prices and rising interest rates take their toll. For the first half of this year, real personal spending by consumers

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1 AlabamaBusiness Center for Business and Economic Research, Culverhouse College of Commerce, The University of Alabama Volume 74, Number 3 Economic Outlook: 3rd Quarter 2005 United States Overview. The U.S. economy grew at an average annual rate of 3.8 percent in the first quarter of 2005, adding almost 500,000 new jobs. Strong consumer spending, record growth in the housing market, and an increase in investment spending by businesses on equipment and software fueled the increase. During the second quarter of 2005, the economy slowed, mainly due to sluggish growth in manufacturing as the sector worked off excessive inventories. Second quarter growth is now estimated to be around 3.3 percent. However, all current economic indicators point to relatively stronger gains in the second half of the year than were previously anticipated. Once the second quarter inventory correction is out of the way, growth in the third quarter should pick up to around 3.6 percent. For 2005 as a whole economic growth is forecasted to be around 3.6 percent. The expansion could lose steam in 2006 though as higher energy Third Quarter 2005 prices and rising interest rates take their toll. For the first half of this year, real personal spending by consumers increased 3.4 percent, with spending on durable goods rising 7.3 percent. The Conference Board s Consumer Confidence Index hit a three-year high of in June, up from in May. Consumer spending has been slowing in recent quarters, however, with spending growth slipping from 4.7 percent in the second half of 2004 to an average of 3.4 percent in the first half of For the second half of 2005, consumer spending is forecasted to increase by approximately 3 percent as high energy prices take a larger bite out of incomes, forcing consumers to curtail spending. And even though job growth has been relatively good, the economy is still not generating as many jobs as it should for this stage of the recovery. Fixed nonresidential investment by firms increased 4.8 percent in the first half of 2005, with spending on equipment and software growing at an average annualized rate of 6.4 percent. At the same time, spending by businesses on information processing equipment increased by slightly over 15 percent. For the second half of 2005, spending by firms on equipment and software is forecasted to grow approximately 9 percent with expenditures for information processing equipment increasing by close to 14 percent. One of the strongest areas for growth has been computers and peripherals expenditures increased almost 35 percent in the first half of 2005, and are expected to post a second half increase of at least 24 percent. Orders for communications-related equipment have been up by almost 10 percent over the last several years, for the strongest increases since the industry went bust in Since the late 1990s housing prices in the United States and in many other In this issue: Economic Outlook: 3rd Quarter Business Leaders Confidence Index: 3rd Quarter Selected Indicators 9 So, when are you leaving? 10 The source you know... 11

2 2 Alabama Business parts of the world have skyrocketed. Strength in the housing markets in 2005 suggests that we could see yet another year of record home sales. Despite the fact that the Federal Reserve has raised short-term interest rates by 225 basis points over the past 12 months, mortgage rates are only slightly higher than they were in 2003, when they were at their lowest level in almost 40 years. However, the rapid rise in home prices in some U.S. markets is making housing less affordable. To lower payments, more buyers are taking on interest only or adjustable rate mortgages that are highly susceptible to interest rate changes. Residential fixed investment increased by over 9 percent in the first half of 2005, and is expected to remain relatively strong at least through the remainder of this year. Still, any marked upturn in mortgage interest rates could have a severe dampening effect on home sales. It would also result in a sharp decline in refinancing, which has been supporting consumer spending. According to a study by Global Insight, a 10 percent decline in home prices will result in the loss of $1.8 trillion in household wealth nationwide. The Federal Reserve is expected to continue to raise rates by 25 basis points at every meeting from now through November, pushing the federal funds rate to 4.0 percent by year-end. Longterm interest rates generally increase with an increase in short-term rates, but recently they have declined instead. The demand for U.S. treasury securities, particularly by Asian central banks, could be depressing longterm yields. Furthermore, a glut of global savings is exerting downward pressure on U.S. interest rates. Manufacturing. From April 1998 to May 2005, manufacturing employment in the United States declined from 17.6 million to 14.3 million, a loss of 3.3 million jobs. Manufacturing employment is currently at its lowest level since the 1950s, despite the fact that output has been expanding since June 2003, after stagnating for almost three