2008 Industry Outlook
Home remodelers can expect more business, automotive jobs return with Kia, ports are booming and healthcare remains a strong performer.
The director of the Selig Center for Economic Research at the University of Georgia’s Terry College of Business reports on some key Georgia industries.
New Home Construction
Georgia’s housing downturn will deepen considerably, with existing home sales declining through the third quarter. Sales of new homes will stabilize and begin to recover before sales of existing homes. That’s because builders will be quicker to cut their profit margins than homeowners will be to grant price concessions. The upturn in new home sales in mid-2008 should prompt spending on new residential construction to slowly rise from its recessionary lows in the first quarter of 2009. Nonetheless, for the year as a whole, the number of single-family home permits authorized for new construction will decline by about 14 percent. That drop will come on the heels of the 35 percent plunge in 2007. Existing home values will not begin to appreciate until mid-2009.
Home Renovation and Repairs
Spending on home renovations and repairs appears to be following overall activity in Georgia’s housing market, but the recession in remodeling activity will be milder than the slump in new home construction. Spending on home improvements will stabilize by late 2008. The major negatives include declines in new home sales, less turnover of existing homes, stagnant home prices, repricing of risk for sub-prime and jumbo mortgages, and much less cash-back refinancing of home mortgages. Historically, cash-back refinancing has been a major source of funds for home-improvement projects.
In Georgia, remodeling firms can count on burgeoning numbers of relatively well-heeled retirees who are likely to spend aggressively for home improvements. Aging-in-place remodeling projects also will be an increasingly important source of growth. The remodeling industry will benefit from the fact that existing home values in Georgia will hold relatively steady, with no signs of widespread overvaluation. Homeowners and bankers can depend upon homes in Georgia to retain their value even as prices decline in most of the nation’s major housing markets.
Lumber and Wood
Due to the deep recession in homebuilding, a slowdown in residential renovations and the easing of hurricane-induced shortages, activity in lumber and wood products manufacturing will decline in 2008. Because lumber prices have been dropping for the last three years, they are already at depressed levels. Lumber prices may not drop much further in 2008. The recent “phase out” of chromated copper arsenate pressure-treated wood will cause timbers made from recycled plastics and composites to dramatically expand their share of applications where treated wood use once dominated.
Although overall demand for lumber and wood products will soften in 2008, several positive developments will continue to support industry activity. Demand for pallets and crates will rise moderately. Nonresidential and industrial construction both will absorb more lumber. Extremely high steel prices will stymie the steel industry’s attempts to capture a larger share of the market for framing-sized lumber. Finally, the weak dollar will boost exports of U.S. lumber and wood products and limit imports, especially with respect to Western Europe.
Paper And Pulp
Support for paper and pulp prices will come from the declining value of the U.S. dollar, which will restrict imports into the U.S. market and stimulate exports. Increased exports to China are expected to prevent too much decline in pulp prices. Nonetheless, there are reasons to be cautious about prospects for paper prices. Chronic global overcapacity will keep inventories from tightening, and recent mill closings will restrain growth in regional demand.
Harvests of mature pines in the Southeast are expected to stay at relatively high levels, and there will be more salvage timber to harvest and process. Finally, the use of fiber from recycled paper will increase. Paper prices will be high enough to stop further capacity reductions, but probably will not stimulate significant new investment. Mean-while, due to less favorable conditions in the nation’s financial markets, the paper industry’s fast-paced deconsolidation will slow appreciably.
Equipment producers will continue to see increases in demand, but after four solid years the gains in sales will come much more slowly. Capacity utilization in manufacturing as a whole will remain at levels consistent with slightly higher demand for industrial equipment and machine tools. A decline in corporate profits will be a limiting factor. Mean-while, strong shipping volumes will power demand for related machinery and equipment. The low value of the U.S. dollar and economic growth among our trading partners will help reinforce exports of manufacturing equipment.
The downturn in residential construction and the growing realization that nonresidential construction is close to peaking will reduce sales of construction machinery. High raw materials prices will increase cost pressures on the machinery and manufacturing equipment industry, and will also increase demand from industries that produce basic commodities. The net effect should be slightly positive for producers of manufacturing equipment.
