high harvests of mature pines in the Southeast and more use of fiber from recycled paper.
Compared to several areas of the developing world, the South is a high-cost producer of market pulp, as are Western Canada and Western Europe. These regions bear the brunt of any decline in global demand for market pulp and paper and are among the last to benefit from rising prices.
Further declines in new and existing home sales and fewer opportunities for cash-back refinancing of home mortgages will be immediate headwinds for furniture sales. Of course, the perennial problem facing domestic manufacturers is intense competition from overseas rivals. Furniture imports, especially inexpensive ready-to-assemble furniture, will continue to usurp market share. The depreciating value of the dollar should help, but the dollar’s value against some key Asian currencies is not expected to change enough to make an appreciable difference.
Residential real estate trends are the key to furniture sales. Home building softened considerably in 2006 and will continue to trend lower in 2007, but the home building cycle still should provide some support to the demand for furniture through early 2008. Since Georgia’s housing market is buoyed by substantially above-average population growth, furniture manufacturers selling within the state will fare somewhat better than those catering to national markets.
Job losses stemming from the closing of the Ford plant in Hapeville and the General Motors facility in Doraville will probably have their greatest impact on manufacturing employment in 2007.
There is considerable excitement regarding Kia Motors’ plans to build a plant on the western fringe of the Atlanta metro area. When this plant is built, it will employ some 2,500 workers, enough to replace about half of the jobs that were lost at the Ford and GM plants combined; but job creation at the Kia plant will lag job destruction at the plants in Doraville and Hapeville.
Nationally, the situation facing the automobile manufacturing industry isn’t much better than Georgia’s. The forecast calls for unit sales of both new and used cars to consumers to drop significantly in 2007. The drop will be steepest for many of the models that traditionally have generated the highest profit margins.
The downturn in new auto sales will hurt manufacturers of original equipment. In contrast, manufacturers of replacement parts should enjoy stronger markets in 2007. Tire manufacturers will benefit from increases in the number of miles driven as well as consumers’ increased desire to buy high-performance and other specialty tires.
Rising transportation costs and political pressures will encourage foreign manufacturers to invest more in U.S. production facilities and to buy automotive parts from U.S. manufacturers. More foreign companies now have assembly plants in neighboring states in the Southeast, fostering growth of auto parts manufacturers in Georgia.
Accounting for about one fifth of Georgia’s manufacturing output, food products is the state’s largest manufacturing industry. It will continue to expand in terms of both output and jobs. For example, Purdue Farms plans to add nearly 1,000 workers at its facility in Houston County by 2009, and the Wrigley Company is expanding its Gainesville plant for the second time since 2005.
The demand for food products will continue to grow moderately. Food processing is highly competitive and faces demanding consumers, so firms will have limited flexibility in pricing; the industry’s already thin profit margins probably won’t widen appreciably.
Sales growth will come from small increases in disposable personal income, population gains and the development of niche products with higher value-added margins. Because many consumers are expected to trade up to more expensive foods, an increasing proportion of households’ new income gains will go to food purchases.
Apparel And Textiles
Georgia’s apparel industry suffered some major setbacks in 2006, including loss of the Fruit of the Loom plant in Rabun County and the closing of Springs Global’s plants in Hart County. The industry will continue to contract as open world trade and cheap foreign labor give a tremendous price advantage to many imported items. Excessive debt levels hobble some companies.
The domestic industry’s profit margins will remain under severe pressure. Apparel prices almost certainly won’t keep pace with inflation. On the positive side, shoppers will spend more on clothing in 2007, which could help to slow apparel job losses in Georgia.
The carpet and textile industry’s short-term outlook is clouded by a slowdown in the nation’s housing market and declining car sales. Nonetheless, steady spending for renovation and repairs, as well as an upturn in nonresidential construction, will help support demand for textiles.
This industry’s long-term outlook is better than that for the apparel sector, but prospects are by no means sanguine. By investing heavily in plants and equipment, Georgia’s textile and carpet manufacturers have become world-class competitors, but state-of-the-art facilities increasingly will be built overseas.
Georgia’s printing industry faces more competition from other media and printers located abroad, but economic growth will lead to a moderate increase in both sales and profits. Growth in office-based employment and advertising spending will be the primary drivers. Budget surpluses for many state and local governments and higher enrollments will stimulate purchases of printed material by public schools, colleges and libraries. Higher prices for paper and specialty inks will push up printers’ production costs, however.
