2019 Industry Outlook
A look at 19 of the state’s primary industries and what’s ahead in the coming year.
As far as the good life, Georgia has got it going on. Whether you’re looking to locate a business, find employment or just seeking that great quality of life, with its expanding economy, the Peach State has you covered.
The growth rate is holding steady; unemployment is low; the state’s population is swelling with young, educated workers; and our economy once again promises to outpace the nation’s. In terms of a bright economic future, Georgia is the place to be.
Our annual outlook for the state’s primary industries is based on research from the Selig Center for Economic Growth at the University of Georgia’s Terry College of Business.
A growing demand for furniture will follow on the heels of an increase in new home sales, more home renovations, stronger home price appreciation and an expansion in the size of the average new home. Household mobility and formation will also continue recovering from recessionary lows. Nonetheless, a decrease in sales of existing homes and an abundant supply of good used furniture will temper the industry’s recovery. Less encouraging for the industry is the recent increase in the proportion of renters and the sales of commercial and institutional furniture, which will increase more slowly than GDP.
Higher spending for manufacturing equipment reflects replacement needs, growth of markets for final products and substitution of manufacturing equipment for labor as wage and salary pressures mount. Equipment producers will benefit from cyclical increases in domestic and global demand. Capacity utilization in manufacturing as a whole will move closer to levels consistent with higher demand for industrial equipment and machine tools. Credit will be available, and many companies will have the means to finance the purchase of more equipment. Slightly higher raw materials prices will increase cost pressures on the industry but will also increase demand from industries that produce basic commodities. The net effect will be positive.
Unit sales of new and used cars, SUVs and light trucks to consumers will decline slightly. Sales simply have reached levels that will be hard to sustain, especially as lenders tighten credit conditions for auto loans due to rising default rates. In addition, financing costs will rise. Nonetheless, larger gains in disposable personal income, more jobs, better fuel efficiency and the aging vehicle fleet will be powerful drivers of sales and will prevent sales from declining very much. The average light vehicle is almost 12 years old, an all-time record. The old age of the fleet partially reflects improved durability, but also suggests that replacement demand will be strong.
Auto Parts Manufacturing
Flat or slightly lower sales of new cars and light trucks will hurt manufacturers of original equipment. In contrast, manufacturers of replacement parts will enjoy stronger markets due to the large proportion of older cars still on the road. Auto parts and tire manufacturers will benefit from an expected increase in the number of miles driven as well as consumers’ increased acceptance of high-performance and other specialty tires.
Rising transportation costs and political pressures will encourage foreign manufacturers to invest more in U.S. production facilities and to buy automotive parts from U.S. manufacturers. More foreign companies now have assembly plants in the Southeast, fostering growth of auto parts manufacturers in Georgia.
Manufacturers of civilian aircraft stand to gain from airlines’ pressing need to update fleets with more fuel-efficient, quieter and productive aircraft. The early retirement of less fuel-efficient airplanes will have negative implications for manufacturers that provide maintenance and repair services. A second powerful tailwind for U.S. manufacturers will be the rapid growth in air travel throughout Asia, India and the Middle East. Despite new competitors from Russia and China, sales of U.S.-built aircraft to emerging nations will grow strongly.
Demand for personal and business aircraft will increase. Corporate profits are high. High-income households have recovered the wealth lost to the Great Recession, and the number of individuals wealthy enough to purchase, maintain and operate private planes has risen significantly.
Many of the economic development projects announced over the last several years were food processors, which implies that production will increase significantly in Georgia. 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. Indeed, higher agricultural commodity prices could exert additional pressure on food processors’ margins. Another problem is that high-margin branded foods will lose market share to lower-margin, less-profitable private label products.
Georgia’s floor covering industry will continue to benefit from increases in new home construction, more home renovations and appreciating home values. Nonresidential usage also will increase, reflecting both renovation activity and new construction. The repeal of the state’s sales tax on energy used in manufacturing, along with productivity gains and product development innovation, boost prospects for the industry. The industry is becoming highly automated. As the plants become much less labor intensive, total employment in this industry will not grow nearly as fast as total sales.
Demand for many chemical products will increase in the typical cyclical fashion, roughly tracking increases in overall industrial production. 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, agricultural chemicals, and cosmetics and beauty products.
An abundance of shale gas substantially lowered natural gas prices, providing U.S. manufacturers with a much-needed advantage in global markets. Despite this critical advantage in terms of lower feedstock costs, chemical production gradually will relocate to developing countries, reflecting the higher costs of complying with U.S. environmental and security regulations.
Pharmaceuticals and Medicines
Favorable demographics and cost effectiveness enhance prospects for pharmaceutical and medical supply firms. Sales will expand rapidly, but profit margins probably will narrow, in part because sales of low-margin generic drugs will expand much faster than sales of high-margin branded products. Pressures from the federal government and other large buyers to hold down prices will also intensify. The industry will continue to benefit from its focus on marketing products directly to consumers.