years. The last time manufacturing saw no growth for three consecutive years was during the Great Depression of the early 1930s. After a surge in 2004, the sector is again showing signs of weakness, primarily due to a high level of inventories related to automobile production. Although the Institute for Supply Management s manufacturing index has remained above 50, indicating expansion, for nearly 24 months, it posted a steady decline during the first half of However, now that inventories are mostly worked off, the sector is beginning to show improvement, as evidenced by an increase in the index in July. Much of the growth in manufacturing has been concentrated in industrial equipment and other nonelectrical machinery manufacturing. The transportation sector and electrical machinery manufacturing have also rebounded strongly. According to the Census Bureau, U.S. manufacturers have increased spending on new plants at the fastest pace seen in several years. However, while spending on plant construction rose 24.3 percent, or $28.1 billion, during the 12- month period ending in May 2005, it was still below the $40 billion record set in the mid- 1990s. Overseas investment by U.S. manufacturing firms increased 92 percent in 2004 to $54 billion, up from $28 billion in Despite the decline in the U.S. dollar in recent years, manufacturing exports have not increased significantly. The U.S. trade deficit has continued to balloon and could reach close to $700 billion this year. The fact that approximately 40 percent of the nation s imports are from the overseas subsidiaries of American companies contributes substantially to the trade deficit. Employment Growth. After creating approximately 2.1 million jobs in 2004, the U.S. economy has added 546,000 and 542,000 jobs, respectively, during the first two quarters of 2005 for a monthly average of 181,000 jobs. At the current pace, payroll employment is expected to increase by 2.2 million this year. Most of the new jobs added in 2005 will be in services-related industries, primarily in business and administrative services, healthcare and related services, and retailing. Among goods producing firms, only construction and mining are adding to their payrolls. In manufacturing, fast-paced productivity and output growth will keep payroll employment on the decline, at least in the near future. From the first quarter of 2004 to the first quarter of 2005, productivity in manufacturing industries increased by 5.5 percent and output grew by 4.7 percent, but only 29,000 new manufacturing jobs were added. In contrast, construction has added more than a million jobs in just two years alone. Given higher energy prices, payroll employment in the min-

3 Alabama Business ing sector is expected to increase significantly in 2005 at the current pace, these firms could add almost 45,000 new jobs this year. Alabama Employment. Compared to the same time last year, payroll employment conditions in the state have improved significantly. During the 12-month period ending in May 2005, the state gained 30,300 net new jobs. The construction sector added 3,500 jobs; manufacturing 5,700; and the services producing sector, including government entities, contributed 20,500 new jobs. Durable goods manufacturing gained 5,600 workers while nondurable goods manufacturers netted only 100 new jobs, primarily in plastics and rubber products (1,400) and animal slaughtering and processing (400). Textile mills and apparel manufacturing lost a total of about 700 jobs. With the expiration of quotas on textiles and apparel at the beginning of 2005, there is a strong possibility that more jobs could be lost to either off-shoring or to competition from countries with relatively cheaper labor costs. According to the U.S. Department of Commerce, during the first quarter of 2005 textile exports to the United States increased by 60 percent over the first quarter of Transportation equipment, which includes motor vehicle production, remains one of the strongest manufacturing industries in the state. These firms, including both OEMs and their suppliers, added 4,300 new jobs during the 12-month period ending in May In the services producing sector, professional and business services remained one of the strongest industries, adding 8,100 jobs during the 12-month period through May 2005, with almost 5,700 of these jobs in administrative support and related services. Healthcare and social assistance-related services contributed another 5,300 new jobs between May 2004 and May 2005, while government entities, including federal, state, and local governments, added another 1,400 jobs during the same period. Of the total 30,300 new jobs added in the state during the 12-month period ending in May 2005, 26,400 were in Alabama s metropolitan areas while the non-metro areas netted 3,900 jobs. The Mobile metro area created 5,500 new jobs and Huntsville and Tuscaloosa

