2013 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.
Lumber & Wood
Production is poised to substantially outperform the overall economy in 2013. The above-average growth is due to the much-delayed cyclical recovery of the housing market. The push from an upturn in new residential construction will exceed the push from remodeling activity, but there will be a push from both subsectors. Most of the nation’s housing markets will be in the early stages of recovery. The overall increase in demand for lumber and wood products will be large, growing four to five times faster than either U.S. or state GDP. Wood pellet manufacturing, bio-fuels and cogeneration are emerging sources of demand for timber and wood fiber.
Nonresidential construction should begin to recover in 2014-15, and the recovery will help ensure that demand for overall lumber and wood products continues to advance at an above-average pace through at least 2016.
Paper & Pulp
Support for paper and pulp prices will come from the expansion of GDP; the low value of the U.S. dollar will restrict pulp and paper imports into the U.S. market and will 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. mills. The supply of wood chip and wood fiber waste from lumber production for the construction industry will be on the increase, reflecting recovery of the na-tion’s housing industry. That extra supply will restrain increases in pulp prices. The recent closing of many less-efficient paper mills located in the Southeast will restrain growth in the regional demand for market pulp, while helping to support paper prices.
Despite improving short-term market conditions, the steep reductions in demand for some types of paper reflect more than just cyclical forces. Increas-ingly, various forms of electronic communication are substituting for printed materials, and this trend will intensify. The recession accelerated the long-term secular decline of direct mail, catalogs, magazines and newspapers. New paper mills built in many developing countries will increase the level of import competition for domestic manufacturers of paper products.
Sales to households are poised to grow twice as fast as GDP in 2013. Higher turnover of existing homes, the upturn in new home sales and home price appreciation – rather than depreciation – are noteworthy positives for households’ demand for furniture; but slow recovery of jobs, limited prospects for substantial gains in disposable personal income and an abundant supply of good used furniture will temper the industry’s recovery. The outlook is less encouraging for commercial and institutional furniture, with overall spending by businesses and governments holding steady at 2012 levels. Businesses’ low outlays for furniture reflect depressed corporate headcounts, large inventories of surplus furniture that accumulated, an abundance of underutilized office space and limited immediate prospects for relocation and expansion.
Budget challenges will mandate pullbacks in spending for office and institutional furniture by many state and local governments. Even school districts where enrollments are rising will be cutting back, courtesy of less support by state governments as well as the lagged impact that depreciated home values will have on local property tax collections. Competition from overseas furniture manufacturers will cause furniture prices to rise more slowly than domestic production costs.
Businesses’ spending for capital equipment will contribute to state and national GDP growth, but the rate of growth in spending will be slower than in 2012. The slower rate reflects partial satisfaction of replacement needs de-ferred during the Great Recession as well as slow growth of global markets for final products. High levels of uncertainty regarding both the economic situation and federal fiscal and regulatory polices will help keep a lid on spending.
Equipment producers will benefit from cyclical increases in demand, and capacity utilization in manufacturing will approach levels consistent with higher demand for industrial equipment and machine tools. Demand will increase because spending had been cut to levels that are too low to maintain, much less expand, the capital stock. Slightly higher raw materials prices may increase cost pressures on machinery and the equipment industry, but would also increase demand from industries that produce basic commodities. The net effect should be positive.
The low value of the dollar will help increase exports of manufacturing equipment; exports to developing nations will increase much faster than exports to developed countries.
Nationally, the forecast calls for unit sales of both new and used cars to consumers to rise, and the biggest gains will be for light trucks. Automakers’ bottom lines will continue to improve. Busi-nesses and consumers will increase their purchases of new vehicles, but purchases by most state and local governments will decline.
Higher auto sales will help manufacturers of original equipment. Despite the success of the “Cash for Clunkers” program, manufacturers of replacement parts will enjoy stronger markets in 2013. Although makers of replacement parts lost some sales because vehicles were scrapped, there will be more demand for the growing number of older cars still on the road. Tire manufacturers will benefit from an 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.
Representing the state’s largest manufacturing industry, food products account for about one-fourth of the manufacturing gross state product. This industry will expand its presence in Georgia, both in output and employment. The demand for food products will grow at a moderate pace. Food processing is highly competitive, faces very demanding consumers and must adjust to volatile commodity prices. Consequently, firms will have limited flexibility in pricing, and the industry’s already thin profit margins probably will not widen.
Branded foods have lost market share to private labels, which are far less profitable for food processors. Sales growth will come from population gains and the development of niche products, and exports should grow modestly.
Apparel & Textiles
This industry suffered major setbacks from 2006 through 2012, and it will continue to contract as open world trade and cheaper foreign labor give a tremendous price advantage to many imported ap-parel 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. The apparel and textile manufacturing sector will decline at a decelerating rate this year.
