2014 Industry outlook
The director of the Selig Center for Economic Research at the University of Georgia’s Terry College of Business reports on what to expect this year for the state’s key industries.
Lumber and Wood
Production of lumber and wood products is poised to grow much faster than GDP. Surging production will be due to the nation’s housing market recovery, supply constraints related to the mountain pine beetle in Canada and higher exports.
Housing activity will grow much faster than the overall economy, benefiting the lumber and wood products industry. There will be a push from both homebuilding subsectors, with new residential construction exceeding remodeling activity. Demand for lumber and wood products therefore will be very large, growing four to five times faster than either U.S. or state GDP. Demand for pallets and crates will closely track the growth of overall economic activity, with usage for domestic shipments growing at about the same pace as use for international trade-related shipments.
Paper and Pulp
In 2014, paper and pulp prices will increase, but pulp and paper production will grow less than half as fast as GDP. Therefore, producers’ profit margins probably will decline. The best prospects are for producers of converted paper product such as paperboard containers, but limiting factors include outsourcing and import competition. The worst prospects are for producers of newsprint.
The continued strengthening of the U.S. dollar will discourage pulp and paper exports but encourage imports. 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.
Wood chip and wood fiber waste from the production of lumber will increase, reflecting recovery of the nation’s housing industry. That extra supply will restrain increases in pulp prices. The recent closing of many less-efficient paper mills in the Southeast will restrain growth in regional demand for market pulp.
Household furniture sales are poised to grow substantially due to higher turnover of existing homes, the upturn in new home sales, more home renovations and home price appreciation. Household mobility and formation will rise significantly, 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 sales of commercial and institutional furniture. Businesses’ spending for furniture will increase slowly, reflecting low corporate headcounts, large inventories of surplus furniture that accumulated as people were laid off, an abundance of underutilized office space, and uncertainty regarding federal government tax and spending policies. Lingering budget challenges will limit increases in spending for office and institutional furniture by many state and local governments in 2014, but at least cutbacks in such spending are not expected.
The rate of growth in spending for manufacturing equipment will be slightly faster in 2014, but it will remain subdued. The modest pace of growth reflects partial satisfaction of replacement needs deferred during the Great Recession as well as slow growth of markets for final products. High levels of uncertainty regarding both federal fiscal and regulatory policies also will keep a lid on businesses’ spending for capital equipment.
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. Spending had been cut to levels that were too low to maintain, much less expand, the capital stock, so demand will increase.
Unit sales of both new and used cars will rise in 2014, and the biggest gains will be for light trucks. Better credit conditions and the aging vehicle fleet will be primary drivers of automobile sales in 2014, and auto-makers’ bottom lines will continue to improve. The average light vehicle is 11 years old, suggesting there is still considerable pent up demand for new automobiles. Purchases by local, state and federal governments probably will decline.
Higher auto sales will help manufactures of original equipment. Despite the success of the “Cash for Clunkers” program, manufacturers of replacement parts will enjoy stronger markets in 2014. Needed automobile maintenance and tire purchases that were deferred will go forward as the economy improves. Tire manufacturers will benefit from an expected increase in the number of miles driven and consumer acceptance of high-performance and other specialty tires.
Although short-term prospects are excellent, eventually the high – and rising – debt-to-GDP ratios in the U.S. and many other developed economies will be formidable headwinds for aerospace manufacturers. Longer-term, expect both China and Russia to put greater emphasis on developing domestic aerospace manufacturing industries, which increasingly will compete with U.S. manufacturers for both civilian and military sales to maturing economies in the developing world.
Civilian aircraft manufacturers stand to gain from airlines’ pressing need to update fleets with more fuel-efficient, quieter and productive aircraft. This will become the main driver of the industry’s sales in developed economies. However, early retirement of less fuel-efficient airplanes will affect maintenance and repair services providers. A second powerful tailwind for U.S. civilian aircraft manufacturers will be the rapid growth in air travel via private plane throughout Asia, India and the Middle East.
Food product manufacturing is the state’s largest manufacturing industry, accounting for one-fourth of its manufacturing gross state product. Demand for food products will grow moderately this year, so the industry will expand its output and hire more employees. Sales growth will come from population gains and the development of niche products with higher value-added margins.
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. Also, branded foods have lost market share to private labels, and the private labels are far less profitable for food processors.
Georgia’s apparel manufacturing industry suffered some major setbacks in 2006-2013, and it will continue to contract as open world trade and cheaper foreign labor give a tremendous price advantage to many imported apparel 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. Some high-end apparel 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 once booming apparel industry. One positive development is that production of high-quality niche apparel products generally requires more highly skilled workers, which implies that average wages in this shrinking industry will be increasing rather than decreasing.
Due partially to the repeal of the state’s sales tax on energy used in manufacturing, Calhoun-based Engineered Floors announced it would invest more than $450 million in two plants in Northwest Georgia, creating about 2,400 direct jobs. The new plants will use leading-edge technologies, which will help keep Georgia’s carpet industry competitive.
In 2014, Georgia’s carpet industry will benefit from increases in housing activity, more home renovations and appreciating home values, as well as rising automobile sales. Nonresidential usage will increase slightly, reflecting mostly renovation activity rather than new construction. Carpet exports will expand due to growth in developing markets.