4 4 Alabama Business Alabama Nonagricultural Employment Change in Number of Jobs May 2004 to May 2005 Total Nonagricultural 30,300 Natural Resources and Mining 500 Construction 3,600 Manufacturing 5,700 Durable Goods Manufacturing 5,600 Wood Products Manufacturing 400 Primary Metal Manufacturing 200 Fabricated Metal Product Manufacturing 400 Machinery Manufacturing 100 Computers and Electronic Products Manufacturing 100 Electrical Equipment, Appliance and Component Mfg Transportation Equipment Manufacturing 4,300 Motor Vehicle Manufacturing 1,700 Furniture and Related Products 400 Nondurable Goods Manufacturing 100 Food Manufacturing 400 Textile Mills -500 Textile Product Mills 200 Apparel Manufacturing -200 Paper Manufacturing 0 Plastics and Rubber Product Manufacturing 1,400 Trade, Transportation and Utilities 5,600 Wholesale Trade 1,700 Retail Trade 3,100 Transportation, Warehousing and Utilities 800 Information -600 Telecommunications -600 Financial Activity -800 Professional and Business Services 8,100 Educational and Health Services 5,300 Leisure and Hospitality 2,400 Other Services -900 Government 1,400 Federal Government 600 State Government 200 State Education 0 Local Government 600 Source: Alabama Department of Industrial Relations. added 4,500 and 4,900 jobs, respectively. Job gains were distributed across the state with every metro area except Decatur (which was flat) adding jobs. Tax Revenues. With the state s economy showing significant improvement during the second half of 2004 and the first half of 2005, tax revenues continue to climb. During the first three quarters of the current fiscal year, tax receipts in Alabama rose approximately 11 percent, increasing by $586 million to total $5.8 billion. Sales tax revenues during the first three quarters amounted to $1.3 billion, an increase of 5.8 percent, or $74 million, over the first three quarters of the previous fiscal year. Both individual and corporate income tax revenues showed considerable improvement. During the first three quarters of the current fiscal year, corporate income tax revenues jumped almost 39 percent to $330 million, an increase of $93 million over the first three quarters of last fiscal year. During the same period, receipts from individual income taxes climbed from almost $2.1 billion to about $2.3 billion, an increase of approximately 11 percent, or $224 million, compared to the first three quarters of the last fiscal year. During the first three quarters of the current fiscal year, appropriations to the Alabama Education Trust Fund rose $373 million to $3.7 billion, an increase of slightly more than 11 percent over the same period last year. Appropriations to the state s General Fund increased by almost $158 million, or about 20 percent, to $971 million. Outlook. For 2005 as a whole, Alabama s economy is expected to grow by close to 3.5 percent with employment increasing by 1.4 to 1.6 percent. Approximately 30,000 to 35,000 new jobs will be created during the year. The manufacturing sector in the state is forecasted to add jobs, primarily in automotive production-related firms. However, the bulk of the new jobs will be in service-related industries, particularly retailing, professional and business services (with a focus on administrative support), educational and health services (primarily health care and social assistance), and food services. Ahmad Ijaz aijaz@cba.ua.edu

5 Alabama Third Quarter 2005 Volume 3, Number 3 Business Leaders Temper Expectations The third quarter 2005 Alabama Business Leaders Confidence Index (BLCI) declined 1.8 points to Although the index has dropped over the last four quarters, the third quarter reading clearly indicates moderate expansion. Weaker outlooks for the national economy and for industry sales, profits, and capital expenditures pulled down the overall index. The success of Alabama s economic development initiatives and consequent job creation boosted the third quarter state and industry hiring outlooks. Panelists in the construction industry; transportation, information, and public utilities (TIPU); and in other services had the most positive outlooks for the third quarter. Index values in professional, scientific, and technical services and in the healthcare industry were about five points below the overall BLCI score of THE OUTLOOK National Economy 58.3 Alabama Economy 62.6 Industry Sales 61.8 Industry Profits 59.4 Industry Hiring 58.0 Capital Expenditures 58.1 BLCI 59.7 Index above 50 indicates expansion. increase from previous quarter decrease from previous quarter National Economic Outlook Optimism about National Economy Slips Alabama business leaders expect the pace of growth in the national economy to slow in the third quarter of This index component fell four points to 58.3 for the weakest outlook in over two years. Just 45.8 percent of BLCI panelists expect U.S. economic growth to accelerate during the quarter, and 16.3 percent anticipate a downturn. Uncertainties including the effect of high energy prices on consumer spending for other goods and services, the influence of a stronger dollar and weak overseas economic growth on U.S. exports, and the sustainability of the current housing market may be influencing expectations. While revised first quarter 2005 GDP growth came in at 3.8 percent, a sharp inventory correction in the second quarter likely dropped GDP gains to around 3.1 percent. Forecast for Alabama Economy Upbeat Panelists are more optimistic about third quarter prospects for the state s economy than they are for the nation as a whole. The third quarter component index value of 62.6 represents the first time in 15 quarters of survey history that expectations for the Alabama economy are above those for the United States and is the highest of the six BLCI components this quarter. Almost 53 percent forecast an increase in the pace of economic growth in the state, while just 6.6 percent feel that Alabama s economy may slow. Recent positive indicators including higher tax receipts, job gains, new industry announcements, low unemployment, and signs that more people are moving into the state all support expectations for an improving economy. Alabama Economic Outlook Center for Business and Economic Research, The University of Alabama