Job losses stemming from the closings of the Ford plant in Hapeville and the General Motors facility in Doraville probably will have their greatest impact on manufacturing employment in 2007-08. Before the closings were announced, the Ford and General Motors plants employed 2,100 and 3,100, respectively. In addition to direct job losses, nearly as many additional jobs will be lost as well, via reverse multiplier effects. Manpower needs will be reduced at supplier firms that depend on contracts with one or both plants. When the KIA plant comes online it will employ about 2,800 workers, which will replace about half the jobs that were lost at the Ford and GM plants combined.
Nationally, the situation facing the automobile manufacturing industry is not much better than it is here in Georgia. The forecast calls for unit sales of both new and used cars to consumers to drop significantly.
Accounting for about one fifth of Georgia’s manufacturing gross state product, food product manufacturing is the state’s largest manufacturing industry. This industry will expand its presence in Georgia, in terms of output and employment. The demand for food products will continue to grow at a moderate pace. Food processing is highly competitive and faces very demanding consumers. Consequently, firms will have limited flexibility in pricing, and the industry’s already thin profit margins probably will not widen appreciably.
Branded foods will continue to lose market share to private labels, which are far less profitable. Demand for “better-for-you” foods will continue to grow strongly, propelled by an aging population that’s better informed about good eating habits. Sales of natural and organic foods are especially likely to outpace sales of traditional foods.
Georgia’s apparel manufacturing industry suffered some major setbacks in 2006-07, including the 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 cheaper foreign labor give a tremendous price advantage to many imported apparel items. Excessive levels of debt also hobble some companies.
The domestic industry’s profit margins will remain under severe pressure. Apparel prices almost certainly will not keep pace with inflation. The number of apparel and textile jobs lost will be smaller than in recent years because of the recent purging of virtually all of the weaker firms. Georgia has long since lost its comparative advantage because employee compensation in this labor-intensive industry is too high compared to what it is in developing nations. Some high-end manufacturers may survive based on their proximity to or knowledge of their customers, but such efforts ultimately will preserve only a very small fraction of Georgia’s apparel industry.
Georgia’s carpet and textile industry will be coping with both the housing recession and slumping automobile sales, but higher spending for nonresidential construction will help support demand for textile products. The long-term outlook for this industry is better than that for the apparel sector, but the industry’s 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. Eventually, many foreign manufacturers will be on a more equal footing with those operating in Georgia. Productiv-ity gains also will help Georgia’s textile and carpet manufacturers survive, but as the plants become much less labor intensive, total employment in this industry will decline.
Fast-paced growth of cargo to and from Georgia’s ports, more international trade, small increases in industrial production, and positive – but slower – growth in consumer spending will cause total cargo volumes to increase. Containerized cargo shipments will be the most powerful force powering the growth of Georgia’s transportation sector, and will insure that cargo volumes grow faster than state GDP.
The biggest challenge will be the continuing pattern of slow U.S. GDP growth, especially given that the slowdown is likely to be focused on transportation-intensive sectors of the economy. Nonetheless, bigger shipments of many nondurable consumer and manufactured goods, capital equipment, coal and processed foods are expected to more than offset smaller shipments of home building materials and home-related consumer durables. Truckers already are shifting the focus of their businesses from weak sectors to strong sectors. Rate competition in even the strongest sectors will intensify.
Georgia’s deepwater ports industry will thrive by tapping directly into the fast-paced economic growth taking place overseas, by diversifying the services that call on Georgia’s ports and by taking market shares from other U.S. ports.
In 2008, Georgia’s ports are poised to set another in a long series of new records in terms of cargo volumes. Traffic volumes appear to be ahead of long-term projections. The Port of Savannah has established itself as the second busiest container facility on the East Coast and the fourth busiest in the nation. In FY 2007, the Colonel’s Island facility posted a 10 percent increase in cargo over the previous year, and a 41.1 percent increase in bulk commodities.
Banks will be challenged by high and rising mortgage default rates, the deepening housing recession, less vigorous spending for expensive consumer durable goods, a decline in U.S. corporate profits and fewer opportunities to boost earnings derived from mergers and acquisitions, IPOs or trading stocks. Banks that cater to business customers are likely to fare better than those that cater to households. Strong foreign economies and expanding export markets will be two areas of economic opportunity favoring banks that operate globally.