The main opportunities for chemical manufacturing will be higher use in construction; growth of the industrial sector; and higher sales for consumer use. The best prospects are for medicines, pharmaceuticals, paints and agricultural chemicals. An abundance of shale gas has substantially lowered natural gas prices, providing a much-needed advantage in global markets. Still, chemical production gradually will relocate to developing countries since the costs of complying with environmental and security regulations are relatively high in the U.S. In fact, many of the chemical industry’s largest industrial customers already have moved to the developing world. Chemical production therefore is very likely to follow.
Pharmaceuticals and 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. That’s partially because sales of generic drugs will expand faster than sales of branded products. Pressures from large buyers and the federal government to hold down prices also will intensify.
In 2014, domestic demand is expected to grow steadily, as the industry continues to market products directly to consumers, the population ages and the incidence of diseases related to aging and sedentary lifestyles rises. Globally, the population will age fastest in the more developed countries, where people are more likely to afford high-priced prescription drugs.
Georgia’s housing market conditions will improve significantly due to a more favorable balance of supply and demand. New jobs and bigger paychecks will give more Georgians the confidence and ability to buy homes, ensuring that the current upturn in housing permits and starts is not another false dawn. Mortgage rates will remain very low from an historical perspective, albeit higher than in 2012-2013. Couple the predicted improvements in labor market conditions with investors’ interest in single-family homes for use as rental housing, and overall demand growth should be sufficient to sustain recovery in homebuilding as well as renovation and repair activity.
Increases in consumer spending and industrial production and more shipments via Georgia’s ports will cause total statewide cargo volumes to significantly outpace state and U.S. GDP growth in 2014. That’s quite an accomplishment for an industry that typically moves in lockstep with the overall economy.
Because the foreign sector is so weak, growth will have to come from within the U.S. Bigger shipments of many durable goods, including capital equipment, automobiles and building materials, are expected to drive demand for transportation. Shipments of most nondurable goods also will increase, but at a much slower pace. Meanwhile, shipments of textiles, apparel and printed materials probably will decline slightly. Rate competition will become less intense, reflecting higher freight volumes and the lagged impacts of capacity reductions that occurred during the Great Recession.
The superb performance of Georgia’s ports will encourage expansion of their share of regional and national waterborne cargo traffic. Refrigerated exports of poultry and other foods recently increased substantially, reflecting strategic additions to port infrastructure and major investments by cold storage operators such as Nordic.
The use of super Post-Panamax vessels will increase dramatically, forcing shippers to move their largest and most economic-impact rich operations to ports that can accommodate the larger ships. Therefore, deepening the harbor from 42 to 47 feet is not only essential to growth, it’s also a matter of ensuring that the economic benefits that Georgia already enjoys do not decline.
Cable and Satellite TV Services
The industry’s outlook reflects renewed growth in the number of Georgia’s households, an increase in advertising outlays and faster growth in the demand for an expanding array of new digital products. However, declining number of cable television subscribers and the proliferation of online video distribution will be major headwinds for cable television providers.
An improvement in labor market conditions and more bundling of services should cause subscriber churn rates to fall. Rising household incomes will prompt some that disconnected premium services to reconnect. In 2014, demand for broadband Internet connections will more than offset the slight decline in demand for cable television. Top-line and bottom-line growth should be very positive, but profit margins may not change very much.
Voice over Internet Protocol (VoIP) initially gave cable companies the ability to provide their customers with traditional wired phone services, but mobile VoIP shifts the advantage to wireless providers. The format war between 4G wireless technologies has been resolved in favor of Long-Term Evolution (LTE), which means the rollout of 4G technologies will accelerate quickly. With LTE, wireless phone providers can offer Internet access that matches the speed and capacity of cable modems, meaning the era of cable modem access reigning supreme will soon come to an end.
Since VoIP calls on 4G networks are identical to other types of data transmission, the build out of 4G networks will dramatically reverse the current pricing structure. Going forward, charges for data transmission are destined to rise significantly for high-volume users, while charges for voice calls will flatten or disappear completely.
The prospects for restaurants are good. Job growth, more business activity, fatter expense accounts, and more travel and tourism will be the main tailwinds for the industry, but rising food prices and higher labor costs for entry-level workers will squeeze profit margins. Inexpensive quick-casual restaurants will outperform both fast-food and expensive full-service restaurants. Grocery stores, especially in metro areas, will continue to expand their selections of freshly prepared foods on premises, directly competing with quick-service and fast-food restaurants. Hotel restaurants will see an increase in patronage due to the improved outlook for travel and tourism.
Printing and Publishing
Due primarily to competition from digital media, Georgia’s printing and publishing industry is in decline, but the rate of decline will probably decelerate in 2014. Cyclical increases in commercial advertising will be a tailwind for Georgia’s printing industry, but an increasing share of advertising dollars will migrate to the Internet. Slowly rising levels of office-based employment and a limited uptick in new business formation will increase demand for printed materials.
The more widespread use of electronic publishing will ensure that the industry’s revenues will grow much slower than Georgia’s GDP. High-quality printers will reduce organizations’ economic incentive to outsource small runs. Productivity gains stemming from new technologies will lead to job losses in the state’s printing industry. Overcapacity will cause margin compression, so total profits for many printers will decline.
Retailers at the high and low ends will fare better than those aimed at the mid-market. Retailers will see top-line growth, and their margins will widen. In 2014, retail sales growth will be sustained by increases in the number of jobs, which will give more people the confidence and the wherewithal to spend more for retail items. Faster growth of disposable personal income expected in 2014 implies faster growth of retail sales. The upcycle in residential real estate markets will be a second major force powering retail sales growth in 2014, especially sales of home-related items.