Alabama Economic Outlook: Slowing Down
March 2016
By David Zaslawsky
Photography by Robert Fouts
The state’s automotive sector continues to pump up the Alabama economy, but the headwinds of weakness overseas, a rising dollar as well as uncertainty in the stock market are putting pressure on the financial outlook for 2016.
Speaking about gross domestic product (GDP) growth this year, Keivan Deravi, dean of the Auburn University at Montgomery College of Public Policy & Justice and an economics professor, said, “If we hit 1.5 (percent) to 1.8 percent – and that’s the rate we’re looking at – we’re going to be doing real well. We will not hit 2 percent.”
He said there will be growth this year, “but you’ll need a magnifying glass to find (it). I think it’s going to be very, very challenging for businesses, and if you’re challenged and you are right on the line, then the slightest crisis can push you down.”
The University of Alabama’s Center for Business and Economic Research in the Culverhouse College of Commerce is a bit more optimistic with a GDP forecast of 2.3 percent. The forecast range is 1.5 percent to 3.0 percent. The center is also forecasting a 2.3 percent in GDP for 2017.
One of the key drags on the U.S. economy as well as the state economy is the slowdown in China, which is expected to grow its economy about 6 percent this year. That would be a decline of one-third from its peak, and if the actual growth is closer to 4.5 percent as some economists have stated – the decline would be 50 percent. Even China’s 6.9 percent growth in 2015 was the lowest in 25 years, said Ahmad Ijaz, executive director and director of forecasting the for The University of Alabama’s Center for Business and Economic Research.
It’s important to Alabama because China is its No. 2 trading partner at $3.2 billion in 2014 behind Canada ($4.2).
The weakness overseas is not limited to China. Japan’s economy grew 0.5 percent last year and is expected to do the same this year, according to Deravi. He said that the European economy “is sick” and Brazil is in recession. “So where’s the growth?” he asked. “The disturbing part in all of this is, as mediocre as the economy in the United States has been, it’s the best economy in the world,” Deravi said. “If mediocracy is the best, then what is weakness? It just changes the scale of proportionality.”
As the dollar increases in value it makes U.S. exports more expensive, and that has been impacting companies with overseas sales.
Because U.S. companies that invest in heavy equipment “don’t see the European and Chinese (economies) are going to turnaround anytime soon, they are halting plans,” Deravi said, and that is beginning to trickle down to less heavy manufacturing.
“We think that manufacturing will be in recession,” Deravi said. “We think services (sector) will be under a lot of pressure and that’s a big provider (of jobs) simply because of pressure on consumer spending and consumer income.”
He said the energy sector, because of oil prices that have declined by as much as 80 percent, “is not in a recession, but in a depression, and it’s going to take years for the energy sector to pull out.” The impact will affect royalties that Alabama receives from offshore oil and gas operations. Deravi is forecasting a decline of about $50 million for the state.
He expects the price of gas to be closer to $1 than $1.50. “Fifty dollars for a barrel of crude right now would be a dream,” he said at the time when crude was selling $27 to $33 per barrel.
Another concern is the longevity of the recovery, which is in its sixth year, while other post-World War II recoveries have lasted about four years, Ijaz said. He does not forecast a recession this year. “We’re not seeing any excesses,” he said at the 28th annual Economic Outlook Conference at Embassy Suites Hotel & Conference Center.
Deravi also said “this recovery is long in tooth. I think the best is over and now we’re going to go up and down a lot to find a direction.” He, too, does not foresee a recession unless “there is a global slowdown of a major proportion.” He asked, “Are we really down to our last life of this recovery out of our nine lives? Probably not, but we maybe at the seventh life or eighth life. We just don’t have much to go with and the world economy seems to be in a state of imbalance and that’s what makes it very, very difficult.”
Employment is forecast to grow about 1 percent this year, according to the Center for Business and Economic Research. The center is forecasting a range of 0.8 percent to 1.5 percent. The state is still not back to pre-recession employment numbers, according to Ijaz. Alabama lost 180,000 to 200,000 jobs during the Great Recession. “The lost jobs are not coming back,” he said. The center expects 15,000 to 20,000 new jobs this year, but that pales in comparison to 30,000 new jobs a year in the 1990s and some years when employment grew 40,000 to 50,000.
