2011 Industry Outlook
Recovery is coming, but the pace is slow
The director of the Selig Center for Economic Research at the University of Georgia’s Terry College of Business reports on prospects for some of Georgia’s key industries this year.
Lumber & Wood
Production of many lumber and wood products will advance substantially. The year-over-year percentage gains in logging and wood products manufacturing will be large, but only because activity was extremely depressed in 2009 and 2010. Gains in remodeling activity will support growth, and demand for pallets and crates will improve with the overall economic activity. Wood pellet manufacturing, biofuels, and cogeneration are emerging sources of demand for timber and wood fiber, but diminishing activity in non-residential construction will subtract from demand.
Positive international developments should support Georgia’s lumber and wood products industry; the depreciated value of the dollar will boost exports of U.S. lumber and wood products and limit imports.
Paper & Pulp
Moderate support for paper and pulp prices will come from the expansion of GDP as well as the weak value of the dollar. China will be a major force powering the recovery of global pulp markets. The limited supply of wood chip and wood fiber waste from the production of lumber for the construction industry is another factor that will help to support pulp prices. Hardwood pulpwood prices have held up much better than the prices of other major timber products.
The steep reductions in demand for some types of paper may reflect more than just negative cyclical forces: The recession may have accelerated long-term secular declines in direct mail, catalogs, magazines and newspapers. The industry’s fast-paced deconsolidation probably will not make much headway this year.
Furniture sales to households will rise moderately. A slightly higher turnover of existing homes, an upturn in new home sales and the end of home price depreciation are positives for households’ demand for furniture; but recent job losses, limited prospects for substantial gains in disposable personal income, a higher savings rate and an abundant supply of good used furniture will temper the industry’s recovery.
The outlook is worse for commercial and institutional furniture sales. Businesses’ low outlays for furniture reflect lower corporate head counts. Large inventories of surplus furniture, an abundance of underutilized office space and limited immediate prospects for relocation and expansion will suppress sales.
Equipment producers will benefit from strong cyclical increases in demand, and capacity utilization will be high enough to support higher demand for industrial equipment and machine tools. Demand will increase because spending has been cut to levels that are too low to maintain, much less expand, the capital stock. Although tight credit will limit many small businesses’ ability to purchase more manufacturing equipment, many medium and large companies will have ample means to expand their orders for equipment due to good internal cash flows.
Low short- and long-term interest rates bode well for manufacturing equipment sales, and some loosening of credit conditions will reinforce the impact of low rates on actual sales of equipment. The low value of the dollar and economic growth among our trading partners will help boost exports of manufacturing equipment.
Prospects will continue to diminish for a while. Due to new spending priorities as well as projected budget deficits, the Obama Administration is likely to significantly scale back, or scrap, many major Department of Defense weapons projects. Recent sharp drops in passenger and cargo traffic as well as airlines’ restricted ability to secure financing on favorable terms will be strong and likely persistent headwinds for manufacturers of civilian aircraft and have already led to order postponements and cancellations.
The aircraft manufacturing industry’s fortunes will continue to dim as the pipeline of work empties out. Longer-term, both China and Russia will put greater emphasis on developing domestic aerospace manufacturing industries, which increasingly will compete with U.S. manufacturers for sales.
Food product manufacturing, the state’s largest manufacturing industry, will expand its presence in Georgia, both in terms of output and employment. Demand will grow at a moderate pace. Food processing is highly competitive and faces demanding consumers. Consequently, firms will have limited flexibility in pricing, and the industry’s already thin profit margins probably will not widen. Agricultural commodity prices may exert additional pressure on food processors’ margins.
Sales growth will come from population gains and the development of niche products with higher value-added margins. Due to growth of the global economy and a weak dollar, exports should grow modestly.
Apparel & Textiles
The industry will continue to contract as open world trade and cheaper foreign labor give a tremendous price advantage to many imported items. Global competition will ensure that the domestic industry’s sales and profit margins remain under severe pressure. Apparel prices almost certainly will not keep pace with inflation. Nonetheless, the number of apparel and textile jobs lost will be smaller than in recent years due to the already-reduced size of the industry and the recent purging of virtually all of the weaker firms.
Georgia lost its comparative advantage because employee compensation in this labor-intensive industry is high compared to what it is in developing nations. Some manufacturers operating in niches that are suited to automation will survive for a while longer, but even these companies will find it hard to compete. 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 jobs.
Although the housing recession is over, Georgia’s carpet and textile industry will be coping with the extremely depressed levels of housing and nonresidential construction activity.
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. Still, chemical production increasingly will relocate from the U.S. to developing countries.
Natural gas prices are likely to remain much higher in the U.S. than in other regions of the world; costs of complying with environmental regulations are relatively high in the U.S., and many of the chemical industry’s largest industrial customers already have moved to the developing world.
It probably won’t be long before the research and development jobs also migrate to overseas locations. The pool of talented workers required to staff offshore plants is growing very rapidly.
Pharmaceuticals & Medicines
Although many lucrative patents are expiring, favorable demographics and cost effectiveness enhance prospects for pharmaceutical and medical supply firms. Sales will expand relatively rapidly, but profit margins will narrow. Sales of generic drugs will expand faster than sales of branded products.