The carpet and textile industry will begin to benefit from increases in housing activity and housing renovations. 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.
Georgia’s printing industry is in decline, but the rate of decline will slow in 2013. The industry faces more competition from digital media and from printers located abroad. Even sustained recovery will not lessen these two challenges too much. Cyclical increases in commercial advertising will be a tailwind for the printing industry, but political advertising will decline. Depressed levels of office-based employment and limited new business formation will continue to curb demand for printed materials; slumping revenue collections by local government will cause public schools and libraries to decrease their outlays for printed materials.
Electronic publishing will ensure that the industry’s revenues will grow much more slowly than GDP. High-quality machines suitable for small printing jobs will reduce organizations’ economic incentive to outsource small runs. Productivity gains stemming from new technologies will lead to job losses. The industry also is characterized by overcapacity, which will cause margin compression. Total profits for many printers will rise more slowly than total revenues.
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 – in part, because sales of generic drugs will expand faster than those of branded products. Pressures from large buyers and the federal government to hold down prices will intensify.
The pharmaceuticals industry is not particularly cyclical and was not hurt as much by the slump in GDP and employment as many other industries were; domestic demand is expected to grow steadily. 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.
Globally, the population will age fastest in more developed countries, where people are more able to afford to purchase high-priced prescription drugs. The Patient Protection and Affordable Care Act promises to dramatically expand the population of insured persons, which in turn will boost demand for pharmaceuticals and medicines while simultaneously compressing profit margins. The opportunity to sell generic equivalents of biologic drugs to consumers in emerging nations is enormous, but the competition will be intense.
Both long- and short-term interest rates are at historically low levels, and the yield curve is very flat. Net interest margin compression has pushed banks to purchase a greater proportion of assets with longer maturities, which means that many banks have taken on credit risks that could come back to haunt their balance sheets – and their mark-to-market value – should long-term interest rates rise substantially. Long-term rates are expected to rise only slightly in 2013, and the Federal Reserve is not expected to raise short-term policy rates. Net interest margins are poised to widen, which will provide some support for banks’ profits. Wider net margins will be vital to generating profits.
Financial institutions will begin to benefit from the next up cycle for residential real estate, declining mortgage default rates, modest home price appreciation, higher spending for consumer durable goods, high levels of corporate profits and slightly more opportunities to boost earnings derived from mergers and acquisitions and IPOs.
Due to more rigorous lending standards and depreciated real estate values, new loans will generally prove to be very good ones. The best loans are typically made during economic recoveries or the early stages of an expansion; the worst are typically made during the boom years.
Residential Real Estate
Increases in sales of new and existing single-family homes – albeit from extremely depressed levels – are ex-pected to boost commissions earned by Georgia’s residential real estate brokerage firms. In addition, these firms will see more active multi-unit housing markets. But tight credit standards, less confidence in real estate as an investment, already depressed home prices and the still weak job market will be among the factors that will stymie recovery.
Growth in truck freight coupled with recent fleet reductions means tighter capacity, which implies somewhat less intense competition for loads within the trucking industry itself. But internal competition will still be strong. Long-haul truckers will face more competition from the railroads, which are more fuel efficient; short-haul truckers will not be overly impacted by such competition. In general, trucking firms will be able to raise rates sufficiently to more than offset higher costs, but their pricing power will not be strong enough to cause net margins to widen dramatically.
Trucking firms will continue to benefit from businesses’ increased outsourcing of their transportation and logistics needs, as supply chains continue to become more complex, putting more emphasis on just-in-time inventory systems and global supply networks. The increased proportion of inputs and products from overseas will focus the industry’s growth on port cities, especially those with large port-focused distribution centers, such as Savannah.
Click & Mortar Retailers
Online sales will grow much faster than overall retail sales, further ex-panding e-tailers’ share of overall retail sales to approximately 5 percent. Prior to the Great Recession, e-commerce ac-counted for only 3.6 percent of total retail sales. Research shows that most consumers who shop online are very satisfied.
Computer-based retailers gain the most from rapid technological change and consumers’ increased understanding and use of electronic, mobile and social media. Increasingly, 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 offline.
Spending on home renovations and repairs appears to be closely tracking overall activity in both the nation’s and Georgia’s housing market. Al-though remodelers will benefit from the overall recovery of the economy and housing markets, they should remain cautious. Depreciated home prices and much less cash-back refinancing of home mortgages are strong headwinds for the industry. Hi- storically, cash-back refinancing has been a major source of funds for home-improvement projects. Low appraisals will limit the availability of financing for large projects such as room additions.
Remodeling firms can count on retirees to spend more on home improvements. Aging-in-place remodeling projects will be an increasingly important source of growth, reflecting baby boomers’ planning for the future, living with older parents, the onset of age-related disabilities and retirees’ inability to sell their current homes on acceptable terms.