6 Outlook for Sales Growth Moderates Although the third quarter sales index of 61.8 indicates continued gains in industry sales, it is down from last quarter s And the 59.3 percent of panelists expecting sales in their industry to rise is the lowest in two years. High oil prices compounded by rising interest rates and the lack of any new federal stimulus could constrain consumer spending, while economic weakness overseas and a stronger dollar place a drag on exports. Still, the University of Michigan s Consumer Sentiment Index came in at a six-month high in June. Over 73 percent of BLCI participants in the transportation, information, and public utilities industries anticipate stronger sales in the third quarter. Expectations among firms in retail and wholesale trade are also above average. Industry Sales Industry Profits Profit Gains to Slow Slightly Expectations for increased profits dropped modestly with the index component slipping from 60.7 in the second quarter of 2005 to 59.4 in the third quarter. Higher oil prices coupled with difficulty passing costs on to customers are squeezing profit margins in many industries. Rising interest rates and a stronger U.S. dollar are also having an impact. Just 51.2 percent of panelists expect profits in their industry to rise in the third quarter, down from 54.6 percent in the second quarter for the weakest profit forecast in two years. Profit growth should be strongest in construction, retail trade, and other services and well below average in the healthcare industry. Alabama Should Continue to Add Jobs The state s hiring plans index value of 58.0 indicates that job growth will continue at a moderate pace in the summer quarter. While just over half of Alabama business leaders completing the survey expect no change in jobs in their industry, the 38.4 percent anticipating increased hiring is above the 11.0 percent forecasting a decline in jobs. A robust 5.3 percent are expecting a strong increase in hiring this quarter. Alabama added 29,000 jobs between January and May 2005, including 9,200 jobs in the leisure and hospitality industry and 4,300 in manufacturing. Unemployment fell to 3.9 percent in May, well below the U.S. rate of 5.1 percent. Panelists expect third quarter job gains to be strongest in the construction industry and in services. The pace of manufacturing job growth is expected to slow. Industry Hiring Plans Industry Capital Expenditures Capital Spending Backs Off from 2004 Pace After a particularly strong year in 2004, expectations for capital spending have slowed in The third quarter capital expenditure index of 58.1 is down from 59.8 in the second quarter, with 41.8 percent of panelists expecting business investment to increase compared to 45.9 percent last quarter. A payback for the 2004 investment boost that came from bonus depreciation may help account for weaker business investment in the first half of 2005, but available cash and a rebound in nonresidential construction could boost investment for the remainder of the year. Only 12.4 percent of panelists expect capital spending to decline this quarter. Capital expenditure expectations are weak among firms in professional, scientific, and technical services and in wholesale trade, but well above average in the healthcare and other services industries. 2 Center for Business and Economic Research, The University of Alabama

7 Alabama Businesses Cope with High Energy Costs This quarter s topical questions explore business cost concerns with an emphasis on the impact of energy costs. When asked to identify their top three cost concerns for the remainder of this year, 73 percent of Alabama business leaders selected healthcare benefits. The first quarter 2005 BLCI survey found that 83 percent of Alabama firms are paying at least part of the increased cost of health insurance. According to Mercer s National Survey of Employer-Sponsored Health Plans, costs to employers rose an average of 7.5 percent in 2004, with an increase between 6.6 and 10 percent anticipated for While down from the recent peak of 14.7 percent in 2002, these increases represent a significant challenge for businesses. Energy prices are a key concern for 54.5 percent of Alabama BLCI panelists. A number of factors, including rapidly rising global demand and threats from weather, terrorism, and labor strife in key oil producing regions have combined to push oil prices up by about 55 percent over the past year. Concerns extend to other forms of energy including natural gas, where demand for natural gas-fired electricity generation has kept prices up. Higher energy