Stagnant wages and growth in low-paying sectors compound the problems. The leisure and hospitality sector showed the largest employment gains from January 2011 to November 2015 – accounting for 32,000 of the 136,000 new jobs.
Bucking the trend is the state’s motor vehicle and parts manufacturers, which are forecast to deliver another strong year in 2016. What also bodes well for Alabama and its Hyundai, Honda and Mercedes-Benz manufacturing plants and Toyota’s engine facility – the forecast for new vehicle sales shows a 3.7 percent increase on top of last year’s record of 17.5 million vehicles. That would be an increase of about 640,000 vehicles. Light truck sales are expected to rise 5.7 percent while car sales are expected to decline 0.6 percent.
That is why Hyundai Motor Co. announced that it was adding Santa Fe production to the Hyundai Motor Manufacturing Alabama plant in Montgomery. With Hyundai leading the way with 384,519 units produced last year, the three Alabama automotive manufacturers combined for more than 1 million units.
A 6.7 percent GDP rise is forecast for the motor vehicle, trailer and parts sector this year and a healthy 5.7 percent increase in 2017.
Employment for motor vehicle and parts manufacturers is expected to grow 4.4 percent and another 4.7 percent in 2017.
“… As much as I love the automobile sector in Alabama and specifically in Montgomery, I think it is long (in the recovery),” Deravi said. “The (sector) has had a long, long stretch of very good years. At any point in time that may break. The consumer can change their mind very quickly.”
Construction is another solid sector and is forecast for a third straight year of jobs gains with a 3.4 increase this year. Other employment forecasts are 4.1 percent growth in leisure and hospitality and 3.6 percent in professional and business services.
Tax revenues are forecast to grow 3.3 percent this year to $10.1 billion and 2.5 percent in 2017 to about $10.3 billion.
“What we see is that consumers are healthy, but the industrial sector is not healthy,” Deravi said. “Eventually the industrial sector is going to impact the consumers. We see right now that the GDP is limping, but employment is pretty good. Eventually, employment is going to get in line with GDP.”
For Deravi, his 2016 forecast changed when he saw December 2015 data, including weakness in factory production; decline in heavy manufacturing; and a slowdown in truck traffic and cardboard production. He also cited increasing uncertainty and volatility in the stock market in the first part of the year, which hit home. Deravi said his wife saw the stock market dropping 400 points one morning and asked if he sold their positions. “I said, no.’ She said, ‘Do you know what you’re doing?’ No.”
But a negative perception of the market impacts consumers’ spending and they may start hoarding or saving money, Deravi said. “That’s why if we hit 1.5 or 1.8 in terms of growth for GDP for Alabama, we’re good. My biggest fear is not to hit that. If I’m proven wrong that is good. Nothing is wrong with being wrong.”
0‘Simple, but not easy’
March 2016
By David Zaslawsky
Photography by Robert Fouts
If the state tax ratio to gross domestic product reached an optimal 5.5 percent, Alabama would have an additional $1.6 billion in tax receipts.
But how do you get there? Sam Addy, dean for economic development outreach in the Culverhouse College of Commerce at The University of Alabama and a senior research economist, has some proposals. He looks to overhaul the state’s current tax system, which he said does not raise adequate revenue; is regressive; and is inefficient in collection and use.
Before tackling the $1.6 billion issue, Addy said it’s paramount that people acknowledge the revenue shortfall and define the problem.
Here are Addy’s proposals:
Remove the federal income tax deduction, which would generate between $700 million and $850 million. Alabama is one of three states that permits the deduction of federal income tax.
Reduce the sales tax rate, but add a tax on services. That would generate $430 million. The services sector is not only the fastest-growing sector, but consumers spend more on services than goods. Services are currently not taxed. Sales taxes used to generate more revenue than individual income tax, but last year the individual income tax brought in about $900 million compared with less than $560 million from sales tax.
Double the property tax rate from 6.5 mills to 13 mills, which would raise $370 million. The state has the lowest property tax in the country, which, according to Addy, is one of the primary reasons why there are repeated revenue shortfalls.
