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Home > Industry Analysis > Research & Analysis > Atlanta Regional Outlook - Second Quarter 1998 |
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Atlanta Regional Outlook - Second Quarter 1998 |
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Regular FeaturesAtlanta Region's Economic Expansion Continues
After flattening throughout much of 1997, year-over-year job growth in the Atlanta Region rose to 3.3 percent in the fourth quarter, its highest level since early 1995 (see Chart 1). The growth trend in the Region paralleled that of the nation as a whole. Despite strong levels of domestic demand so far in 1998, many analysts believe that regional and national growth will slow later in the year as exports weaken in the face of reduced Asian demand and a strong U.S. dollar. One area of concern, because of its global exposure, is the Atlanta Region's important textile and apparel industries. Chart 1
Florida's Economy Continues to Expand at an Above-Average RateFlorida's economic performance during 1997 and the early months of 1998 has been exceptional, with job growth during 1997 approaching 4 percent (see Chart 2). Gains in the state have been led by high levels of construction activity, especially in central Florida, where theme park-related construction continues. Recent reports suggest that damage from March tornadoes in that portion of the state have exacerbated already tight labor markets for construction workers.Chart 2
North Carolina, South Carolina, and Virginia Turn in Strong Performances in 1997The Carolinas and Virginia saw job growth in excess of the national average during 1997. Economic gains, however, remain confined to metropolitan areas, particularly along interstate highways. In manufacturing, growth is constrained by continued losses in the production of durable goods, particularly textiles and apparel. Even in durable goods the rate of decline moderated throughout late 1997.Late-Year Rally Boosts Georgia's Economic Performance, but Agricultural Lenders Face RisksGeorgia's economic performance improved in the latter part of 1997 as the constraining impacts of the 1996 Summer Olympics receded. Growth in the Atlanta metropolitan area accelerated, in part because of gains in construction and transportation services. Atlanta's real estate markets also continue to flourish, causing some risk of overbuilding, particularly in multifamily and retail markets.The southern portion of the state has seen record precipitation in recent months, prompting concern about agricultural prospects for 1998. Flooding slowed spring field preparation and planting activity. Conditions were exacerbated further in mid-March 1998 by freezing conditions that threatened the state's peach and blueberry crops, which had seen early growth because of a mild winter. Recent reports have estimated that Georgia farmers could lose as much as $200 million in 1998 because of adverse weather conditions. Growth in Alabama and West Virginia Continues to Lag the Region and the NationDespite strength in some of its metropolitan areas (such as Mobile, Birmingham, Tuscaloosa, and Huntsville), weakness elsewhere has constrained Alabama's economic expansion. Similar conditions prevail in West Virginia. These states remain exposed to their continued dependence on primary industries (textiles, apparel, lumber, and wood pulp in Alabama; energy and metals in West Virginia). Growth is constrained by the states' slow population growth as well.The Textile and Apparel Industries Are Beset by Competitive PressuresAlthough economic growth remains above the national average, one vulnerability in the Atlanta Region is its exposure to the textile and apparel industries. Last year marked the fifth consecutive year of job losses and continued imbalance between imports and exports in these industries. Risks to textile- and apparel-related businesses, as well as the insured financial institutions that actively lend to those businesses, could rise in the future given the industries' vulnerability to cyclical fluctuations in addition to growing pressures from global markets, automation, and industry consolidation.Atlanta Region Is Vulnerable because of Textile and Apparel ExposureThe decline in the textile and apparel industries has placed a heavier burden on the Atlanta Region than on perhaps any other area of the country. The Atlanta Region accounts for approximately 73 percent of all textile industry jobs in the nation. Moreover, the Atlanta Region is a significant player in the apparel industry, accounting for 25 percent of the nation's total apparel employment. In assessing the impact of the continually declining textile and apparel industries, the rural/urban dichotomy must be examined carefully. The rural areas of the Region have felt the deterioration of these two industries most strongly, primarily because of the very limited employment opportunities available as plants are closed or downsizing becomes necessary. Urban areas are less likely to feel severe effects from the declining industries because the healthy economy they have experienced in recent years has allowed displaced employees to move into other jobs.Textile and Apparel Exposure by StateThe textile industry comprises approximately 38 percent of all manufacturing jobs in Georgia, with the majority of these jobs in the carpet manufacturing sector. In fact, two-thirds of the nation's carpet manufacturing is done in Georgia. Whitfield, Gordon, Bartow, and Floyd counties in Georgia make up the bulk of the carpet industry for the Region (see Chart 3, next page). These counties in and around the Atlanta metropolitan area have flourished as the real estate market has expanded. In contrast to textiles, Georgia's apparel industry has continued to deteriorate, losing 15,000 jobs since 1995.Chart 3
North Carolina's textile and apparel industries account for 6.4 percent of total employment in the state, compared with 19.2 percent in 1973. While declines in the industry have become the norm, layoffs and closures in the state have been particularly severe recently. Since 1995, the industry has shed over 30,000 jobs, roughly equivalent to the net loss in employment that occurred from 1985 to 1995. The northern and western portions of the state tend to have the highest concentration of textile and apparel jobs. South Carolina is dominated by the textile and apparel industries, with employment in most counties exceeding 1,000 workers. The Greenville-Spartanburg-Anderson metropolitan area, which has a heavy concentration of textile and apparel operations, has also felt decline. For example, one company in the area announced in January 1998 that it would cut its workforce in half by spring. Textile workers in metropolitan areas may be absorbed into other sectors of the economy. South Florida's Dade County is another area to feel the effects of the declining textile industry, although textiles were less than 2 percent of total employment in 1997. Textiles and apparel were among the area's strengths for many years, but by now most plants have moved to Latin America and the Caribbean. Alabama historically