costs affect businesses in virtually every industry in a myriad of ways including travel and transportation costs, shipping and delivery expenses, raw material prices, workplace energy costs, and the ability of consumers to purchase the goods and services they sell. Employee wages and salaries were selected as a significant cost concern by 46.3 percent of third quarter respondents. With high healthcare and energy expenses, businesses may feel that they have little leeway to give employee wage and salary increases. Although job gains have been steady over the past year, wage increases have been modest. Between June 2004 and June 2005, average hourly earnings rose 2.7 percent nationwide. But with indications that productivity growth is slowing and with unemployment falling, higher wage and salary gains may be on the horizon. What are the top three cost concerns in your business for the remainder of 2005? How is your business dealing with high energy costs? Absorb Most of Cost 64.6% Other 2.3% Neutralize through Efficiencies 4.4% Pass on to Customers 15.9% Share Equally with Customers 12.8% Businesses are finding it difficult to pass high energy costs on to their customers, with BLCI survey comments indicating that competition is frequently the reason for this difficulty. Almost 65 percent of Alabama firms surveyed this quarter absorb most of the costs, while another 12.8 percent share the costs about equally with customers. Just 15.9 percent are able to pass most or all energy cost increases on to their customers. Although only 4.4 percent of businesses have been able to neutralize rising costs through energy efficiencies, panelists comments indicate that this share will increase as firms have more time and impetus to implement energy reduction measures. While 51.8 percent of third quarter panelists report that rising energy costs over the past year have had a minimal impact on their business, a sizeable 45.6 percent feel that their business has been negatively impacted. The inability to pass along costs means that higher energy prices are directly affecting the bottom line for many firms, draining resources that could otherwise be used for capital investment and business expansion. And the impact of energy costs on customers of businesses across the spectrum of industries raises concerns about the ability of firms to grow or even maintain sales. A prolonged period of high energy prices will increasingly affect the consumer s ability to purchase other goods and services. Impact of rising energy costs Minimal 51.8% Negative 45.6% Positive 2.6% Center for Business and Economic Research, The University of Alabama 3

8 While the price of West Texas Intermediate (WTI) crude oil was close to $52 per barrel in late May, prices averaged $56 per barrel in June The U.S. Energy Information Administration now expects crude oil prices to average $59 per barrel in the third quarter of 2005 and remain above $55 per barrel throughout Responding to the BLCI survey during June, 25.9 percent of Alabama panelists felt oil would likely end the year in the $50 to $54 range. Most panelists (69.5 percent) placed bets on year-end WTI crude oil in the range of $45 to $59 per barrel. However, the fragility of the oil situation was emphasized in early July when early-season tropical storm and hurricane activity disrupted some oil production and refining in the Gulf of Mexico, temporarily pushing prices above $61 per barrel. Despite high oil prices, U.S. gasoline consumption has continued to rise. Aging refineries, a lack of oilfield development, and a dearth of petroleum engineers make it difficult for the United States to expand production. 1.5 Expected price of oil per barrel at the end of Q BLCI Alabama 59.7 Birmingham MSA 60.3 Huntsville MSA 64.7 Mobile MSA 61.5 Montgomery MSA 55.9 Metro Indices Reflect Diverse Economies At 60.3, third quarter sentiment in the Birmingham metro area was just above the statewide index of Birmingham area panelists in construction and other services were most upbeat about the outlook. Mobile, with a recent boost from the announcement of a new EADS manufacturing facility, was particularly positive about the Alabama economy and registered an index of Facing prospects of job losses at Maxwell-Gunter Air Force Base and related IT support firms, Montgomery respondents less optimistic view of the national economy and industry sales, profits, and hiring pushed their index down to And above average expectations for industry sales and profits boosted the Huntsville MSA index to A Look into the BLCI Almost 400 Alabama business leaders completed the third quarter survey. And well over half took the time to provide their comments on the energy situation in their industry. Many thanks to all of our panel members for making this survey a useful and reliable indicator. Please join us in September for our Fourth Quarter 2005 survey at Analysis provided by Carolyn Trent, Socioeconomic Analyst, Center for Business and Economic Research, The University of Alabama. The BLCI is a Compass on Business initiative created in collaboration with: For more details on the Alabama Business Leaders Confidence Index, visit For more details on the Center for Business and Economic Research, visit cber.cba.ua.edu.

