EconSouth (Fourth Quarter 2008)

The Southeastern Economy in 2009

Mixed Messages for Manufacturing
photo of a car

The region's manufacturing sector experienced a weak performance in 2008 amid a slowdown in the broader economy. In particular, many manufacturers were hampered by a worsening housing market, declining automobile sales, and credit strains related to financial market turmoil. But manufacturers tied to the energy sector or that make goods for export fared better than others because of the surge in commodity prices and the weak dollar.

Weakness reflected in data
One indicator of the status of manufacturing in the region is Kennesaw State University's Southeast Purchasing Managers Index (PMI), which is a monthly report on a manufacturing survey similar to the national PMI produced by the Institute for Supply Management. A PMI reading above 50 indicates expanding manufacturing activity, below 50, contracting activity. Through October 2008, the Southeast's PMI declined to 32.4, down from 41.8 in September and 44.7 in August and 17.8 points below the October 2007 level (see chart 1).

Consumer Spending
Real Estate

For 2007, the Southeast PMI reading averaged 53.1, while nationally the average was 51.1. Since January 2008, however, the Southeast and national PMIs have declined to average readings of 46.1 and 46.8, respectively. So while manufacturing across the country experienced contracting activity in 2008, the Southeast fell further than the national average.

The Federal Reserve Bank of Atlanta conducts its own regional manufacturing survey, which also showed sluggishness in the region throughout 2008. Survey contacts reported weakness in production, shipments, and new orders compared with a year earlier, and most continued to report cutbacks in employment and/or work hours. Price pressures on raw materials rose considerably in the first half of the year but then eased significantly beginning in August. Southeastern manufacturers also noted higher export orders relative to a year earlier although the number of such orders decelerated in the second half of the year as the dollar gained value and demand overseas weakened.

Aside from data on business activity, another crucial metric in analyzing manufacturing is employment. Manufacturing employment in the six Southeastern states was down 4.2 percent through September on a seasonally adjusted basis from a year earlier, according to data from the U.S. Bureau of Labor Statistics (BLS), and down 4 percent on a non-seasonally adjusted basis. (Unless otherwise noted, employment data are from the BLS and are not seasonally adjusted.) Within manufacturing, employment in durable goods industries declined 3.8 percent, while nondurable goods employment declined 4.2 percent (see chart 2).

Related Links
On the Web:
U.S. Census Bureau data on manufacturing, mining, and construction
Federal Reserve data on industrial production and capacity utilization
National Association of Manufacturers Web site
Institute for Supply Management Web site
Purchasing Managers Index data

Dragged down by weak housing and auto sales
As the housing market has weakened, so has the construction industry. Through September, construction employment in the Southeast slumped more than 7 percent from a year earlier on a seasonally adjusted basis. Important manufacturing industries that previously supplied the boom in real estate and construction suffered as well in 2008.

As of September, wood product manufacturers in the Southeast saw their employment rolls decline by 4.8 percent from a year earlier. Alabama and Georgia, the two regional states with the largest share of wood manufacturing, saw employment in the industry fall 3.9 percent each.

Furniture manufacturers' payrolls were down 9.3 percent in the Southeast, hitting Mississippi and Tennessee (where the industry is primarily located) particularly hard with 7.4 and 10.9 percent declines, respectively.

Similarly, textile-related employment was down more than 7 percent through September in the region. In Georgia, with the region's largest share of textile firms, payrolls at textile mills and textile product manufacturers declined 8.7 and 6.1 percent, respectively. On a brighter note, however, in June Zagis USA broke ground on the first of two textile mills to be built in Louisiana's Jefferson Davis Parish. The two mills, to be completed in early 2009, should bring 160 additional jobs to that area.

Chart 1
National and Southeast Purchasing Managers Indexes
Chart of National and Southeast Purchasing Managers Indexes
Note: An index reading over 50 indicates expanding manufacturing activity, below 50, contracting activity.
Source: Institute for Supply Management (national PMI); Kennesaw State University (Southeast PMI)

Along with the declining housing market, the first half of 2008 saw a surge in the price of gasoline, slower consumer spending, and financing constraints for businesses. All of these factors dampened automobile sales and forced car makers to cut back on production, investment, and employment (see the sidebar).

Auto parts manufacturers suffered along with automakers. For every auto manufacturing job there are three jobs in related auto suppliers. In September employment in the region's fabricated metal and transportation equipment industries was 3.0 and 2.1 percent lower, respectively, than a year earlier. Tennessee and Florida were hit particularly hard; during the same period, Tennessee lost 2.4 percent of fabricated metal jobs and 2.0 percent of transportation equipment jobs, and Florida's transportation equipment payrolls declined by 3.2 percent.

The story was more upbeat in Alabama, which was the only state in the region to boast employment growth in transportation equipment manufacturing in October compared with a year earlier, driven by a 4.5 percent expansion in aerospace manufacturing. Alabama's auto producers also saw a 1.0 percent job increase during the same period, primarily supported by Mercedes production in Vance.

Strong commodities and a weak dollar boost some manufacturers
During the first half of 2008 commodities prices soared, supporting business for manufacturers in petroleum, metals, food, and other goods. Manufacturing related to energy and commodities, while weaker than in 2007, thus performed relatively well in 2008 compared with other manufacturing industries. Louisiana's petroleum and coal products industries saw employment declines of less than 1 percent through October—less than half the rate for manufacturers across the state as a whole. One example of spillover growth from the commodity price surge is PSL North America's hiring of more than 300 people at its plant in Perlington, Miss., to produce steel pipe for the gas and oil industry.

