Ups and Downs
The 2016 outlook for the industries that keep Georgia humming.
We are well on the way through 2016, and the road ahead is looking good for most of the state’s economic sectors as employment rises and consumer confidence increases. The Selig Center for Economic Growth at the University of Georgia’s Terry College of Business conducts research on economic, demographic and social issues to determine the outlook for the state’s primary industries, which you will find on the following pages. Barring any unforeseen circumstances, the future of the Peach State’s economy looks sunny indeed.
Hartsfield-Jackson Atlanta International Airport once again ranks as the No. 1 U.S. passenger airport, and domestic air passenger travel will be on the upswing thanks to more business activity, higher corporate profits and higher disposable personal income. Assuming that fuel costs fall significantly, this higher demand coupled with better control of capacity – in part due to recent mergers – will help improve profit margins, which widened quite a bit in 2014 and 2015.
The strong value of the U.S. dollar does not bode well for international arrivals but will encourage U.S. residents to travel abroad. In addition, international deregulation of the industry will encourage more international travel.
Lumber and Wood
At this phase of the current economic cycle, housing activity will grow much faster than the overall economy, benefiting the lumber and wood products industry. Indeed, new residential construction will exceed remodeling activity, but there will be a push from both homebuilding subsectors.
Higher activity in private non-residential construction will also add to an above-average demand for lumber and wood products. Spending by federal, state and local governments for construction also is expected to increase slightly, adding to the overall demand. International developments will provide only limited support to Georgia’s lumber and wood products industry, mostly due to the strength of the U.S. dollar.
Paper and Pulp
Support for paper and pulp prices will come primarily from the expansion of U.S. Gross Domestic Product (GDP), though production will not grow as fast as GDP and profit margins probably will decline. The best prospects are for producers of products such as paperboard containers, but limiting factors include outsourcing and import competition. The worst prospects are for producers of newsprint.
The strengthening of the U.S. dollar will persist through mid-2016, discouraging pulp and paper exports and encouraging imports. New paper mills in China and other developing countries will help power the recovery of global pulp markets but will create more competition for U.S. mills.
Despite improving market conditions, the steep reductions in demand reflect the increasing use of digital communication and recordkeeping. Going forward, this trend will intensify due to the proliferation of more affordable and more convenient broadband and mobile Internet access.
Due primarily to competition from digital media, Georgia’s printing industry will remain in secular decline, though the rate of decline probably will decelerate. Cyclical increases in commercial and political advertising will be a tailwind for Georgia’s printing industry, but an increasing share of advertising dollars will be digital. Slowly rising levels of office-based employment and an uptick in new small businesses also will increase demand for printed materials. Increased revenue collections by local governments will cause public schools and libraries to increase their outlays for printed materials.
The widespread use of electronic publishing and in-house high-quality machines suitable for smaller print runs will ensure that the printing industry’s revenues will grow much more slowly than Georgia’s GDP. Productivity gains stemming from new technologies will lead to job losses in the state’s printing industry. The printing industry also is characterized by overcapacity, which will cause margin compression. Total profits for many printers will decline.
Growth in truck freight coupled with recent fleet reductions means tighter capacity, which implies slightly less intense competition for loads within the trucking industry. Low fuel prices will help long-haul truckers compete with the railroads, which are much more fuel-efficient.
Trucking firms will continue to benefit from businesses’ increased outsourcing of 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. Increasing imports from overseas will focus the trucking industry’s growth on port cities, especially those with large port-focused distribution centers, such as Savannah. The approval of the Savannah Harbor deepening project will ensure that the economic benefits to truckers operating in Georgia continue to expand.
Auto manufacturing is becoming increasingly concentrated in the Southeast, and Georgia is in the sweet spot with proximity to major assembly plants, suppliers, interstates, ports and rail. In addition to KIA’s West Georgia plant and Mercedes’ new Atlanta headquarters, the Volkswagen assembly plant in Chattanooga and the recently announced Volvo assembly plant near Charleston, S.C., make Georgia an even more attractive place for suppliers.
Nationally, the forecast calls for sales of both new and used cars, SUVs and light trucks to rise. Larger gains in disposable personal income, more jobs, more confidence, better credit conditions, better fuel efficiency, low gas prices and the age of the vehicle fleet will be powerful drivers of sales. The average vehicle is more than 11 years old, suggesting that there is still pent-up demand for new automobiles. The strong dollar will be a countervailing force encouraging U.S. consumers to buy imported cars while reducing sales of U.S. automobiles abroad.
Demand for many chemical products will increase in the typical cyclical fashion. The main opportunities for chemical manufacturing will be higher use in construction, slightly higher use in the industrial sector and significantly higher sales for consumer use. The best prospects are for medicines and pharmaceuticals.
An abundance of shale gas has substantially lowered natural gas prices, providing U.S. manufacturers with a much-needed advantage in global markets in terms of lower feedstock costs. However, U.S. chemical production gradually will relocate to developing countries due to the costs of complying with U.S. environmental and security regulations. Also, because many of the chemical industry’s largest industrial customers have already moved to the developing world, chemical production is very likely to follow the customers.
Apparel and Textiles
Georgia’s apparel manufacturing industry has suffered some major setbacks and will continue to contract as open world trade and cheaper foreign labor give a tremendous price advantage to imported apparel items. Even as domestic demand increases, global competition will ensure that the domestic industry’s sales and profit margins remain under severe pressure. Intense competition among retailers also will keep a lid on apparel prices. Apparel prices almost certainly will not keep pace with inflation. The bottom line is that Georgia’s apparel manufacturing sector will decline at a decelerating rate.
