Montgomery Business Journal

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Economic Forecast

November/December 2014
Interview by David Zaslawsky

Keivan Deravi is an economics professor at Auburn University at Montgomery and special assistant to the chancellor.

Montgomery Business Journal: What is your 2015 economic forecast for the Montgomery region?

Deravi: I believe that 2015 is going to be a jailbreak for economic activity. There is so much pent-up demand and pent-up resources and eventually they have to be brought in to the mainstream. By that I mean, if you took a look at the overall Montgomery growth – the metropolitan area – to say that it’s been really, really weak is an understatement. Over the last four or five years (2008 to 2012), the average growth rate in the metropolitan area had been about 1 percent. I can say with a great deal of confidence that it’s probably the lowest we have had coming after such a deep recession.

Please elaborate.

When you come out of a recession, the growth is going to be overshooting – over-exaggerating, but this has really not been a typical recovery. This has been a very, very slow growth without what I would say acceleration at all. We had growth with no acceleration, but now we’re going to get acceleration attached to growth.

What percentage increase are you looking at in 2015 for the Montgomery metropolitan area?

For Montgomery itself, somewhere upward of 3 percent as opposed to 1 percent.

That’s significant.

It’s significant, but the problem is that the other counties may have adversely impacted growth for the metropolitan area.

You’re talking about Autauga, Elmore and Lowndes counties.

And Macon County. There really is not much going on in Autauga County in terms of production. Millbrook doesn’t have much manufacturing. The biggest business (in Elmore County) is tourism because of the expansion of the gambling in Wetumpka. The heart and soul of the metro area would be Montgomery. Montgomery has underperformed in almost every area. When I look at the metro GDP for 2012, Montgomery underperformed in every year with the exception of durable manufacturing, and durable manufacturing is single-handedly coming from Hyundai. That’s how (Hyundai) grew by double digits in 2011 and in 2012 about 7 to 8 percent and still we hear that the automobile industry has not run out of the cycle. (August) was a great month for Hyundai. That’s where the growth is coming from.

What other sectors will drive growth in Montgomery next year?

We’re looking at a rebounding in the housing market. The inventory is dwindling to some extent and new housing is overdue. Housing will be pretty much dominated by the demographics of the buyer. We will most likely see a surge in the higher-priced levels then mid-priced levels. 

Are you talking about $300,000-plus houses?

Yes, simply because the income has been generated for those income-earners in the 1 percent, but that will come to an end. What will happen is there will be more solid job growth because there is pent-up demand in retail. Retail activity will start showing some life, and that’s going to lead to employment and employment is going to lead to even more retail.

Montgomery Mayor Todd Strange talks about how the annual retail sales tax revenue went from $98.2 million in 2007 and fell to $83.7 million two years later. Will Montgomery return to the pre-recession level of $98-plus million?

I think this year we’re going to see about 5 percent growth, which is fantastically better than 2013, which was about 3 percent.

What about 2015?

We’ll probably see about 6 percent or 6.5 percent simply because we think housing is going to have a lot of activity. The second thing is the formation of new businesses, because what was holding back a lot of businesses is uncertainty about the future and banker reluctance of getting engaged.

What do you mean by that?

I simply mean that interest rates are extremely low and banks are basically stealing business customers from each other – cannibalism – and that even pushes the rate lower. In 2015 when the (interest) rate goes up, banks will be more willing to take a chance. I am absolutely convinced by the end of the first quarter or middle of the second quarter in 2015, the Federal Reserve System is going to raise interest rates.

That’s a bit ahead of the consensus, which is expecting the Fed to raise interest rates in the summer of 2015. Do you expect the first hike will be 0.5 percent?

Probably go 0.5 percent to not spook the (stock) market. In about a year’s time, the rate on the 10-year Treasury bond will probably be 5 percent. [It was 2.5 percent at the time of this interview.] The Federal Reserve System is looking at how many jobs are being created (monthly) and the average is 210,000 to 215,000.

What about Alabama?

At the state level, we are OK. We are growing about 14,000 this year. We should be growing about 20,000 in an average year for the state.

Will Alabama hit that 20,000 mark in 2015?

Mostly likely it will hit 25,000.

From what you’re saying, is more of the projected job growth in 2015 coming from retail instead of manufacturing?

Manufacturing led us to this point, but construction is going to come back. It’s going to have a much bigger contribution. Another factor that played a big role in the Montgomery market is the state government. State government had been contracting or right-sizing or however you want to put it. I think that era is over. I think that after we successfully pay back all the money we borrowed from rainy day funds, there will be a large amount of money that can be spent on a variety of programs, especially the Education Trust Fund.

What you have been describing is a very much improved economy in 2015.

It is going to be a good year in 2015 and to some extent 2016, but our biggest fear right now is we are a creature of history – meaning that we predict the future by looking at the past. This recession is long in tooth. It started in 2009 and if the recovery continues in 2015 and 2016 that we predict it to do, we’re looking at a seven-year recovery, which is a long and enduring recovery on an historical basis. The odds are for a recession to occur after you pass five years (of a recovery). We are looking at statistical odds vs. market reality.

What are the odds for a recession in 2016 or 2017?

At any point in time, you’re looking at 25 percent odds of a recession, but we’re probably looking at 35 to 40 percent odds. It’s not because of the markets.

I talked to one of the region’s top homebuilders and he expects to see his company’s new home sales increase 20 percent in 2015 and 2016 to reach a previous 17-year average. Will housing lead the recovery next year?

