2015 Industry Outlook
As we become fully ensconced in 2015, the road ahead is looking good for most of Georgia's economic sectors. 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 state of affairs for the state's primary industries. While a strong U.S. dollar means exports won't grow much across industry sectors, barring unforeseen circumstances, the future of Georgia's economy looks bright indeed.
LUMBER AND WOOD
Surging production of and demand for lumber and wood products will be mainly due to the recovery of the nation’s housing markets – both new construction and remodeling – and demand will grow much faster than either the U.S. or state GDP.
In contrast, demand for pallets and crates will closely track the growth of overall economic activity, with use for domestic shipments growing faster than for international trade-related shipments. Wood pellet manufacturing, bio-fuels and cogeneration also are emerging sources of demand for timber and wood fiber. Higher activity in non-residential construction will also add to demand for lumber and wood products.
PAPER AND PULP
Pulp and paper production will not grow as fast as GDP, and producers’ profit margins probably will decline. The best prospects are for producers of converted paper products such as paperboard containers, but limiting factors include outsourcing and more import competition. The worst prospects are for producers of newsprint. New paper mills in China and other developing countries will be a major force powering the recovery of global pulp markets, but these will create more competition for U.S. paper mills.
The supply of wood chips and wood fiber waste from the production of lumber for the construction industry will be on the increase, reflecting recovery of the nation’s housing industry. That extra supply will restrain increases in pulp prices. The recent paper mill closings in the Southeast will restrain growth in the regional demand for pulp while helping support paper prices.
Furniture sales to households are poised to grow substantially faster than the GDP. Higher turnover of existing homes, the upturn in new home sales, more home renovations and home price appreciation – rather than depreciation – are noteworthy positives for households’ demand for furniture. Household mobility and household formation also will slowly recover from their recessionary lows. An abundant supply of good used furniture, however, will temper the industry’s recovery.
Equipment producers will benefit from cyclical increases in demand, and capacity utilization in manufacturing as a whole will be at 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 lower raw materials prices – at least in U.S. dollar terms – may lower cost pressures on the machinery and manufacturing equipment industry, but it would also decrease demand from industries that produce basic commodities.
Low short- and long-term interest rates bode well for manufacturing equipment sales. Continued easing of credit conditions will enhance the positive impact of low borrowing costs on demand for manufacturing equipment. A strong U.S. dollar will be a headwind for exports of manufacturing equipment.
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, so private labels are currently far less profitable for food processors. Sales growth will now come from population gains and the development of niche products with higher value-added margins. Due to slow growth of the global economy and the strong U.S. dollar, food exports will not grow very much.
Product innovations are important drivers of sales in this intensely competitive industry. Specialized products recognize consumers’ increased health consciousness, greater ethnic diversity and the growing acceptance of foods from other cultures. Demand for “better-for-you” foods will continue to grow strongly, propelled by an aging population that is well in-formed about good eating habits.
Georgia’s floor coverings industry will continue to benefit from increases in housing activity, appreciating home values and rising automobile sales. Carpet exports will expand due to growth in developing markets. Productivity gains and innovation in terms of product development also will help Georgia’s textile and carpet manufacturers. Nonetheless, as the plants become less labor intensive, total employment in this industry will not grow nearly as fast as total sales.
Due to cyclical economic factors as well as 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 Northwest Georgia facilities, creating about 2,400 direct jobs. The new plants will use leading-edge technologies, which will help keep the state’s carpet industry competitive. Similarly, Shaw Industries also announced plans to build a new facility that will produce modular carpet tiles, creating about 500 jobs. Mohawk Industries announced the conversion of two of its existing plants, adding about 420 net new jobs.
The number of apparel jobs lost this year will be smaller than in recent years because of the already much-reduced size of the industry as well as the recent purging of most of the weaker firms.
Georgia has long since lost its comparative advantage because employee compensation in this labor-intensive industry is just too high compared to what it is in developing nations. Some apparel manufacturers operating in niches suited to automation will survive for a while longer, but even these companies will find it increasingly difficult to compete as even more modern facilities are built in developing countries. 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 mighty apparel industry.
One positive 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.
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 as sales of generic drugs expand faster than branded products and pressures from the federal government and other large buyers to hold down prices intensify.
Domestic demand is expected to grow steadily as the industry continues to market its products directly to the consumer. The industry will also benefit from an aging population and rising incidences of diseases related to aging and sedentary lifestyles. Globally, the population will age fastest in developed countries, where people are more able to afford high-priced prescription drugs. Unless repealed in whole or in part, the Patient Protection and Affordable Care Act will continue to expand the population of insured persons, which in turn will boost demand for pharmaceuticals and medicines while simultaneously compressing profit margins.
Housing and real estate development will be a powerful tailwind for Georgia’s economy, helping the state outperform the nation. The number of single-family home starts for new construction will increase by 20 percent, and existing single-family home prices will rise by 6 percent as the housing market responds to a more favorable balance of supply and demand.