has had a large exposure to the textile and apparel industries, which still account for 20 percent of the state's jobs, even though about 10 percent of the industry's workforce has been eliminated just since 1996. Textiles and apparel account for more than 25 percent of total employment in DeKalb, Chambers, and Tallapoosa counties. Virginia has several counties that rely heavily on the textile and apparel industries for employment, particularly along the Virginia-North Carolina border. In December 1997, several textile producers in the state indicated that their orders had been trimmed by increased Asian competition. With the exception of Roane and Ritchie counties, West Virginia has a low concentration of employment in the textile and apparel industries. Industry DriversThe textile and apparel industries are extremely cyclical and have been driven by consumer income, although the industries have been in secular decline for decades because of other factors as well. From 1993 on, the industry has seen substantial job losses from which it has been unable to recover, despite the overall health of the U.S. economy. A recent study speculates that weakened growth in demand may be linked to demographic changes in the nation. It argues that current plant capacity was developed for the "baby boomer" generation of 77 million people, not the 45 million "Generation X-ers." As such, overcapacity may be a risk for the industry's long-term health.Seasonality is another important driver, particularly in the apparel industry. Orders for the season's apparel are based on expected demand, which can be strongly affected by factors such as weather, fashion trends, and other unpredictable variables. Because of their lack of product diversity, niche manufacturers are at a higher level of risk from changes in consumer tastes. Structural TrendsEmployment in the combined textile and apparel sectors is currently about 1.5 million nationwide, although this number is decreasing rapidly. In 1997, the textile and apparel industries shed more jobs than any other industry--45,000 workers were dropped from the apparel industry and 12,000 from the textile industry (see Chart 4).Chart 4
A changing global environment has been unfolding in the textile and apparel industries and was strengthened by the passage of the Caribbean Basin Initiative (CBI) and the North American Free Trade Agreement (NAFTA). The CBI made it possible for U.S. fabrics to be shipped offshore, made into garments by low-wage workers, and imported into the United States duty-free. While U.S. textile and apparel jobs are dwindling, NAFTA has had some positive effects for the United States in that it has substantially increased U.S. trade with Canada and Mexico, encouraging significant new fabric business. Although Mexico and Canada are the largest exporters of textiles and apparel to the United States, about 80 percent of the yarns and fabrics used to make the apparel are produced in the United States. The effects of the General Agreement on Tariffs and Trade will come into play around 2004, when all tariffs on textiles will be phased out in all countries, a situation that is expected to create additional pressure on the U.S. textile and apparel industries. While the Asian crisis is adding pressure to an already stressed industry, it is but one factor in the decline of the textile and apparel industries. For the Atlanta Region, long-term economic problems in the "Asia 10" could translate into substantial problems for manufacturers who export to those countries1 as well. According to the Office of Trade and Economic Analysis, the amount of total exports, excluding services, destined for the "Asian 10" from the Atlanta Region could be upwards of $10.4 billion in sales--dollars that could evaporate. Because of continued overseas competition, the layoffs in the textile and apparel industries are expected to continue even if the Asian crisis calms. 1 The "Asian 10" are China, Hong Kong, Indonesia, Japan, Malaysia, the Philippines, Singapore, South Korea, Taiwan, and Thailand. Market Risk and Financial Institution ExposureThe volatility in the textile and apparel industries can affect the Atlanta Region's financial institutions at two levels. First, banks face risk through direct lending to manufacturers; second, they have indirect exposure by virtue of their interdependent relationship with the local economy.Direct Exposure: A key risk to financial institutions that lend to manufacturers in the textile and apparel industries is the fact that they are vulnerable to seasonal and cyclical fluctuations. To meet the fixed cost of salaries and overhead during off-peak seasons, manufacturers often use their inventory as collateral to borrow from insured financial institutions and other lenders, intending to repay the debt during the peak sales season. There is a dual risk in this type of asset-based lending. Sales of seasonal wear are highly dependent on weather and economic conditions. A mild winter could severely limit demand for a firm's product. Moreover, there is a high degree of correlation between income and job growth and sales in the textile and apparel industries. Producing now for consumption later in the year, based on assumptions of continued rapid growth, entails risk. If weather is abnormal or economic growth is slower than expected, a manufacturer's peak season may leave it unable to service its debt. A second common type of short-term financing for textile and apparel manufacturers involves accounts receivable factoring. Because of slow turnover of receivables into cash, manufacturers often sell their invoices to a factoring agent, which, in turn, collects on the invoice. Here, the risk from defaulted payment by retailers is absorbed by the factoring agent, which can be a bank or nonbank entity. Over the past few years, factoring risk has increased because of consolidation and higher bankruptcy rates among retailers. Indirect Exposure: The indirect impact of textiles and apparel on the Region's banking industry arises from the ripple effects of plant closures or layoffs on the surrounding community. As workers lose their jobs, their ability to meet financial obligations is jeopardized. This situation may occur even when the financial standing of the company remains sound, as in the case of a firm discharging employees because of plant automation. In areas where the unemployment rate is low or the level of economic diversification is high, economic dislocation may be lower than in a community where the plant is the single largest source of employment and income. In rural areas such as the northwestern corner of Georgia, textile manufacturing plays a dominant role in the local economy. Layoffs or plant closures there could have a more pronounced effect on businesses' and consumers' ability to meet debt obligations than in metropolitan areas such as Greenville-Spartanburg-Anderson, which has other economic drivers such as transportation equipment manufacturing.
Scott C. Hughes, Regional Economist
Regional Outlook
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| Last Updated 7/26/1999 | insurance-research@fdic.gov |