Renewed hiring in many service sector and professional occupations will boost demand for technical, scientific, business and training publications. Foreign demand for English language books will rise; printers can expect solid increases in domestic demand for books, periodicals and newspapers in Spanish. Electronic publishing will continue to displace printed reports, magazines and newspapers, but probably not books.
Demand for many chemical products will continue to grow, and profits will be driven primarily by industrial growth. More nonresidential construction is also a good sign; but declining auto sales and new residential construction will diminish the industry’s performance somewhat.
High natural gas prices squeezed chemical manufacturers’ net margins in 2003-06, and this pattern could be repeated in the coming year. Chemical manufacturers have been unable to raise prices enough to entirely offset the increased price of basic raw materials. Recent U.S. natural gas prices are among the highest in the world, putting the nation’s chemical manufacturing industry at a competitive disadvantage in global markets.
Overall retail sales will expand, reflecting many fundamentally positive economic developments. The state’s unemployment rate is fairly low, and the number of jobs will increase in 2007. Substantially above-average population growth is a big plus, as is steady consumer confidence.
Finally, more out-of-state visitors will provide boosts to retailers located in the areas of the state – such as Savannah and Brunswick – that are major destinations for business travelers or tourists. Unless the downturn in Georgia’s housing market is sharp, the lagged effects of recent home price appreciation and new housing development probably will continue to help retailers.
Even though both retail sales and profits will expand, slowly accelerating labor costs, higher financing costs, higher transportation costs, the necessity to invest heavily in new retail technologies and more competition among retailers will exert intense pressure on net profit margins. In general, large retailers will gain at the expense of smaller ones, but a counter-trend favors a few types of smaller stores.
Despite the high-profile failures of many e-tailers, online retailing has already reached critical mass and will continue to experience rapid growth, thanks to traditional retailers digitizing their operations. The rapid expansion of the number of products available online and competitive prices will fuel the growth. But the greatest barrier to online sales continues to be shipping costs.
E-tailers also must contend with customers’ concerns about secure access and methods of payment, returning merchandise, spam e-mail and post-purchase services. Large, established retailers with name recognition may be among the firms most able to ease such concerns. Currently, sales tax laws provide some online retailers with a substantial pricing advantage over traditional stores, but these e-tailers should prepare for the day when this pricing advantage is repealed.
Home Renovation And Repair
Until recently, all indicators of future spending on home improvements were bullish, but now signs are mixed. The major negatives include a slowdown in new home sales, a drop in turnover of existing homes and much less cash-back refinancing of home mortgages. Histor-ically, cash-back refinancing has been a major source of funds for home-improvement projects. The major positives are continuing job growth, income growth and the lagged benefits of record high levels of sales of new and existing homes over the last several years.
The outlook for Atlanta’s office market calls for positive growth in new construction and lease volume, but the pace of absorption will slow. While two straight years of growth in office-based employment has brought the Atlanta area’s office vacancy rate down to 20 percent from its peak of 23 percent, it’s still one of the nation’s highest.
Nevertheless, real estate investors continue to be undaunted. Looking forward, the Selig Center expects the appeal of lower quality properties to grow, primarily because Atlanta’s prestige addresses are now ultra expensive.
Cyclical increases in demand will boost Georgia’s trucking industry, as jumps in industrial production, gains in consumer spending, a rise in domestic outsourcing and growing international trade will help total cargo volumes to grow slightly faster than state GDP. We expect container cargo shipments to grow much faster than state GDP. Big shipments of most consumer and manufactured goods, capital equipment, coal, nonresidential construction materials and processed foods will more than offset small shipments of cars and home building materials.
Thanks to strong demand growth and several profitable years, carriers will be eager to add trucks, but a severe shortage of drivers will hamper such efforts. Higher demand should give trucking firms the pricing power needed to continue to raise rates, however. The recent flurry of mergers and acquisitions among these companies also will help to keep rates firm, but this favorable development will be offset somewhat by the continuing consolidation of retailing.
Business conditions favor railroads in 2007. Demand growth will exceed capacity growth, continuing the recent pattern of rising rates. Intermodal shipping of consumer goods and light industrial products will mushroom, and the continued success of Georgia’s ports will be a big plus.
Railroads should have no problems passing high fuel costs onto shippers, because rail is an extremely fuel-efficient transportation mode. We expect railroads to raise rates sufficiently to widen profit margins. High trucking costs, increased highway congestion and rising concern about air quality are additional factors that favor the railroads.