Georgia gets a three for one from the housing recovery because home builders and real estate agencies benefit directly; demand increases for goods produced by the state’s large floor covering, building materials and forestry industries; and our large transportation and logistics industry benefits from construction – a very transportation-intensive activity.
Increased demand will come from above-trend job growth, slightly bigger paychecks and appreciating home values, which will give more people the wherewithal, and the confidence, to buy. In addition, mortgage rates remain a tremendous bargain, while rent is at an all-time high.
The main opportunities for chemical manufacturing will be higher use in construction, the growth of the industrial sector of the economy 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 U.S. manufacturers with a much-needed advantage in global markets. Despite this, chemical production will gradually relocate to developing countries.
The move will occur much more slowly than would otherwise have been the case, but the costs of complying with U.S. environmental and security regulations are relatively high. Also, many of the chemical industry’s largest industrial customers have already moved to the developing world, so chemical production is very likely to follow.
Due primarily to competition from digital media, Georgia’s printing and publishing industry will remain in decline, but the rate will slow in 2015. Cyclical increases in commercial advertising will be a tailwind for Georgia’s printing industry, but an increasing share of those dollars will be spent on digital rather than printed material. Slowly rising levels of office-based employment and a limited uptick in new business formation also will increase demand for printed materials.
The more widespread use of electronic publishing will ensure that the printing industry’s revenues will grow much more slowly than Georgia’s GDP. Also, 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 in the state’s printing industry. The printing industry also is characterized by overcapacity, which will cause margin compression.
More spending by consumers, increases in industrial production and larger shipments via Georgia’s ports will cause total statewide cargo volumes to outpace state and U.S. GDP growth. That’s quite an accomplishment for an industry that typically moves in lockstep with the overall economy.
Industrial production’s expansion will gain impetus from the continuing recovery of construction, one of the most transportation-intensive sectors of the economy. Manufacturing activity will upshift, providing yet another tailwind to transportation. Carriers’ profit margins will widen slightly but will still be quite low relative to other industries – the result of intense competition within and between the transportation industry’s subsectors.
Bigger shipments of many durable goods, such as capital equipment and automobiles, as well as building materials are expected to drive demand for transportation. Shipments of most nondurable goods will also increase, but at a much slower pace. Rate competition will be less intense, reflecting higher freight volumes as well as a lagged impact of capacity reductions that occurred during the Great Recession.
Retailers will see top-line growth, and their margins will also widen. Multi-channel retailers that fully integrate electronic and physical stores will fare better than those that do not. Brick-and-mortar retailers with the best prospects include wireless stores, off-price luxury stores, discounters, drug stores and specialized small-format grocery stores.
The strongest malls will do very well, but non-competitive malls will see more vacant storefronts. The brick-and-mortar retailers with the worst prospects are primarily those who face the most intense digital competition, including bookstores, video stores, shipping/postal stores and stationary stores. Unionized grocery, office supply and mid-priced apparel/department stores also will struggle.
STOCKBROKERS AND FINANCIAL PLANNERS
The short-term prospects for financial planners and stockbrokers call for revenues to rise faster than GDP, reflecting growth in disposable personal income, increased employment, a probable uptick in the savings rate and recent wealth gains realized by many high net worth individuals.
The long-run forecast for stockbrokers is good, but it’s not exuberant. That’s partially because two major market reversals since the turn of the millennium did lasting damage to households’ opinion of equities as an investment. Plus, increasing proportions of U.S. and Georgia households are entering their retirement years, which argues for asset allocations that give heavier weights to bonds rather than stocks – or at least toward income stocks rather than growth stocks.
Concerns about the viability of Social Security and other pensions favor stockbrokers and financial planners. Major long-run challenges to financial planners as well as traditional stockbrokers will be more competition from banks, insurance companies and online discount brokers that promote do-it-yourself financial planning. As consumers become more familiar with online and mobile banking, they will engage in the online or mobile trading of stocks and be more apt to manage their own accounts.
The superb performance of Georgia’s ports relative to other economic sectors and other U.S. ports is the result of a series of strategic expansions over many years. For example, refrigerated exports of poultry and other foods have increased substantially, reflecting additions to port infrastructure and major investments by cold storage operators such as Nordic. Labor problems at West Coast ports should also bring additional traffic to Georgia’s ports. The state has already set aside its full share of the construction costs for the Savannah Harbor Expansion Project. With the passage of the Water Resources and Development Act in 2014, the project has an estimated completion date of late 2017.
RESIDENTIAL REAL ESTATE FIRMS
Increases in sales of new and existing single-family homes will boost commissions earned by Georgia’s residential real estate brokerage firms, and these firms will benefit from more active multi-unit housing markets. Some easing of tight credit standards, slightly more confidence in real estate as an investment, appreciating home prices and the gradually strengthening job market will be among the factors that will bolster recovery for residential real estate firms.
Georgia’s real estate industry is also well positioned to benefit from the retirement of the baby boomers – a strong demographic trend that is virtually locked in until approximately 2028.