9 Selected Economic Indicators Alabama Business 9 United States 2003/Q4 2004/Q1 2004/Q2 2004/Q3 2004/Q4 2005/Q1 2005/Q2 Gross Domestic Product (billions) 10, , , , , , ,163.5 Percent Change Year Treasury Bond Rate Month Treasury Bill Rate Consumer Price Index Inflation Rate Housing Starts (millions) Percent Change Nonfarm Payrolls (millions) Percent Change Unemployment Rate Alabama 2003/Q4 2004/Q1 2004/Q2 2004/Q3 2004/Q4 2005/Q1 2005/Q2 Total Nonagricultural Employment (thousands) 1, , , , , , ,931.1 Percent Change Manufacturing Employment (thousands) Percent Change Durable Goods Manufacturing Employment (thousands) Percent Change Nondurable Goods Manufacturing Employment (thousands) Percent Change Wholesale Trade Employment (thousands) Percent Change Retail Trade Employment (thousands) Percent Change Alabama Unemployment Rate Initial Benefit Claims (thousands) N/A Manufacturing Weekly Hours Total Tax Revenues (millions) 1, , , , , , ,150.8 Percent Change Total Income Tax Revenues (millions) ,088.8 Percent Change Total Sales Tax Revenues (millions) Percent Change Note: All percent changes indicate change over the same period of the previous year. Source: U.S. Bureau of Labor Statistics, U.S. Department of Commerce, Alabama Department of Industrial Relations, Alabama Department of Revenue, and Center for Business and Economic Research, The University of Alabama. Alabama Business is a quarterly publication of the Center for Business and Economic Research, Culverhouse College of Commerce and Business Administration, The University of Alabama. Articles reflect the opinions of the authors, but not necessarily those of the staff of the Center, the faculty of the Culverhouse College of Commerce, or the administrative officials of The University of Alabama. All correspondence should be addressed to: Editor, Alabama Business, Center for Business and Economic Research, Box , Tuscaloosa, Alabama Copies of this publication as well as other socioeconomic data resources are available on the Center website:

10 10 Alabama Business So, when are you leaving? Every year, across Alabama, people move in and people move out. Their reasons differ, but many people move because of job opportunities. The decade of the 1990s was a period of great economic change in Alabama. Alabama employment in manufacturing, accounting for well over 20 percent of all jobs in the early 90s, fell to 15 percent by Conversely, jobs in service industries rose considerably. These structural changes in our economy have also had profound effects on our population. Migration changes the character of our towns and counties, the tax base, the local amenities and services available, and the political climate. The most recent data come from Census Between 1995 and 2000 Alabama lost quite a few of its young and well-educated people the creative class and with them, many of our high income households. We cannot continue to experience such losses if we are to enjoy a growing economy and resulting prosperity. Newly released tables from Census 2000 describe the characteristics of the people who moved into and out of Alabama. For more information about migration definitions, methodology, and specific reports and tables please see the Census Bureau s website at cen2000/migration.html. Migration Patterns by Age Persons in every age group move into and out of Alabama. However, during the last decade of the 20th century, more people 25 to 29 moved out of Alabama than moved into the state, resulting in a net loss of people in their late 20s. The census does not tell us that every one of them had a college education or moved to find better employment opportunities elsewhere. However, we know that this age group is an important part of our creative class of knowledge workers, highly skilled manufacturing employees, and service professionals such as young doctors, lawyers, accountants, and management executives. Alabama also experienced a net loss of the young, single, and college-educated. The economic health and vitality of businesses, government agencies, and the social fabric of our communities draw heavily from this age group. They are the future business leaders, scientists, engineers, and government officials. We need to work aggressively to create employment and educational opportunities for these individuals. Where are these people going? The same census reports reveal that the top 10 destinations for persons leaving Alabama are Georgia, Florida, Tennessee, Texas, Mississippi, California, Louisiana, New York, Michigan, and North Carolina. Of course, other people who lived in those states moved into Alabama. The highways have lanes going both ways. But Alabama had a net loss of people to Florida, Texas, Mississippi, California, Louisiana, New York, and Michigan. Migration Patterns by Educational Attainment Most people who are 25 years old or older have finished their education. Education level categories range from Less than a 9th grade education to Graduate or professional degree. As one would expect, people with all levels of education moved into and out of Alabama over the period 1995 to However, it is most disturbing to note that Alabama experienced a net loss of 5,460 persons with a bachelor s degree or higher 5,365 with a bachelor s degree and 95 with a graduate or professional degrees. The census does not tell us any more about these 5,460 people. However, it is reasonable to assume that many of