No, I think it’s going to be more broad-based. There have been so many weak sectors, but housing will be one of the (strong) sectors and there is going to be a rebound in the government sector. Professional services – lawyers and accountants – we were negative in that category. I think we’re going to get some positive growth there. Retail is going to be strong, too. What makes me feel better is that it’s going to be a broad-based recovery – it’s going to spread everywhere, but …

There’s always a but …

There’s a new normal in place, meaning that the people who did better in the last recovery won’t do as good this time. This recovery is going to be very selective in terms of skills. There is going to be pressure on the middle income because of technology and globalization. The middle-income class for the last five years fell behind an enormous amount, so for them, it’s hard to catch up. Any positive recovery still won’t be sufficient to make up the difference. The accelerated recovery is going to impact the higher skills and the lower skills. For the middle class, it’s still going to be a recovery, but a slow recovery.

The automotive sector has not slowed down. Analysts at one automotive website raised their 2014 new car sales forecast to 16.4 million, which would be the best year 2006 when sales hit 17 million. What does 2015 look like?

At some point, yes. I think we still have room to go to 18 million, but I’m not as optimistic about the automobile industry as some of the experts are because the success of the past does not mean success in the future – because there is a market saturation at some point.

The average vehicle is still 11 years old. That leaves a lot of room for new sales growth.

That is high, but my suspicion is that we are in the sweet spot in the automobile industry that will last four or five years and after that, we have to come back to reality. It will probably be another year or two before the sweet spot is history. From my conversations with the bankers, a lot of these cars are being purchased with cash. People are basically saying that (there’s no point in) putting my money in the bank with no interest rate, so I could go ahead and buy whatever I need if I have the cash rather than put the money in the bank and lose it to inflation. A lot of the decisions are very intelligent, economic decisions being made by consumers. Low-interest (rates) in the bank are changing the tastes and preferences of the consumer in regards to how they spend their cash.

Is that going to continue?

It’s going to continue, but when the (interest) rate goes up it will be different, because rather than buying a brand new car, they can earn about 4 percent in the bank.

I know you review gasoline tax and cardboard and cartons for trends. What are those things telling you about 2015?

The gasoline tax is not standing out like gangbusters. They are holding to 3 or 4 percent. That means there is a steady flow of packaging, transportation, delivery, which is going on. That will stay at that level because a lot of our retail products will come from overseas.

What other factors impact the economy?

There are some special factors – one is Apple factor and one is CNN factor. The Apple factor is whenever Apple comes up (with a new product) and you have to have it, it disrupts other (spending) plans that you have. The CNN factor is if there is a war or event going on you get glued to the TV and you don’t go out. There’s always these two effects that we have to worry about.

Are there any other sectors in Montgomery that will rebound in 2015?

Right now, we are looking at four areas for growth: housing, professional services and another was government. I think another area is banking and the real estate sector. Banks will begin to start adding folks. You will see some growth because the confidence will lead to more borrowing – businesses will be more confident. A lot of the business that took place in the banking sector was refinancing. A lot of refinancing made a lot of bankers really, really busy. Business loans are still very slow and bankers are extremely conservative in their approach. A lot of those recession hangover issues will be a whole lot better, but will not go away. I have to admit to you, when we talked last year at this time, I wasn’t as optimistic about 2015 because I was overwhelmed with the new normal of the economy. I’m not saying that this new normal and new economy will not play into (2015), but I’m saying there is so much pent-up demand both from consumers and businesses.

You’re saying that demand means more buying from consumers who have been slow to spend.

Consumers have cleaned up their financial (situation). They saved a lot – the savings rate is much higher than it used to be back before the recession. Credit card use – we follow that – back in August set a new record.

Are you saying people are spending more?

Yes. After clearing a lot of credit card debt – I’m talking about the average, not everyone – they are beginning to go back to their old habits.

Spend, spend, spend.

This is a spending economy. This is an economy where we like new toys and we spend on new toys.

What you’re saying is that both consumers and businesses are more confident.

They are more confident and there is less bad news from the state.

Getting back to the city’s retail sales revenue: Will Montgomery get back to the pre-recession of $98.2 million in 2015?

Most likely. Many of the states and many cities have already hit the 2008 level, so they have gone back to where they started. Alabama hasn’t. For whatever reason, the Alabama economy has been underperforming.

There have been a lot of job announcements, but a lot of those positions have been hired.

The announcements are great, but you have to look at the actual (number of people working). From 2011 to 2013, I think we created about 29,000 jobs in the State of Alabama. If you look at South Carolina, I think they created 70,000 jobs. If you look at South Carolina, 70 percent of the jobs were in high-paying jobs and ours was 30 percent. We look at that mismatch, which is truly coming from the lack of diversification that we have. They are doing a whole lot better in terms of the new economy.

Why hasn’t Alabama created more jobs during that time span? Is it because of federal and state government cutbacks?

I have a different theory. Even though we can blame state and federal government, if you look at employment and GDP (gross domestic product), state and federal are important. I think they count for 23 percent. We don’t not see huge jobs in state employment, maybe a 10,000 drop. In a 2 million labor force market, that’s not that big. We had a broad-based decline or lack of recovery in almost everything in the state – I think because of the mismatch that we have between the state economy and the new economy. The new economy is being driven by two things: energy and high-skilled folks. Middle income is going to get hurt and low income will get some employment gains, but there is not going to be much.

The state doesn’t have an energy sector such as Louisiana or Texas.

Or South Dakota. We don’t have that. Yesterday, we were looking at South Dakota. The unemployment rate in South Dakota was 2.3 percent.

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