2012 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 of Georgia’s key industries this year.
Lumber & Wood
Production of many lumber and wood products is poised to advance. The push from remodeling will exceed the push from new construction, as the nation’s homebuilding industry continues to bounce along the bottom rather than experience meaningful recovery. The overall increase in demand for lumber and wood products will be modest. Demand for pallets and crates will closely track the growth of overall economic activity, with usage for international trade-related shipments growing much faster than usage for domestic shipments.
Wood pellet manufacturing, biofuels and cogeneration are emerging sources of demand. Depressed activity in non-residential construction will limit demand; the areas of non-residential construction that will see the most growth in 2012, such as utility construction, are not wood-intensive.
Paper & Pulp
Moderate support for paper and pulp prices will come from the expansion of GDP, and the low value of the dollar will restrict pulp and paper imports and stimulate exports. New paper mills in China and other developing countries will be a major force powering the recovery of global pulp markets but will create more competition for U.S. paper mills. The limited supply of wood chip and wood fiber waste from the production of lumber for construction will help support pulp prices. The recent closing of many less-efficient paper mills in the Southeast will restrain growth in the regional demand for market pulp.
Despite improving short-term market conditions, the steep reductions in demand for some types of paper reflect more than just negative cyclical forces. Increasingly, various forms of electronic communication are substituting for printed materials. This trend will intensify due to the proliferation of more affordable and more convenient broadband Internet access.
Furniture sales to households have stabilized – at relatively depressed levels – and will rise moderately. The primary culprits behind the steep plunge in sales were the deep-seated housing recession and the financial crisis. Going forward, slightly higher turnover of existing homes, a slight upturn in home sales, and the end of home price depreciation are positives for households’ demand for furniture; but slow recovery of jobs, limited prospects for substantial gains in disposable personal income, a higher savings rate and an abundant supply of good used furniture will temper the recovery.
The outlook is worse for sales of commercial and institutional furniture. Busi-nesses’ low outlays for furniture reflect lower corporate headcounts, large inventories of surplus furniture, an abundance of underutilized office space and limited prospects for relocation and expansion.
Spending for capital equipment will contribute significantly to state and national GDP growth, although the rate of growth will be slower than in 2011.
The slower rate of growth reflects partial satisfaction of replacement needs deferred as well as slow growth of markets for final products. Capacity utilization in manufacturing as a whole will be far below levels consistent with higher demand for industrial equipment and machine tools, but demand will increase.
Although tight credit could potentially limit some businesses’ ability to purchase more manufacturing equipment, many companies will have the means to expand due to good internal cash flows and pristine corporate balance sheets.
Nationally, the forecast calls for unit sales of both new and used cars to rise, but the biggest gains will be for models that generate the lowest profit margins. Still, automakers’ bottom lines will continue to improve. Both businesses and consumers will increase their purchases of new vehicles, but government purchases will decline. Manufacturers of replacement parts will enjoy stronger markets.
Tire manufacturers will benefit from an expected increase in the number of miles driv-en as well as consumers’ increased acceptance of high-performance and other specialty tires.
High – and rising – debt-to-GDP ratios in the U.S. and many other developed economies will prove to be formidable headwinds for aerospace manufacturers.
Sovereign debt problems have made both the short- and medium-term expectations for producers of aerospace products far less sanguine than they appeared to be a few years ago.
Of course, Georgia does have some terrific assets fully capable of bringing a major aerospace project, but without a “Hail Mary” or two, the state will have to depend on other industries to power the recovery.
Food product manufacturing accounts for about one-fourth of Georgia’s manufacturing gross state product. This industry will expand its presence both in terms of output and employment, and the demand for food products will grow at a moderate pace. Food processing is highly competitive, with very 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 processors’ margins.
Georgia’s printing industry is in decline, and the rate of decline will accelerate as the industry faces more competition from digital media and from printers located abroad. Even sustained economic recovery will not lessen these two challenges by much.
Cyclical increases in commercial and political print advertising will be the most powerful tailwinds for Georgia’s printing industry in this election year. Depressed levels of office-based employment and limited new business formation will continue to curb demand for printed materials.
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. Productivity gains stemming from new technologies will lead to job losses in the printing industry.
Demand for many chemical products will increase in typical cyclical fashion. The main opportunities for chemical manufacturing will result from growth of the industrial sector of the economy, higher sales for consumer use and stable use in construction.
The best prospects are for medicines, pharmaceuticals and agricultural chemicals. Chemical production increasingly will relocate from the U.S. to developing countries. 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 will not be very long before the research and development jobs migrate to overseas locations, as the pool of talented workers required to staff offshore plants is growing very rapidly.
Pharmaceuticals & Medicines
Favorable demographics and cost effectiveness enhance 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 industry did not get hurt as much by the slump in GDP and employment as many others did.
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 products directly to the consumer. A number of new niche drugs in the development pipeline, better research and development techniques, faster FDA approval of new drugs, and the 1994 General Agreement on Tariffs and Trade (GATT) agreement, which effectively extended the patent life of many drugs, favor the industry’s long-run prospects.
The industry will benefit from the aging of the population and rising incidences of diseases related to aging. Globally, the population will age fastest in the more developed countries, where more people can afford to purchase high-priced prescription drugs.
The Patient Protection and Affordable Care Act, if it survives, promises to dramatically expand the population of insured persons, which in turn will boost demand for pharmaceuticals and medicines while simultaneously compressing profit margins.