them are recent graduates of our colleges and universities, seeking their future in other states of our nation. While there are many reasons for leaving Alabama following graduation from college, the one most often given is to pursue better job opportunities. We find ourselves challenged once again. We are losing a significant number, over 5,000, of Alabama s best and brightest the current and future backbone of our new knowledge economy. Migration Patterns by Industry and Occupation What industries and occupations are losing these young Alabamians? Census 2000 reveals a total net loss of over 3,700 persons from two primary industries: information (1,500), and the broad category of professional, scientific, management, and administration services (2,260). Loss of employment in these industries reduces our capacity to support the human capital needs of our knowledge driven economy. The information industry includes publishing, broadcasting, telecommunications, Internet service providers, and Internet publishing and broadcasting. These are not major industries in Alabama, but they can be lucrative ones, and are at the heart of the knowledge economy of the 21st century. The professional, scientific, and technical services sector employs people with a high degree of expertise and training. Establishments in this group are engaged in processes where human capital is the major input. Businesses in this category include offices of lawyers, architects, and engineers. These are the companies that do industrial design, graphic design, computer systems design, management consulting, and marketing. Here are classified advertising agencies, photographic services, veterinary services, and research and development in many different fields. Between 1995 and 2000 Alabama had a net loss of residents with occupational titles such as accountant, auditor, analyst, engineer, manager, administrator, or specialist. These were people who are both young and mature professionals. The loss between 1995 and 2000 of more than 3,700 people who are qualified to work in information and professional services businesses will hurt the state. Taken together, these data send a warning that we are losing people critical to the long-term economic health of our state. Migration Patterns by Household Income Not surprisingly, when these same data are summarized by household income, we find that we have lost some of our wealthiest families. Census 2000 reports a net loss of 3,210 households earning between $100,000 and $199,999. This represents an annual loss to the Alabama economy of between $320 to $640 million dollars a year. Taking into account the multiplier effects of these dollars circulating through our economy home and auto payments, retail sales, entertainment, and all other typical family expenditures we find that these migration losses conservatively have cost the Alabama economy over $1.0 billion dollars a year. That Was Then, This Is Now The data from the Census describe what happened between 1995 and Five years have passed since then. Maybe those trends have been reversed? Maybe economic conditions have flipped in Alabama in the last five years? While we have made some progress, we have a lot of work left to be done. It takes a long time to turn around a supertanker or a state. Economic indicators more recent than 2000 show that Alabama is making progress. In 2005 Alabama s median family income was up to 84 percent of the

11 national average. Per capita income is also up to 83 percent of the national average. Up is the right direction, but we have to acknowledge that we ve been losing some of our most valuable human resources and reverse that loss. Regional infrastructure and competitive labor have worked to Alabama s great advantage in attracting and growing new and existing industries. Examples include aerospace, science and technology, automotive, and logistics industries. Our research universities and network of 2- and 4-year regional colleges and trade schools have played major roles in growing existing and attracting new industries to our state. However, wage and unemployment rates in our metros are now paradoxically signaling that skilled human capital is in increasingly short supply. If workers are needed, why then are skilled professionals leaving our state in relatively large numbers? For the reason of low expectations. Parents, school officials, government executives, and employers have got to convey in a united front that Alabama s pastures are as green as anybody s. By not being willing to invest in our youth, we lower expectations for future economic growth and opportunity. Lowered state university funding, less-than-needed spending on high school facilities and programs, and higher-than-desired dropout rates combine to weaken our capacity to educate tomorrow s workforce. There is nothing that will pay more dividends to Alabama s economic wellbeing than the investments made in education resources. A well-educated workforce, beginning with qualified high school graduates, greatly increases the likelihood of continuing to attract new industries that demand highly skilled workers, pay high wages, and create high value-added products. Equally important is increasing the number of graduates who choose to stay in or come to Alabama after they complete their education. These investments create a labor pool that will keep Alabama in the site locators playbook. Business