Market Outlook: Regional Forecast

Growth may slow in '06, but will continue

By Candy McCampbell

The best way to see how the economy in your area will fare in 2006 is to look around.

Roads, shops, schools and homes under construction are indicators that the South Central states will see continued economic growth this year.

But the rate of growth may be slower than in 2005.

Economists in Alabama, Arkansas, Mississippi and Tennessee and industry leaders in the four states agree that growth will continue, but the rate will differ in each state.

Mississippi is still recovering from Hurricane Katrina and Alabama, Arkansas and Tennessee are also feeling the effects of the monster hurricane in terms of costs that have changed the pricing picture across the board.

advertisement

Ahmad Ijaz, economist at the University of Alabama Center for Business and Economic Research, predicts 3.4 percent growth this year, down 0.1 percent point from 2005.

Blame higher interest rates, not Katrina, for the slowdown, he said.

The killer storm "took .5 to 1 percent off (gross domestic product) growth overall," he said.

But neither he nor other economists contacted would venture a measure of the impact on their states.

For one reason, all the numbers aren't in, Ijaz said.

"We won't have the numbers until the insurance companies tally everything," he said. That could take another 12 to 18 months.

Greg Hamilton, senior research economist and demographer at the Institute for Economic Advancement at the University of Arkansas at Little Rock, is looking at a 5.7 percent increase in gross state product this year and a 5.4 percent gain next year.

Part of that is due to population growth fueled by Katrina evacuees who are becoming Arkansans. Also contributing: the state's lumber industry's sales for reconstruction.

Marianne Hill, senior economist at Mississippi's University Research Center, is projecting a 3.2 percent employment gain this year - the best in more than a decade.

Look for double-digit gains - about 15 percent - in construction employment as the state works on reconstruction.

Most major road repairs in Mississippi have been completed but housing losses appear to total about 33,000 dwellings in Harrison and Jackson counties, she said. She bases the numbers on power company records of homes that could not have power re-connected after it had been restored.

Tennessee this year will look like last year, said Matt Murray, associate director of the Center for Business and Economic Research at the University of Tennessee in Knoxville.

"We expect job growth to be stronger but income growth a shade weaker," he said.

Part of the job growth will come in manufacturing, a sector that has been in decline in Tennessee and elsewhere. The gain will come in the manufacture of durable goods - items expected to last three years or more.

"I am optimistic that growth in durable goods (manufacturing) will be able to outweigh the contraction in non-durables," he said.

Construction will get job growth as well, at a rate of 2.3 percent, following a 2.4 percent gain in 2005. Both residential and commercial construction are contributors, although Murray expected higher interest rates and building costs to slow residential building.

John Finch, owner of Powell Building Group in Nashville and president of Associated General Contractors of Tennessee, sees a bright outlook.

"I think 2006 will be as good for everybody (as 2005) and better for most," he said.

"It is a strong market," he said. "Every contractor I know now has plenty to do.

"Many of us are struggling to handle the workload we have and are actually saying no to new opportunities," something not done locally since the 1980s boom.

Material prices "have been going out the roof … and I don't see any relief in the next six months," Finch said.

Demand for materials, especially for reconstruction along the Gulf Coast, has not really started yet. He looks for shortages through this year and into 2007.

Steve Turner, industrial resources manager for Multi-Craft Contractors in Springdale, Ark., and chairman of the Arkansas Chapter of Associated Builders and Contractors, sees the same pressure.

"We buy a lot of steel," he said. "Suppliers are holding prices for a week and if you don't buy in that week your prices will be different."

Strong growth is under way in Arkansas' northwest corner, with companies like Wal-Mart and its vendors and J.B. Hunt Transportation Services.

"I think the boom will be started in the northeast before the northwest slows down," Turner said.

The northeast quadrant has the Hino Motors auto parts manufacturing plant, now under construction in Marion.

Billy Smith, president of Smith General Contractors LLC of Florence, Ala., and president of the Alabama Associated General Contractors, said the outlook is good.

"We have a good number of Alabama construction firms who work on the Gulf Coast and the economy there should be very good with the hurricane repairs," he said.

He reports price increases in "basic residential materials" - plywood, gypsum, roofing materials, cement products, plastic and PVC products - and shipping and handling costs, though some have backed off their peaks.

The biggest problem is labor, he said, calling it "the single largest problem that contractors face every day" in Alabama and across the country.

"I don't see labor shortages getting better in the near future," he said, citing a lack of training for crafts, low wages and benefits, and difficulty recruiting potential workers.

Mark Lamberth, vice president and owner of Atlas Asphalt in Batesville, Ark., and president of the Arkansas Chapter of Associated General Contractors, credited some labor shortages to "not as many people who want to do a lot of this work."

His company has a plant in Jonesboro, Ark., where it must compete with Fortune 500 companies that attract workers with 8 a.m. to 4 p.m. workdays and 40-hour weeks.

The outlook is "very good" for highway construction in Arkansas after passage of federal legislation that will allocated more money.

It's also good for the building and utility divisions, especially if voters in a December election approve bond issues for interstate maintenance and higher education facilities.

Billy Norrell, executive director of the Alabama Road Builders Association, is also looking forward to more highway funds.

"A lot of big ticket projects are out there," he said. "We have to find the funding" as the state budget goes through the legislature.

He points to major bridge projects like the one over the Tennessee River in the north and a $100 million bridge in Mobile in the south, and highway bypasses around Anniston and Birmingham.

Major bridges are also in the works in Mississippi, where a $245 million span over the Mississippi is going up near Greenville, and bridges on U.S. 90 are being repaired in Bay St. Louis and Ocean Springs following Hurricane Katrina. Bids on both were to have been opened in December.

"They are each $200 million projects and will take a couple of years," said Dave Barton, executive director of the Mississippi Road Builders Association.

While many companies are still involved in post-storm cleanup, Barton said, "It is going to be a long time to re-build the coast."

The outlook - even without Katrina - is good, with institutional, infrastructure and education projects planned or under way, said Perry L. Nations, executive director of Associated General Contractors of Mississippi.

Add to that refurbishing or reconstruction of damaged hotels and casinos, projects that will cost billions of dollars.

Plans are to build casinos in the first two or three floors that got washed out, he said. "When they move in on land … they will build the first three floors as parking, and have the casinos on the upper floors," he said.

One big issue is whether - and to what extent - building codes would be implemented for that construction, he said

An industry coalition - including architects, engineers, contractors, even the General Services Administration and FEMA - is working on a statewide building code, now absent in Mississippi.

"We want to implement one … and if a community wants to adopt it, they could," Nations said.

The proposal would make this building code the only one a city could use, and it would allow for differences in different locations, such as 150-mph wind loads in coastal areas that would be lowered to 50-mph loads in cities farther north.