In contrast, worsening conditions in the state’s and nation’s housing markets, less mortgage origination and refinancing, and restraint in consumer spending for durables will have the greatest impact on community banks. Financial institutions will have to cope with slower growth of non-revolving loans to consumers, more identity theft, more concerns about privacy, persistent overcapacity and new regulations. One positive development is the recent widening of the yield curve, which will contribute to growth in net interest income.
Despite the state’s high foreclosure rate, prospects for banks that operate primarily in Georgia are better than for those operating nationwide. Georgia’s economy will grow faster than the nation’s economy. Because Georgia’s home prices rose very modestly and remain very affordable, the risk of a significant home price decline here is minimal. Home mortgages are much better collateralized here than in many states. Georgia’s banks will continue to benefit from positive demographic trends, including population growth and household formation.
Real Estate Firms
For the third straight year, sharp decreases in sales of new and existing single-family homes will substantially reduce commissions earned by residential real estate brokerage firms. In addition, these firms will see much less active multi-unit housing markets. Tighter credit standards and less confidence in real estate as an investment will be the primary factors extending the housing recession into 2008.
The market for retirement housing should be less vulnerable to tighter credit standards and stands to benefit from higher numbers of incoming retirees. The up cycle for Georgia’s commercial real estate brokers has nearly run its course. Because the residential real estate industry has over-expanded, as the volume of transactions diminishes, competitive pressures will be especially intense, and staffing levels will be reduced.
Georgia’s staffing and temp agencies probably will fare better in 2008 than in either 2006 or 2007. A modest rise in the state’s unemployment rate will help the staffing industry because the supply of suitable temporary workers will be less constrained. The industry will benefit from its increased focus on professional and technical workers. Because of the recent volatility of the financial markets, more companies will opt to remain flexible and responsive to changing economic conditions, which favors temporary workers over permanent hires.
One factor that will challenge staffing agencies is that many of Georgia’s largest companies have not been performing very well, and historically large firms tend to rely the most on staffing agencies. Some of the fastest growing niche markets include medical and technical staffing. In 2008, there also should be greater opportunities to provide staff to export-oriented companies, including those involved in logistics and distribution.
The outlook for Georgia’s health providers is good, but not exuberant. Nonetheless, this sector will be one of the better performers in 2008. Job growth will reduce the proportion of customers who self-pay or do not have insurance. Georgia’s rapid population growth, stable funding for Medicare, Medicare’s new prescription drug insurance plan, more use of health services, better management of operating expenses, and the increasing market power of healthcare providers will help the industry’s bottom line.
Large numbers of baby boomers are reaching the age where the incidence of heart attacks, strokes and other care-intensive problems begins to rise rapidly. Hospitals’ outpatient care facilities and specialty care centers will experience exceptionally strong growth in demand, and inpatient care facilities will see moderately higher demand.
The percentage of the state’s lodging rooms that are rented will decrease slightly, due to more development of new hotels; but room rates in many areas will reach new all-time record highs. The industry’s impressive performance over the last several years is causing supply growth to accelerate, and it will overtake demand growth in 2008. Higher room rates and increased use of many hotel services will support moderate growth in revenue per available room. As demand growth slows, holding down operating expenses will become increasingly important to profit generation.
Limited service properties will do well as corporate travel policies put greater emphasis on cost control. The luxury segment will benefit from increases in individual wealth. The demographics also favor such properties: Maturing baby boomers increasingly are trading up from economy and mid-priced hotels.
There are some notable headwinds as well as downside risks in 2008. Gasoline and jet-fuel prices will still be relatively high, which will temper gains for economy and midscale properties, but probably will have relatively little impact on spending by travelers who stay in upscale properties. Interest rates, utility costs and security costs all will rise; and the greatest impact of these cost increases will be on luxury and upscale properties. Hotel property taxes also are expected to rise sharply, reflecting appreciated values. Insurance costs will rise, but the pace will be markedly slower than in recent years. The gradual tightening of the labor market coupled with the second of three scheduled 70-cent increases in the federal minimum wage will put pressure on margins.