January 25, 1989
The southeastern economy (especially the manufacturing sector) continues to perform well in part due to expanding exports. Most respondents are optimistic about prospects for 1989 and project capital spending to be at or above the 1988 pace. Although a majority of producers polled do not anticipate serious shortages or particularly large price increases this year, it promises to be a close call in some regional industries, for example primary metals and paper. Overall, added capacity in the region is expected to reduce supply bottlenecks that emerged last year.
Announcements of price increases were fairly widespread in December. However, that is normally the time when suppliers post higher prices for the year ahead. At this point, respondents expect that some of these will be trimmed or deferred because of buyer resistance. With modest additions to capacity during the latter half of 1988, expectations of product price increases in 1989 are below the pace seen in 1988 and range between 3 and 5 percent. Despite import quotas on many products and higher import prices, foreign competition is still reported to be an important limitation on price increases. Several contacts remarked that some important labor contracts are up for renewal; they expect wage increases in 1989 to turn out between 4 and 6 percent. Many report that double digit increases in employee medical insurance are adding significantly to labor costs.
By and large, growth in exports of regional industries does not appear to have been affected by capacity constraints and there are few reports of delivery lags in meeting export orders. In many instances strong global markets have served to offset a slackening in domestic demand. At the same time, import levels have been unusually high in a few industries facing bottlenecks in production. New capacity coming on stream in 1989 is expected to increase domestic supplies and lower the general level of imports.
Some southeastern industries such as home appliance and lumber manufacturers are projecting slower growth in 1989 as a result of the flatness in homebuilding. Inventory adjustments at the retail level caused some Tennessee sawmills and furniture plants to schedule two weeks of shutdown in December. Lumber company salesmen commented that volume lumber purchasers have become more conservative. Weak domestic demand for lumber is being partially offset by strong foreign demand as rebuilding efforts in Iraq and in the Caribbean are using significant amounts of lumber. There are reports of higher input prices for selected items such as steel and plastic in the appliance industry. Because of weakness in domestic purchases and competitive pricing, they have not been able to pass along the full increase in raw material prices.
The aluminum industry is running at high capacity levels and producers report increases in input (aluminum ingot) prices of about 60 percent since a year ago. New orders are tapering off slightly as higher input prices have been passed through to finished products. Thus, no further price increases are planned in the near future. Delays in deliveries have been limited to scrap aluminum, which was diverted to export markets as world prices rose. Producers remain optimistic about prospects for 1989 and the industry is expanding. A new plant is coming on line in Georgia and an Alabama manufacturer is undergoing major capacity expansion.
Paper mills have experienced especially strong demand, although there are signs of easing compared with the first half of 1988. Orders are higher in selected grades such as coated paper and some types of paperboard. Capacity constraints on domestic shipments of these grades have kept imports higher than they otherwise would have been. Several producers of linerboard announced price increases of up to 10 percent. Capital spending in 1989 is projected to be slightly above the 1988 level, which was up a sharp 25 percent. Additions to capacity are primarily in the form of new machinery or extra shifts of workers to make heavier use of existing equipment.
Production capacity poses an important constraint on growth in chemicals. New orders for basic chemicals continue to be strong and tight supplies of ethylene have meant higher imports (despite sharply higher prices). The global market for specialty chemicals going into plastics and paper is experiencing robust growth. When questioned about marketing efforts, one source remarked "it's been more a game of getting the pounds out rather than worrying about product differentiation." Polyethylene sales are being eroded by cheaper, competing polymers.
Although demand for agricultural chemicals is said to be seasonally low, increased 1989 planting expectations and strong export markets have strengthened the outlook. A previously idle agricultural chemicals plant in Louisiana was opened in December.
Trucking transportation should experience increased activity this year. Frozen foods and dry goods carriers appear to be doing best. Some carriers are facing a shortage of drivers. While labor costs or wage gains are reported as moderate, high and rapidly escalating insurance premiums are placing pressures on costs. These cost pressures are expected to lead to increases in freight rates in 1989.
Apparel and textile companies are taking a cautious outlook for the new year. A large apparel manufacturer plans to keep inventories lean and reduce domestic production by outsourcing to low-wage countries. Textile firms report solid orders for bed and bath products but apparel producers are reluctant to create a new fashion direction because of the industry's uncertainty as to the direction of the economy. One spokesman warns that imports could surge during 1989 as a result of 1988's market weakness which left importers with unused quotas that can be carried forward to the new year.