The pharmaceuticals industry did not get hurt as much by the slump in GDP and employment as many other industries did. Domestic demand is expected to grow steadily, and export markets will benefit from a weak dollar.
The industry continues to benefit from its new focus on marketing products directly to the consumer and will benefit from the aging of the population and the rising incidences of diseases related to aging and sedentary lifestyles.
Property & Casualty Insurance
Insurance premiums should increase only slightly. Still, overall demand for personal lines of insurance will increase for the first time in four years. Barring major catastrophic events, property and casualty insurers are very likely to earn underwriting profits on personal lines, but a continuing soft market for commercial lines will challenge overall underwriting profits.
2011 will see an increase in households’ demand for property and casualty insurance, with automobile insurance leading homeowners insurance. The housing recovery will be too anemic to substantially boost the number of new polices written, and the severe correction in home prices will severely limit increases in insured amounts.
The proportion of households that are unable to make their mortgage payments will remain quite high. Consequently, claim rates on home insurance policies will be elevated. Homeowners in a financial bind will be less able to maintain and otherwise secure their homes. Insurers should be prepared to devote more financial resources than usual towards detecting insurance fraud and settling claims.
Growth in truck freight coupled with recent fleet reductions means tighter capacity and less intense competition for loads. These developments should allow trucking firms to raise rates to more than offset higher costs. Truckers’ net margins will widen. Capacity reductions stemming from recent bankruptcies will help prevent further erosion of net margins, but this will be partially offset by the ongoing retail consolidations.
Pressures to raise truckers’ wages and benefits will increase, as trucking firms offer incentives to bring back drivers they took off the road during the recession.
As the economy recovers and expands, Georgia’s deepwater ports will outperform their competitors by tapping directly into the growth taking place overseas, by diversifying the services that call on Georgia’s ports and by taking market shares from other U.S. ports. During fiscal year 2010, the Georgia Ports Authority reported a 9.7 percent increase in TEUs (twenty-foot equivalent units), which offset the decreases experienced in fiscal year 2009. The Georgia Ports Authority indicates that the second half of fiscal year 2010 was particularly strong, with signs of broad-based economic recovery.
The ports industry has fully recovered, and the incoming data bodes well for its expansion. The ports authority indicates its top priority is the Savannah Harbor Expansion Project, which will consist primarily of harbor deepening and will be the largest civil works project in Savannah’s history.
Private spending for new nonresidential construction will decrease in the first half of 2011, but a new upcycle will begin in the second half. Nonetheless, credit conditions will remain tight. The repricing of risk to more accurately match asset fundamentals will continue to exert downward pressure on asset prices and constitutes a primary headwind, especially for markets such as Atlanta with high vacancy rates.
Employment and population growth gradually will generate gains in net occupancy, but vacancy rates will remain elevated. Tenants will have the upper hand in lease negotiations, to a slightly greater degree than they did in 2009-2010.
In 2010, revenue growth returned to positive territory. As the economic recovery continues, the demand for high-volume data applications will grow. Although demand for smart phones, broadband and pre-paid phones will be the information industry’s primary drivers, there is considerable pent-up demand for equipment upgrades, and such spending probably will be unleashed in 2011.
Businesses will find that financing is somewhat easier to obtain, and employment is poised to expand slightly in 2011. Nonetheless, Georgia may never recover all of the 42,000 information jobs that were lost during the decade-long job purge.
Cable & Satellite TV Services
The improved outlook reflects renewed growth in the number of households, a cyclical increase in advertising outlays and faster growth in the demand for an expanding array of new digital products and other services. The declining demand for basic cable television services will be a headwind, however. The improving labor market conditions and more bundling of services should cause subscriber churn rates to fall. Rising household incomes and a decreasing number of economically stressed households will prompt some households that disconnected premium services to reconnect.
The increasing content available on demand will continue to be a powerful driver of the industry’s overall revenue growth. Cable television also benefits from the increased quality and affordability of digital cable-ready HDTV sets. Advertising expenditures will rise slowly as markets for most goods and services recover and begin to expand.
A challenge to both providers of cable television and satellite television is the rapid growth in the quality and quantity of online video content.
Staffing and temp agencies should do well because many firms will opt to remain flexible and will favor temporary workers over permanent hires. The state’s high unemployment rate will help the staffing industry: Workers will be more willing to accept temporary positions, and the supply of suitable temporary workers will be less constrained.
The industry will benefit from its increased focus on professional and technical workers, and workers will be more open to considering temporary positions.
Employee turnover is expected to be quite low, based on the assumption that the average workers’ already low expectations for finding a job will not rise substantially. Another challenge is that many of Georgia’s largest companies have not been performing very well, and historically it is the largest firms that tend to rely the most on staffing agencies to find both temporary and permanent employees.
Above-average population growth will increase demand for educational services. Weak government revenue collections will trim the supply or quality of publicly funded education, boosting demand for private educational services. Current and future jobs will require significant investment in higher education. Widespread dissatisfaction with public K-12 education and the possibility of some unpopular redistricting plans will encourage the growth of private schools. Similarly, Georgia’s extremely low SAT scores will spur demand for supplemental educational services.