November 30, 1988
The strength of the current economic expansion is reflected in the southeastern economy, although pressure on prices is being partially countered by capacity expansion and weaker domestic demand for some products. Several makers of producer goods like ball bearings, air- powered tools, custom-made machinery, paperboard, and metal buildings report that they have been running virtually at 100 percent of capacity. They are currently trying to expand capacity by either adding new space, replacing old equipment with modern machinery, or adding extra shifts of workers. In general, capital investment in the District appears strong and the demand for capital goods produced in the region also seems robust.
Although they are operating near capacity, these manufacturers seem to be satisfied with their ability to keep up with deliveries to their customers. Some report that their suppliers are delaying shipments, while others are having no trouble with input delays. Input prices show no consistent movements, ranging from no increase to an increase of about 5 percent over the year for most products. The prices of metals have increased considerably more. Some substitution of domestic for imported inputs has taken place, although imports are not used to a great extent by southeastern manufacturers. Most point out that wages have increased between 4 and 6 percent over the year; expected increases for 1989 are about the same. Manufacturers in Tennessee and Alabama have had little trouble hiring skilled workers; those reporting difficulty in finding skilled workers are located in rural areas of Mississippi or southern Georgia and Alabama, areas that historically have had fewer skilled workers. Many report pressures on the cost of employee benefits, especially health related ones.
The localized tightness in some labor markets, supplier delays, and input cost increases have yet to result in any consistent increases in final product prices. The manufacturers we contacted say they have not increased their prices because domestic competition is strong. Inventories of materials are lower than usual for these manufacturers, although they seem to prefer to purchase these inputs as new orders arrive rather than maintain larger inventories.
The chemical industry centered in Louisiana is also running at high capacity levels. Some contacts report that there are "bidding wars" for skilled labor. Supplies of ethylene and propylene are tight, and chemicals used in the textile industry, especially those used in rayon, are becoming more expensive. Strong export demand is keeping chemical prices up.
The textile and apparel industries are concentrated in the Southeast, and there has been some retreat from the high levels of capacity utilization seen earlier this year. The weakness seems to be centered in those plants heavily involved in the production of apparel fabrics. Competition from imported apparel is still strong, while domestic demand is showing some weakness, and this has caused some domestic producers to shift out of apparel fabrics and into products like commercial carpets, towels and bedding, and infant clothing (perhaps a result of the baby-boom echo). Except for carpets, weaker demand is preventing increased production costs from being passed on to consumers. The shift in production has been accompanied by the closure of older plants and the expansion or construction of new plants. Labor saving spinning and weaving machines are being installed. Skilled workers, however, are reportedly in short supply, and wages have been rising.
Strong export demand has been offsetting weak domestic demand for several southeastern industries. Steel producers note that foreign demand for steel pipe has been strong. The weakness in domestic purchases stems from a decline in orders from the oil and gas industry, particularly for replacement pipe for older gas pipelines. A producer in Alabama has suggested that steel supplies are plentiful compared to the tight markets earlier this year, with the price of scrap steel now showing some decline. Modernization and construction of new steel and aluminum plants in Alabama are underway. They are technologically state-of-the-art, and while they will expand capacity substantially, they will not result in great employment gains. Appliance manufacturers have reported increases in the prices of steel and aluminum. Because of weak demand owing to the slowdown in the housing market, they have not been able to raise their prices and cover their higher costs. In trucking, however, these increases seem likely to show through. The industry is expanding, and the demand for carriers is brisk.
Foreign demand for hardwoods is supporting the price of raw timber and logs. Japan is a large buyer of hardwoods, and the United Kingdom has been importing hardwoods for flooring. Demand from domestic furniture makers has weakened, resulting in some price declines for certain grades of finished hardwood. The earlier retreat in housing starts has weakened the market for construction grade softwoods. Inventories are increasing as producers hold on to output in hopes of receiving a better price later. Lumber producers do not expect exports to help much in 1989, partly because of competition with Canadian exports and higher interest rates in the United Kingdom that have slowed the housing market there.
Although residential, office, and retail construction is slow in the District, industrial and warehouse construction has been expanding. The strength in exports has resulted in new warehouse construction in Miami and Savannah. Speculative industrial building has been going on in Birmingham, Mobile, and Nashville, where low vacancy rates have encouraged new development. One respondent felt, however, that in Atlanta overbuilding now extended into the industrial and warehouse sector as well as the commercial market. The prospect of more foreign companies moving to the Nashville area has spurred construction there as well.