Charge road use fees that would be the equivalent of an 11-cent increase in gasoline taxes. That would raise $300 million. With higher-mileage vehicles, the gas tax does not generate enough revenue. Addy would like to see a fee based on vehicle miles traveled and drivers would pay when they renew their vehicle tags. There could be various fees for axle or weight classes. He does not phase out the current gas tax.
He would like to see the creation of a flexible fund that would have $400 million to $500 million. Half of that amount could be used for economic development incentives.
“Simple, but not easy,” Addy said about his recommendations at the 28th annual Economic Outlook Conference at the Embassy Suites by Hilton Montgomery Hotel & Conference Center.
“We are more capable than we think we are,” Addy said. “We are more knowledgeable than we think we are. The key is investment.”
He talked about the “big strides” that Alabama made when the state per capita income was less than 50 percent of the U.S. per capita income. That gap has been closed to 81 percent, but that margin has stalled for the past 25 years. Increasing that ratio is key, Addy said.
Declining public sector spending is holding back “optimal” growth for Alabama, according to Addy and for policies to be optimal they must be “efficient, far, flexible and sustainable.”
0The following quotes and statements are a compilation from the 28th annual Economic Outlook Conference at the Embassy Suites by Hilton Montgomery Hotel & Conference Center. The speakers were: Sam Addy, dean for economic development outreach in the Culverhouse College of Commerce at The University of Alabama and a senior research economist; David Bronner, CEO of Retirement Systems of Alabama; David Altig, executive vice president and director of research for the Federal Reserve Bank of Atlanta; Jo Bonner, vice president of government relations & economic development for The University of Alabama System. IHS Global Insight also contributed to the conference booklet.
U.S. GROSS DOMESTIC PRODUCT
IHS Global Insight is forecasting the U.S. gross domestic product (GDP) to grow 2.7 percent this year and 3.0 percent in 2017.
FEDERAL RESERVE GDP FORECAST
The Fed is forecasting GDP to grow 2.5 percent for 2016 with long-term growth of 2.1 percent.
RESIDENTIAL INVESTMENT
IHS Global Insight expects residential investment to jump 9.0 percent this year and 10.3 percent in 2017.
EMPLOYMENT
IHS Global Insight sees employment increasing 1.6 percent in 2016 and 1.3 percent in 2017. The Fed expects job growth to fall to 100,000 to 125,000 a month, which would keep the unemployment rate from increasing.
LABOR PRODUCTIVITY
Labor productivity has declined to 0.5 percent from 2010-2015 while it was nearly 3.5 percent from 1995-2003.
CONSUMER SPENDING
IHS Global Insight is forecasting a 3.1 percent increase this year to about $11.3 trillion and 3.0 percent rise in 2017.
BUSINESS INVESTMENT SPENDING
IHS Global Insight expects a 5.3 increase this year and 5.1 percent increase in 2017.
FOURTH-QUARTER GDP
A rundown on inventories was a key drag on the 2015 fourth-quarter GDP, which had growth of 0.7 percent.
INFLATION
The 2016 forecast is less than 2 percent, which is the Fed target rate. The trend rate is 1.3 percent to 1.6 percent.
FEDERAL RESERVE INTEREST RATE OUTLOOK
The earlier forecast was four interest-rate hikes of 0.25 percent each. If growth continues “to limp along” the Fed will go slowly and could very likely raise interest rates fewer than four times.
HIGHER EDUCATION
For every $1 a college graduate earns, someone without a college degree earns 67 cents.
STATE TAXES
If Alabamians paid the same level of taxes as Kentucky, the state would have $2.6 billion more. The same level of taxes as Arkansas would give Alabama $2.9 billion more and the same as Mississippi would give the state $2.7 billion more.
CYBER ATTACKS
The worldwide cost of cyber attacks is $400 billion to $500 billion.
GLOBAL GROWTH
IHS Global Insight expects GDP worldwide growth to average 1.9 percent a year through 2025 from the country’s major currency trading partners.
PRICE OF CRUDE OIL
IHS Global Insight forecasts the average price of Brent oil will be $54 a barrel this year and average $65 in 2017.
