2010 Industry Outlook
The beginnings of a recovery are improving prospects throughout the state. In West Georgia, Kia’s impact could mean 13,700 jobs.
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 this year.
Lumber and Wood
With the end of the homebuilding recession, production of many lumber and wood products will advance. The year-over-year percentage gains in logging and wood products manufacturing could be substantial, but only because activity was extremely de-pressed in 2009. Prices are so low that most of the harvests that have gone forward were designed primarily to thin stands rather than to clear cut. Gains in remodeling activity are expected to support significant growth in demand for lumber and wood products, and demand for pallets and crates will improve along with the gain in overall economic activity. Conversely, the worsening slump in commercial construction will restrain overall spending. Wood pellet manufacturing, biofuels, and cogeneration are emerging sources of demand for timber and wood fiber. The firming of overall market conditions is likely to cause the price of framing lumber and panels to advance moderately, but current prices and production levels are extremely depressed. The depreciated value of the dollar will boost exports of U.S. lumber and wood products and limit imports.
Paper and Pulp
Support for paper and pulp prices will come from the expansion of GDP as well as the weak value of the dollar, which will restrict imports and stimulate exports. Recent inventory liquidation and the reduced supply of wood chip and wood fiber waste will help to support pulp prices. Exports to China and Japan are very likely to rise.
Despite improving short-term market conditions, there are several reasons to be circumspect about the prospects for paper prices. Chronic global overcapacity will keep inventories from tightening; recent mill closings will restrain growth in regional demand; and 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. Prospects are better for coated papers than they are for newsprint, uncoated paper and pulp, but declines in employment in professional and other office-based occupations will subtract from demand growth for office paper.
The new $1.2 billion Kia assembly plant is expected to employ between 2,500 and 2,800 workers, many of whom will live in the Columbus region; and the multiplier effects will be unusually large. A simulation based on the most conservative estimate of jobs numbers shows an employment impact of 13,700 jobs in Georgia. That implies that each job at the Kia plant will support 4.5 jobs outside the plant. Thus far, major suppliers have announced jobs at sites in Georgia that are well above the estimates promised at the time of the initial announcement. Of course, the 2,500 workers at the Kia plant will only replace about half of the jobs that were lost at the Ford and GM plants combined.
Nationally, the forecast calls for unit sales of both new and used cars to consumers to rise in 2010, but percentage gains will not be too impressive and the biggest gains will be for models that generate the lowest profit margins. Automakers’ bottom lines will remain under severe pressure, and government will decrease purchases of new vehicles in 2010.
Even a slight improvement in auto sales will help manufacturers of original equipment. In spite of the success of the “Cash for Clunkers” program, manufacturers of replacement parts should enjoy slightly stronger markets. It is likely that some needed automobile maintenance and tire purchases were deferred and will go forward as the economy improves. Tire manufacturers also will benefit from an expected increase in the number of miles driven, which declined during the recession, as well as consumers’ increased acceptance of high-performance and other specialty tires.
Food product manufacturing accounts for about one-fifth of Georgia’s manufacturing gross state product. This industry will expand its presence in Georgia, both in terms of output and employment, and demand for food products will 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 too much. Branded foods have lost market share to private-labels, which are far less profitable for processors.
Sales growth will come from population gains and the development of niche products with higher value-added margins. Since many consumers have traded down from restaurants to grocery store foods, an increased proportion of households’ after-tax incomes is going to food purchases. Due to growth of the global economy and a weak dollar, exports should grow modestly in 2010.
Product innovations are important drivers of sales in this intensely competitive industry. Specialized products recognize consumers’ increased health consciousness, greater ethnic diversity and the growing acceptance of foods from other cultures. Demand for “better-for-you” foods will continue to grow strongly, propelled by an aging population that is better informed about good eating habits. Sales of natural and organic foods are likely to grow faster than sales of traditional foods.
Georgia’s printing industry faces more competition from other media and printers located abroad. The end of the recession will lessen these challenges as sales rise slightly. Increases in advertising will be the most powerful driver of revenue growth. Foreign demand for English language pro-ducts also will rise. Printers can expect modest increases in domestic demand for books in foreign languages, particularly Spanish language books, periodicals and newspapers. Over time, rising levels of educational attainment should help the printing industry. Retirees, whose numbers are rising rapidly, are likely to become an even more important market for printed materials.
Although overall demand will rise, many factors will continue to challenge the industry, including depressed levels of office-based employment. Slumping revenue collections by state and local government will cause public schools, colleges and libraries to decrease their outlays for printed materials, despite higher enrollments. The more widespread use of electronic publishing will ensure that the industry’s revenues will grow more slowly than GDP. High-quality machines suitable for small printing jobs will reduce organizations’ economic incentive to outsource small runs.
Demand for many chemical products will increase in typical cyclical fashion. The main opportunities for chemical manufacturing will be the revival of the industrial sector of the economy; higher sales for consumer use; and slightly more residential construction. The best prospects are for medicines, pharmaceuticals and agricultural chemicals.
Chemical production increasingly will relocate from the United States to developing countries. Many of the largest industrial customers already have moved to the developing world, and chemical production is very likely to follow the customers. Over time, even the research and development jobs will migrate to overseas locations.
Costs of complying with environmental regulations are relatively high in the United States, and natural gas prices are likely to be higher in the United States than in many other regions of the world.