The state’s luxury and resort properties are expected to outperform moderate and economy facilities. The luxury segment will benefit from increases in individual wealth and sustained, but slowing, growth of corporate profits. Demographics also favor such properties. Maturing baby boomers increasingly want more sophisticated accommodations; and many travelers also look for exclusive or customized services – such as spas – offered by resorts. Upscale properties also stand to benefit from continued increases in the state’s convention activity.
Business travel’s primary drivers will be sustained growth of corporate profits, rising markets for most goods and services, increasing business investments, further globalization of markets and enhanced business formation. Leisure travel will be powered by employment growth, disposable personal income growth, favorable demographics and the fast-paced growth of the African-American travel market.
Expenditures for restaurant meals will increase moderately. Positive developments include population and employment growth, increasing business activity, higher disposable personal income, growing travel and tourism, an increase in convenient locations, a greater emphasis on meeting the needs of racial and ethnic minorities and healthier menus.
In 2007, legislative efforts to increase the federal minimum wage represent a significant problem for the restaurant industry, which employs many entry-level workers. Also, to the extent that they are successful, recent legislative efforts to curtail the inflow and/or restrict the hiring of illegal aliens will make it even more difficult for the food service industry to meet its manpower needs.
Staffing And Temp Agencies
Staffing and temp agencies should do well, benefiting from sustained economic growth as well as the increased focus on professional and technical workers. Cyclical hiring across broad swaths of the economy will be on the upswing. Many companies may opt to remain flexible and responsive to changing global economic conditions. After several years of disappointing raises and widespread corporate restructuring, employee turnover is on the rise.
The recent decline in Georgia’s unemployment rate will have both positive and negative impacts on staffing firms. Because labor will be somewhat scarce, companies may be more inclined to use temps, but jobseekers may be less likely to accept temporary positions.
Staffing and temp agencies will find some of the fastest growing niche markets include medical and technical staffing. There also should be greater opportunities to provide staff to export-oriented companies. Firms specializing in clerical and light industrial staffing will see more moderate growth.
The outlook for Georgia’s health providers is excellent. Rapid population growth, Medicare’s new prescription drug insurance plan, increased use of health services, better management of operating expenses and the growing market power of health-care providers will boost the industry’s bottom line. Outpatient care facilities and specialty care centers will experience exceptionally strong growth in demand, and inpatient care facilities will see moderately higher demand.
The proportion of Georgians who have health insurance is poised to rise in 2007; a more stable business environment should keep most employers from sharply reducing health insurance coverage for employees. Three factors will limit access to employer-provided health insurance, however. Many newly created jobs will be in small firms that are less inclined to provide generous medical benefits; employers will use more temporary workers; and some large companies may reduce medical benefits for retirees.
The outlook for childcare firms is good, particularly for centers that operate 24 hours a day. As the economy generates new jobs, more parents will rely on childcare providers. Given this demand, providers should be able to raise rates fairly quickly. The trend toward delayed child bearing in order to establish careers and incomes will help the industry, especially those centers that offer premium care. The industry will continue to benefit from tax credits for earned income and dependent care, and from some tax-exempt employer-provided daycare benefits.
Above-average population growth will greatly increase demand for educational services; people need marketable skills to survive in a competitive labor market. Better immediate employment prospects increase the opportunity cost of obtaining additional education, which tends to reduce enrollment; but higher spending for employer-sponsored education and training will counter this trend. The industry is still wrestling with more restrictive visa requirements, which tend to reduce enrollment of foreign students.
Long-term trends are favorable. Widespread dissatisfaction with publicly funded K-12 education will encourage the growth of private schools. Georgia’s extremely low SAT scores will spur demand for supplemental educational services. Distance learning via the internet will see explosive revenue growth.
Despite several years of substantial price increases, electricity remains an excellent value. Electric utilities should expect growth in commercial markets to outpace growth in residential markets. Use in the industrial markets will grow relatively slowly. Georgia’s electric utility industry is relatively well positioned. Its operating costs are comparatively low, fuel mix is diverse and tilted toward coal; and the regional economy’s long-term outlook calls for growth that exceeds the national average.
But several concerns are obvious: among them, increasing reliance on natural gas and uncertainty regarding deregulation.
Sales to residential customers will roughly track increases in household formation, but greater use of energy-efficient appliances and more energy efficient building codes suggest the incremental push to electricity sales per newly formed household will decline.