Pharmaceuticals and Medicines
Favorable demographics and cost effectiveness enhance prospects for pharmaceutical and medical supply firms. The industry continues to benefit from its focus on marketing directly to consumers. A number of new niche drugs – albeit fewer obvious block- busters – in the development pipeline, along with better research and development techniques, faster FDA approval of new drugs and the 1994 General Agreement on Tariffs and Trade, which effectively extended the patent life of many drugs, favor the industry’s long-run prospects.
The industry will benefit from the aging population and the increase in chronic diseases related to aging and sedentary lifestyles. The population will age fastest in more developed countries, where people are better able to afford high-priced prescription drugs. The Patient Protection and Affordable Care Act dramatically expanded the population of insured persons, which in turn has boosted demand for pharmaceuticals and medicines while simultaneously compressing profit margins. Higher funding for Medicare and Medicaid also will support higher sales.
The information industry’s shift from a persistent headwind into a tailwind is one reason why Georgia’s economy outpaced the U.S. economy last year and is poised to outperform again in 2016. Personal and business purchases of high-volume mobile data services, innovative wireless services and software will grow strongly.
Individual demand for smartphones and tablets in combination with businesses’ growing desire for mobile- and cloud-computing will be among the information industry’s primary drivers. There is considerable potential for equipment upgrades and still some pent-up demand for premium cable packages, but specialty streaming video and niche satellite services will take market share from cable operators.
Demand for fixed broadband access and pre-paid phones will also increase but at a pace that is much more moderate than recently experienced. Demand for software is booming due to widespread adoption of new technologies – especially mobile communications – and increasing concerns about data security.
Loan growth and rising asset values favor top-line growth, but compliance costs will challenge the bottom line. The Federal Reserve will likely raise short-term policy interest rates, unwinding its unprecedented easing policies.
Despite relatively stable net interest margins, higher demand for loans will support banks’ profits. Consumers are apt to seek more loans for durable goods, such as automobiles, as well as home equity loans. Financial institutions also will benefit from the up-cycle in residential real estate, declining mortgage default rates and continuing home price appreciation.
Such support will offset unfavorable developments, including fewer reserve releases, a dearth of mortgage refinancing and possible losses in banks’ bond portfolios, should interest rates rise faster than expected. More positively, deposit growth should remain strong.
Georgia’s financial institutions in particular will benefit from demographic trends, including above-average population growth and household formation and the increases in demand for the banking services they bring.
Retailers will see top-line growth, but their margins will not widen due to higher labor costs. Low-end and high-end retailers will fare better than mid-market retailers. Multi-channel retailers that fully integrate electronic and physical stores will fare better than those that do not. The brick-and-mortar retailers with the best prospects include wireless, off-price luxury, discounters, drug and specialized small-format grocery stores (think organic, ethnic or discount).
The brick-and-mortar retailers with the worst pros-pects are those that face the most intense digital competition, such as book, video, shipping/postal and stationary stores. Unionized grocery, office supply and mid-priced apparel/department stores also will struggle.
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 goods. The upcycle in residential real estate markets will be a second major force powering growth in sales of home-related items.
Georgia’s housing market conditions will continue to improve. Increases in demand for housing will be due primarily to the improving performance of the labor market, giving more Georgians the confidence and the wherewithal to buy homes.
Mortgage rates will be higher than from 2012 to 2015 but will remain very low from a historical perspective. The predicted improvements in labor market conditions and household formation coupled with still-affordable mortgage rates and growth in demand for housing should be sufficient to sustain recovery in homebuilding as well as renovation and repair activity.
First-time homebuyers are expected to account for a slightly larger proportion of home sales, reversing the prolonged slump in market share accounted for by first-time buyers. More active first-time buyers are critical because they are not just exchanging one house for another and therefore catalyze activity in new home construction.
Residential Real Estate Firms
Increases in sales of new and existing single-family homes, along with more active multi-unit housing markets, will boost commissions earned by Georgia’s residential real estate firms. Additional easing of credit standards, slightly more confidence in real estate as an investment, appreciating home prices and the stronger job market will be among the factors that bolster recovery for real estate firms. The industry also is well positioned to benefit from the retirement of baby boomers – a strong demographic trend for the next several years.
Georgia’s carpet industry will continue to benefit from increases in housing activity, more home renovations, appreciating home values and increasing automobile sales. Nonresidential usage also will increase, reflecting both renovation activity and new construction. Carpet exports will expand due to growth in developing markets.
Productivity gains and innovations in product development also will help our textile and carpet manufacturers survive. Nonetheless, as the plants become less labor intensive, total employment in this industry will not grow as fast as total sales. In addition, the high value of the U.S. dollar will discourage carpet exports and encourage carpet imports.
Home Renovation and Repairs
Spending on home renovations and repairs appears to be closely tracking overall activity in both the nation’s and Georgia’s housing markets because homebuyers spend much more on renovations and repairs than people who stay put. Although remodelers benefit from rising home prices – through increases in home equity – they should remain cautious. In many neighborhoods, home prices are far from having recovered, limiting cash-back mortgage refinancing, which historically has been a major source of funds for home-improvement projects.
Employment growth will give people both the confidence and means to spend more on home improvement. In Georgia, remodeling firms can count on retirees to spend more. 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.