Favorable demographics and cost effectiveness en-hance prospects for pharmaceutical and medical supply firms. Sales will expand relatively rapidly, but profit margins probably will narrow. Sales of generic drugs will expand faster than sales of branded products. The pharmaceuticals industry is not particularly cyclical and did not get hurt as much by the slump in GDP and employment as other industries. Domestic demand is expected to grow steadily, and export markets will benefit from a weak U.S. dollar. The industry continues to benefit from its new focus on marketing its products directly to the consumer and will further benefit from the aging of the population and the rising incidences of diseases related to aging and sedentary lifestyles. Globally, the population will age fastest in the more developed countries, where people are more able to afford high-priced prescription drugs.
Private spending for new nonresidential construction will decrease sharply, but the intensity of the down cycle will diminish in the second half of the year. Credit conditions will remain tight. The re-pricing of risk to more accurately match asset fundamentals will exert downward pressure on asset prices.
By mid-year, employment and population growth will begin to generate gains in net occupancy, but vacancy rates will remain elevated. Tenants will have the upper hand in lease negotiations to a much greater degree than they did in 2009.
Despite federal stimulus money for infrastructure, in many jurisdictions spending for publicly funded structures will decrease. The recession has diminished collections from sales and use taxes while weak real estate markets have led to downward – or at least slowed upward – adjustments in assessed property values. Typically, such adjustments lag movements in market prices by a year or more. Thus, property tax bases will not be very supportive of revenue collections in 2010-2012. Nonetheless, in some areas, heavy population growth will provide an easy justification for higher construction outlays by local governments, especially for school construction. The challenge will be to find the funds to finance such projects on agreeable terms.
Slight increases in sales of new and existing single-family homes are expected to provide a small boost to commissions earned by Georgia’s residential real estate brokerage firms. In addition, these firms will see slightly more active multi-unit housing markets. The market for retirement housing should be somewhat less vulnerable to higher interest rates and tighter credit standards and stands to benefit from higher numbers of incoming retirees. But the inability to sell their current homes will continue to delay many retirees’ home purchases.
Foreign real estate buyers could be a major force in the property markets, taking advantage of both their strong currencies and depressed property prices. Despite these positives, tight credit standards, less confidence in real estate as an investment, already depressed home prices, the weak job market and the expiration of the tax credit for first-time home buyers will be among the factors that will stymie a robust recovery for residential real estate firms. Commercial real estate markets will become even less active in 2010, although distress sales likely will accelerate. The downcycle for Georgia’s commercial real estate brokers clearly has not run its course.
Georgia’s staffing and temp agencies should do well because, in the initial stages of the economic recovery, many firms will opt to remain flexible and responsive to changing economic conditions. Since the recession was characterized by extreme volatility, especially in the financial and commodity markets, an increased proportion of companies is likely to favor temporary workers over permanent hires. The state’s high un-employment rate will help the staf-fing industry in two ways: Workers will be more willing to accept temporary positions, and the supply of suitable temporary workers will be less constrained than when the economy was expanding.
The staffing industry will benefit from its increased focus on professional and technical workers, whose prospects were less adversely impacted by the recession.
Some of the fastest growing niche markets include medical and technical staffing, and there should be greater opportunities to provide staff to export-oriented companies, including those involved in logistics and distribution.
Cyclical increases in demand for legal services will help lawyers and law firms, but the ongoing recession in nonresidential construction will be a major deterrent. Even a slight rebound in housing activity will boost the amount of money spent by businesses and households on legal fees. In the second half of 2010, firms that provide legal services to households should begin to do better as disposable personal income and the number of jobs begin to grow more significantly.
Law firms that provide services to businesses will benefit from increases in the number of business startups, expansions, and mergers and acquisitions. Businesses typically devote more resources to litigation when corporate profits are on the upswing.
The outlook for Georgia’s health providers is good, but not exuberant. Nonetheless, this sector will be one of the better performers in 2010. Georgia’s population growth, higher per capita use of health services and better management of operating expenses will help the industry’s bottom line. The population of persons with multiple chronic health conditions that require physical care continues to grow rapidly regardless of the ups and downs of the business cycle.
Recent job losses have in-creased the proportion of customers who self-pay or do not have insurance, and it is harder to collect funds from these groups than from insured patients.
Once labor market conditions improve, an increasing proportion of Georgians will be eligible for employer-provided health insurance plans that will lower bad debt expenses, but the uncertain business environment may cause many more employers to reduce health coverage or to dramatically increase deductibles and copayments. Four additional factors will limit access to employer-provided health insurance: Many of the jobs created will be in smaller firms less inclined to provide generous medical benefits; employers will make greater use of temporary workers; some large companies may reduce medical benefits for retirees; and many employers will move towards high-deductible health insurance plans, which will reduce demand for routine care.
The restaurant industry outlook is positive; expenditures for restaurant fare will increase, bolstered by employment growth, more business activity and slightly more travel and tourism. A negative trend for some restaurants is that a smaller proportion of guests are ordering alcoholic drinks – which can be very profitable.
Fast-food and inexpensive quick-casual restaurants will do better than either moderately priced restaurants or expensive full-service restaurants. The latter depend heavily on business people traveling on generous expense accounts, and in 2010, business travelers will be monitoring their meal expenses closely.
Fast-food restaurants are expected to partially recoup recent losses in market share to the slightly more upscale quick-causal restaurants, but the quick-casual restaurants will take market share from moderately priced and full-service restaurants. Quick-service restaurants will face more competition from grocery stores, which now offer a wider selection of freshly prepared foods.