and government throughout Alabama understand the challenge. We intend to become a destination state for the creative class, not a supplier state. Time will judge how well we handle the test. Carl Ferguson cferguso@cba.ua.edu with research assistance from Annette Watters awatters@cba.ua.edu The source you know 75 years of research and service The Center for Business and Economic Research (CBER) turns 75 this year. Since its organization by the School of Business at The University of Alabama in November 1930, CBER has focused on collecting, analyzing, and disseminating socioeconomic and demographic data. While the Center s mission still involves these activities, the fulfillment methods have certainly changed. We have gone from typewriters, carbon paper, and adding machines to personal computers, electronic data bases, and web-based products. The Center established a web site in early Our site, cber.cba.ua.edu, now averages around 80,000 hits a month. The site contains news and announcements as well as articles that present and interpret socioeconomic data. To more efficiently handle information requests, we have posted our most requested data series. From the Data and Maps section, users can read, print, or download current and historical data on Alabama s population, employment, and income, as well as view maps of various geographic, demographic, and socioeconomic constructs. Users can also register to receive notification when the site has been updated. The site was honored by the national Association for University Business and Economic Research (AUBER) as the web site of the year for In addition to posting data to our web site, the Center has developed a web-based program, Alabama FactFinder, to make the state s census information available in such a way that people who have not had special training in obtaining and using statistical information can easily find and use it. The Center s quarterly publication, Alabama Business (which has been ongoing since 1930), is available online in.pdf format in addition to its traditional printed version. In 2000 the Center formed a partnership with Compass Bank that led to the development of the quarterly online Alabama Business Leaders Confidence Index survey. The survey results are published as an insert in Alabama Business. CBER 75 Alabama Business 11 The Center s data resources are enhanced by its participation as Alabama s lead agency in the U.S. Bureau of the Census State Data Center Program, a role it has filled since 1978, and in the Federal-State Cooperative for Population Estimates and Projections. CBER is also a member of the U.S. Bureau of Economic Analysis State User Group. In the late 1970s, the Center developed an econometric model for Alabama and in 1980 published its first Alabama Economic Outlook, a publication that continues to date. The Outlook, which contains short-term forecasts of output and employment in Alabama, has been honored by AUBER on three occasions. Forecasts are updated quarterly and a summary is published in Alabama Business and placed on our web site. In 1989 the forecasting program expanded to include an annual economic outlook conference. The 2005 conference was the largest to date with 178 participants. In addition to our conference, the Compass on Business partnership provides for four additional seminars around the state. Over the years we have developed skills in a number of areas. We have focused on conducting economic impact studies, identifying socioeconomic characteristics of an area, analyzing and forecasting the course of the Alabama economy, and developing specialized population projections. We have a diverse and dedicated staff and we are proud of our accomplishments. My own journey with the Center began in January I have gone from using keypunched cards, to magnetic tape and dedicated mainframe terminals, to personal computers and web-based services. What s next? While I m sure there will be more changes, I am also sure we will do our best to provide you with quality products and service. Deborah Hamilton dhamilto@cba.ua.edu

12 AlabamaBusiness The Center for Business and Economic Research gratefully acknowledges the financial support of Compass Bank. How Confident is Alabama Business? Covering six key financial measures, along with a topical issue each quarter, the Alabama Business Leaders Confidence Index (BLCI) sums up the expectations of hundreds of the state s leading executive decision makers. The BLCI is a collaborative effort between Compass Bank and The University of Alabama s Center for Business and Economic Research to provide local and relevant information to Alabama s business leaders. Please log on at and register to become a BLCI panelist. It only takes a few minutes and you ll be notified by when the next survey opens on September 1st. With increased participation from business leaders like you, the BLCI will become a more valuable planning tool for the Alabama business community. Plus, when you participate, you receive an exclusive preview of survey results before they are released to the general public. Join today! The University of Alabama Center for Business and Economic Research Box Tuscaloosa, Alabama Address service requested. Nonprofit Organization U.S. Postage Paid Tuscaloosa, AL Permit No. 16 CBER 75 Alabama Business is sponsored in part by Compass On Business, a partnership between Compass Bank and The University of Alabama.