After consistently growing for much of 2007, employment in food product manufacturing in Florida held steady in September 2008, with payrolls unchanged from a year earlier.

Employment in the region's primary metals industry (mostly centered in Tennessee) rose about 1 percent in September Wrelative to a year earlier, in contrast to the payroll declines seen in other manufacturing industries.

Chart 2
Manufacturing Employment in Southeastern States
Chart of Manufacturing Employment in Southeastern States
Note: Data are through September 2008 and are not seasonally adjusted (except for construction).
Source: U.S. Bureau of Labor Statistics

Until mid-2008, the consistent depreciation of the U.S. dollar made U.S. exports relatively cheaper for foreign consumers and thus brought a surge of export orders for many manufactured goods in 2007 and early 2008. The new export orders component of the national PMI averaged 54.8 from January 2007 to November 2008, well above the average of 49.3 for all new orders. But as financial turmoil spread globally, the dollar started to appreciate, and new export orders began to fall in the summer of 2008, diminishing hopes for an export-led recovery in manufacturing.

Looking ahead to 2009
As the economy remains weak in 2009, business investment and consumer spending will be subdued and provide little stimulus for the region's manufacturers. In particular, the credit crunch will continue to restrain growth in manufacturing industries, which rely more heavily than many other industries on freely flowing credit to finance big-ticket expansion projects.

In spite of challenging credit conditions, some of the Southeast's manufacturing industries face a more promising future. Along with some positive developments in the auto industry (see the sidebar), another bright spot is the region's strong aerospace industry, which is set to expand even more in the coming years. Embraer, the world's third-largest aircraft manufacturer, based in Brazil, broke ground in December on its first U.S. factory, located at Melbourne International Airport in Florida. The $51 million facility is expected to create approximately 200 additional jobs by 2011. Florida also welcomed the announcement in May that Piper Aircraft will keep its headquarters in Vero Beach and expand its payroll by nearly 50 percent.

In November, Leading Edge Aviation, in Greenville, Miss., was awarded the contract to repaint Northwest Airline planes, which will be given a makeover as a result of Northwest's merger with Delta Air Lines. The contract will require a tripling of the company's workforce.

The strong auto and aerospace industries thus seem likely to provide significant ongoing support to economic activity in the region.

Auto Production Stalls as Economy Sputters
Auto production in the Southeast may be in line for an overhaul. During 2008, the region's five assembly plants and their parts suppliers were affected by a dramatic fall in vehicle sales, the worst in decades. About four-fifths of the models assembled in the region are trucks or SUVs—vehicles most affected by rising fuel prices and shifting consumer demand. The chart illustrates the decline in production from 2007 to 2008 across the region's automobile manufacturers.
Related Links
On the Web:
Automotive News
Automotive Digest

Auto assembly plants in the region employed 29,000 in early 2008, but with closing factories and production adjusting to lower vehicle sales and the recent financial crisis, that number could drop below 25,000 by year-end. In addition, regional suppliers and parts manufacturing companies employed 70,000 workers at the beginning of 2008, down from about 78,000 a year earlier.

The near-term outlook for auto producers is not promising. Pressured to reduce excess production capacity and losses of $1,200 per vehicle by the third quarter, in 2008 General Motors (GM) closed nine plants in North America, including a 61-year-old plant in Doraville, Ga. GM's two remaining factories in the Southeast, in Louisiana and Tennessee, face an uncertain outlook. Recently, GM asked the U.S. government for financial assistance to avoid bankruptcy.

Southeastern Auto Production
Chart of Southeastern Auto Production
Note: Data compare January–October 2007 with January–October 2008.
Source: Automotive News
At the Shreveport, La., GM plant, which assembles the Hummer H3 and Colorado and Canyon trucks, production through the first three quarters of 2008 was 40 percent below levels for the comparable period in 2007. The plant recently laid off about 800 workers to adjust to lower demand. The company is reportedly trying to sell the Hummer brand to foreign automakers. GM's Spring Hill, Tenn., plant, after being idle for almost a year, has recently started production of the Chevrolet Traverse CUV, with a much-reduced workforce and production levels far below last year's output of two Saturn models.

Weak vehicle demand and higher vehicle inventories were not limited to domestic automakers. In fact, most import brands or "transplants" have been working at about half their production capacity during 2008. Toyota announced in mid-December that it is indefinitely suspending the opening, originally scheduled for 2010, of its plant in Blue Springs, Miss. But the company assures that the plant, which is 90 percent complete with nearly $300 million spent so far, will be finished.

Longer term, though, some news is positive. For example, Volkswagen (VW) has selected Chattanooga, Tenn., as the site for its $1 billion auto factory. The plant will assemble 150,000 midsize sedans per year, with production starting in late 2010. VW anticipates that more than 80 percent of its vehicle components will come from North America, and the company is promoting an industrial park nearby to ensure just-in-time supplies to its new assembly plant.

Kia Motors will begin new vehicle assembly production in 2009 in West Point, Ga. And Honda recently announced that it will move production of the Accord from Ohio and of its Ridgeline truck from Canada to its Lincoln, Ala., plant.