Predicted improvements in labor market conditions will allow housing activity to stabilize, but they will not be sufficient to ignite meaningful recovery. The trough of the housing market is likely to last a few more years. Single-family homes will be very affordable, and rents will be rising. That will encourage people to buy rather than rent, but many will delay purchasing due to their lack of confidence in the economic situation. The buyers’ market will continue.
Households’ and businesses’ purchases of high-volume data applications and many of the newer innovative wireless services will grow strongly. Demand for smart phones, broadband and pre-paid phones will be the information industry’s primary drivers.
There appears to be some pent-up demand for equipment upgrades and premium cable packages. Businesses will find that financing is affordable and somewhat easier to obtain, and as broadband and network capacities become more fully utilized the need to invest more will intensify. Heightened competition is expected among the various telecommunications subsectors.
Industry-wide staffing levels will stabilize – expanding in the wireless subsector while continuing to decline in the wired subsector, as customers substitute wireless services for wired.
The Internet economy will expand, but statistically it is becoming increasingly difficult to post sky-high year-over-year percentage gains as the online community gets larger.
Yet, easier and faster access will help keep people online longer and encourage them to spend more. The proliferation of Internet-enabled wireless devices and improved software will make it easier to access the Internet.
Spam, the proliferation of more virulent viruses, online pornography and fraud are major deterrents to the Internet economy. Cybercrime is still soaring and reduces the appeal of using the Internet for the transfer of personal or highly sensitive information.
Online sales will grow much faster than overall retail sales, further expanding e-tailers’ share of sales. Computer-based retailers gain the most from rapid technological change and consumers’ increased understanding and use of electronic and mobile media.
Increasingly, the online operations of multi-channel retailers will generate profits for companies that fully integrate their online and off-line operations. The growing legions of multi-channel customers increasingly will favor “click and mortar” retailers over those operating solely online or off-line. The continued expansion of products available online, competitive prices and social commerce will help fuel the growth of cyber shopping.
Containerized cargo shipments via Georgia’s ports will be the main force contributing to the growth of the transportation sector and will ensure that overall cargo volumes grow faster than state GDP.
Carriers’ profit margins will widen slightly but will remain low relative to other industries due to intense competition. Although the freight recession is over, economic growth has not been and will not be exuberant.
The biggest challenge to carriers will be slow growth of domestic consumer spending. Construction will languish at depressed levels – a significant barrier to fast-paced growth in cargo volumes.
The Wall Street Reform and Consumer Protection Act creates new regulators, extends regulations into new areas, provides new consumer/investor protections and gives regulators new abilities to define firms that create systemic risk. These new regulations will increase costs for firms providing financial services, which will come primarily at the expense of net margins.
Unfortunately, they do not address several primary causes of the financial crisis – financial institutions’ tendency to use pro-cyclical loan to value ratios, the moral hazard of deposit insurance and the FDIC, and the pro-cyclical policies of Fannie Mae and Freddie Mac. The new regulations, which will reduce the efficiency and competitiveness of U.S.-based financial institutions, will do very little to prevent future financial crises.
The Federal Reserve will not raise short-term policy interest rates until late 2014. Even though the yield curve will remain depressed, deposit growth will remain strong due to continuing high levels of uncertainty regarding economic growth and federal government policies.
Deposits will grow much faster at small community banks and credit unions than at larger banks or at savings and loans. That’s partially due to the poor image that large banks have with their customers. Loan growth will improve, but continued uncertainty will cause the gains to come slowly.
Sustained growth of the overall economy will strengthen Georgia’s hospitality sector and boost revenue for travel, accommodations and dining establishments. Lodging demand will continue its modest rise.
Limited supply growth in the face of slightly higher overall demand should absorb excess room supply, raising overall occupancy rates.
The slightly tighter market will exert mild upward pressure on room rates. Prime locations should continue to do well at the expense of older properties in less-than-prime locations. The luxury segment has seen larger growth than the economy sector and will continue to drive the growth in average daily rates. Curtailing operating expenses will be important to profit generation.
Expenditures for restaurant meals will increase slightly, due to employment growth, more business activity and more travel and tourism. The rising cost of food will impact margins as restaurants try to maintain reasonably priced menu items. Fast food and inexpensive quick-casual restaurants will slightly outperform both mid-priced and expensive full-service restaurants. Menu adjustments with emphasis on freshly prepared items will help fast-food restaurants partially recoup recent losses in market share.
Grocery stores, especially in metro areas, will continue to expand offerings to a wider selection of freshly prepared foods.
Lawyers and law firms should see steady demand for their services. Firms that provide services to businesses will benefit from increases in the number of startups, expansions and mergers and acquisitions. Businesses typically devote more resources to litigation when corporate profits are on the upswing; but legal work related to company restructuring, insolvency, bankruptcy and intellectual property will be relatively strong. New laws, new regulations and the increasing complexity of existing laws and regulations will continue to generate business for law firms.
This will remain one of the better-performing sectors. Georgia’s population growth, stable funding for Medicare, more use of health services, better management of operating expenses and the increasing market power of healthcare providers will help the bottom line.
Hospitals’ outpatient care facilities and specialty care centers will continue to experience solid growth, and inpatient facilities will see moderately higher demand.
Large hospitals that provide general care will face increased competition from physician-owned specialty hospitals, and freestanding imaging and diagnostic centers will continue to usurp market share from traditional hospitals.