A number of new niche drugs – albeit fewer obvious blockbusters – in the development pipeline, better research and development techniques, faster FDA approval of new drugs and the 1994 GATT agreement, which effectively extended many drugs’ patent life, favor the industry’s long-term prospects.
The Federal Reserve will raise short-term policy interest rates slightly in 2019 and will continue to reduce the size of its balance sheet. These actions plus market forces could push up short-term interest rates more than long-term interest rates. The yield curve is already very flat, which means there is little difference between short-term and long-term bond rates, and a slightly flatter yield curve will not hurt banks’ profits too much. Fortunately, higher demand for many types of loans will support growth in banks’ profits. Lower compliance costs due to the rollback of some regulations instituted in the wake of the Great Recession will help boost profits.
Property and Casualty Insurance
There will be an increase in households’ demand for property and casualty insurance, with homeowners’ policies leading automobile insurance. The number of new homes sold and home prices will continue to rise in 2019, which means increases in insured amounts. The upturn in home renovation and expansion activities will also increase insured amounts.
However, market conditions will remain soft in 2019, mainly due to high levels of underwriting capacity and intense competition. Insurers will have difficulty increasing premiums, except on auto insurance. Nonetheless, solid demand growth will allow insurers to maintain underwriting discipline, which will be essential to profitability.
Residential Real Estate
A decline in sales of existing single-family homes will reduce commissions earned by Georgia’s residential real estate brokerage firms, but an increase in sales of new homes will boost commissions. A shortage of for-sale inventory is the main reason why existing home sales will decline. Sales of new homes will increase as builders slowly ramp up production.
Additional easing of credit standards, appreciating home prices and the stronger job market will bolster prospects for residential real estate firms. Georgia’s real estate industry is well positioned to benefit from the retirement of baby boomers – a strong demographic trend that is virtually locked in until approximately 2028.
Companies that facilitate the outsourcing of computer services will experience the fastest growth. Moderate increases in business spending for new equipment and software will underpin higher demand for computer services to businesses.
Rapid technological change and increasingly sophisticated equipment that makes it difficult to manage without help will encourage companies and government to outsource IT needs. In addition, public and private organizations are rapidly adopting cloud computing, creating opportunities for firms that provide IT services. There is a growing need for services that deal with cybersecurity, backups and plans to preserve the flow of information in the event of catastrophes. However, two powerful counter trends will restrain demand: increased outsourcing of IT services to providers located abroad and the increasing ability of clients to bring specialized IT services in-house.
The outlook for consulting firms is positive, since business and governmental operations and decisions are increasingly complex and maintaining a range of in-house experts is expensive. Continuing economic expansion, growth in corporate profits, more corporate expansions and relocations, and higher revenue collections by local and state governments will bring prosperity to many consulting firms. Demand for consulting services will grow significantly. Opportunities for domestic consulting will be better than opportunities for international consulting, but revenue from both will grow in 2019. One problem for consulting firms is that more clients are suing for malpractice when things go wrong.
The cyclical increase in demand for legal services will help lawyers and law firms, with businesses and households able to spend more on legal fees thanks to more disposable income and job growth along with more businesses opening and expanding. Businesses also typically devote more resources to litigation when corporate profits are up.
Larger firms will find the best opportunities in Metro Atlanta, but independent lawyers probably will fare best in rapidly expanding small- or medium-sized communities. National firms will continue to expand their Atlanta presence, but at a moderating pace, thanks to the city’s strong client base and its use as a geographic hub to service the Southeast. The growth of Georgia’s population of high-income retirees will benefit lawyers specializing in planning estates and drafting wills.
Despite better preventive care, demand for dental services will continue to grow as standards of acceptable dental care and beauty continue to rise. Restorative work performed on aging baby boomers will contribute to demand growth. Higher incomes and more dental plans will allow consumers to invest more in preventive and cosmetic procedures.
The outlook for childcare firms is good, particularly for centers that expand their operations to offer 24/7 care. As the economy generates new jobs, more parents will rely on childcare providers. In addition, parents who move from part-time jobs to full-time employment will be more likely to use childcare providers. Providers should be able to raise rates at a pace that covers cost increases, but probably will not enlarge net margins too much.
Hospitality will continue to outperform Georgia’s overall economy, but by a far lesser extent than in recent years. Nonetheless, limited-service properties that cater primarily to tourists and full-service properties popular with business travelers will post significant gains. In most areas, lodging demand will rise moderately from already elevated levels.
The long stretch of very impressive performance has stimulated new development. In 2019, the number of new hotel rooms completed will exceed demand growth. That imbalance will cause revenue per room to grow more slowly in 2019, but total revenue will grow faster than statewide GDP.
This year will mark the 11th-straight year of sales growth for the restaurant industry. Consumers’ overall expenditures for restaurant fare will increase at about the same pace as state GDP. Quick-service sales growth will outpace table-service sales growth, with chef-driven fast-casual restaurants faring especially well. Bars and taverns will see very slow growth whereas cafeterias and buffets will see sales decline. Look for more emphasis on meal kits and home delivery and the continued popularity of food trucks, street food, pop-up/temporary restaurants and dog-friendly restaurants.