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Regional Manufacturing Outlook
Wednesday | 09 July, 2008 | 9:36 am

South & Southeastern

By Provided KeyBanc Capital Markets

July 2008- This edition of the regional manufacturing update focuses on the southern and southeastern parts of the United States. While non-farm manufacturing remains strong in the South, boosted by the mining and oil and gas sectors, and while southeastern automotive transplants continue to capture market share from the Big Three, the region’s economies show signs of strain from the national downturn developing over the past three quarters. The strongest drivers of manufacturing growth in the last two to four quarters were in mining and exploration, commercial aerospace and defense. ThyssenKrupp’s deal with the state of Alabama to build a $3.7 billion steel mill was one of the most prominent developments in the last quarter of 2007. The southeast region’s Purchasing Manager’s Index (PMI), published by Kennesaw State University jumped nearly 7 points in March to 54.3 and a further 2.4 points in April to 56.7. A reading above 50 indicates an expansionary manufacturing environment. At current levels, the region’s PMI is markedly higher than the national PMI reading of 48.6 for April, as published by the Institute of Supply Management.

Similarly, data from the Federal Reserve Bank of Dallas shows that the manufacturing index for Texas improved from a 2001 to 2002 trough of 124 (Index 1987 equals 100) to 143 in March 2008. Durable goods manufacturing has improved steadily since 2004, reaching 165 in March 2008. The strongest growth is seen in the mining and oil and gas exploration sectors that, following a 2002 downturn, rose sharply to an index value of more than 145 this year.

The relative decline of the dollar has also fueled exports from the region. Manufacturing exports, primarily in structural steel products, petrochemicals and other finished goods, have been particularly strong. Import volume shrunk considerably in 2007 but showed signs of revival in the first quarter of 2008, with the exception of most structural steel products.

The region’s challenges have been in residential construction and automotive production. With national new home construction down 30 percent, the decline of the Florida housing market features prominently as one of the worst in the country. The southern region also reported an average drop of more than 20 percent in new home permits. Commercial and institutional construction, however, exhibited strong growth in the southeast region, although some signs of headwinds are starting to appear in commercial mortgage-backed securities. Barring certain pockets of growing development, such as in Houston and Dallas, residential and nonresidential construction is projected to remain under duress in the South over the next few quarters. Automotive production in the southeastern states remained soft in the first quarter, consistent with the national automotive production trend, with only two of the five prominent producers in the southeast reporting increasing production figures. Alabama has fared the best in this respect, with the state’s three transplant producers, Honda, Mercedes (Daimler) and Hyundai, increasing vehicles assembled year-over-year.

First quarter 2008 developments in manufacturing
Data published by the Dallas and Atlanta Federal Reserve banks highlight some of the recent economic developments in the first quarter of 2008 that showcase the potential for continued strength of manufacturing in the region.

Defense
The U.S. Air Force awarded a $40 billion long-term contract to Northrop Grumman and EADS North America to build 179 aerial refueling tankers. EADS plans to build the tankers in a new assembly plant in Mobile, Ala., that will employ nearly 2,000 people.

Lockheed Martin was awarded a $49.5 million contract extension from the U.S. Air Force to continue its support of the C-130 cargo plane out of the 5,000-employee facility in Orlando, Fla.

Automotive and transportation
Foreign Direct Investment (FDI) continued to flow in the automotive transplants sector in the southeastern region, with the latest addition being Sewon Precision, a Korean supplier of stamped parts and decorative trim to Kia Motors. Sewon started construction of a $170 million plant in LaGrange, Ga., to complement the operations of Kia Motors that in turn is building a $1.2 billion plant at West Point.

Toyota Motors plans to build a new assembly line at Blue Springs, Miss., although development of the site has now been pushed back to mid-2010 due to tight credit markets and the slack in North American automotive demand.

General Motors plans to reopen its Spring Hill, Tenn., plant in the second half of 2008. This plant has been closed since early 2007 for retooling required to shift production from the Saturn line to the Chevy Traverse crossover vehicle.

The shipbuilding industry in Mississippi received a boost with VT Hulter Marine winning a $250 million contract to build three 330,000-barrel tank barges for Vessel Management Services Inc.

Energy and infrastructure
French energy company Alstom plans to build a steam and gas turbine manufacturing plant in Chatanooga, Tenn. The two-year, $280 million greenfield construction project has started and currently employs about 600 people.

Parallel Petroleum has $40 million budgeted to fund the drilling and completion of an estimated 18 gross-operated wells, pipeline construction and leasehold acquisitions for the Wolfcamp Gas Project in Eddy County, N.M.

Enogex is building a natural gas gathering, processing and transportation system for Chesapeake Energy Corp. in western Oklahoma in a $55 million agreement.

Broadwind Energy is establishing a wind energy maintenance and service center in Abilene, Texas, with construction starting in April 2008, expected to create more than 80 new jobs in the region.

A joint venture between Kinder Morgan and Energy Transfer partners is expected to begin this summer--a $1.3 billion project to extend the Midcontinent Express Pipeline from southeast Oklahoma, across parts of Texas, Lousiana and Mississippi to a connection with the Transco Pipeline in Alabama.

International trade
The southern and southeastern regions demonstrated strong export growth in the last four years. Manufacturing exports from the regions grew at a 14 percent CAGR between 2003 and 2007, ahead of the overall growth in U.S. manufactured goods at 12 percent CAGR. Export growth shrunk in 2007 to approximately 10 percent year-over-year, in spite of the weakened dollar. This can be attributed to strong growth in the preceding three years that’s not expected to be sustained in the long term, as well as a shift in export demand toward raw materials and commodities rather than finished goods.

The highest manufacturing exports from the southern regions, by total dollar amount, were in chemical, automotive and computer products (predominantly semiconductors and chips). However, the strongest growth in southern manufacturing exports in recent years has been in petroleum products, beverages and tobacco, and printing and publishing products, which grew at an average 25 percent from 2006 to 2007. Paper, chemicals, food and machinery item exports grew an average 16 percent in the same period. Textiles and leather products continued to see the sharpest export declines as most manufacturing of these products has moved offshore over the course of the last decade.

Growth in the southeast region’s exports to China outpaced overall export growth, similar to the rest of the United States. The region’s manufacturing exports to China grew at a CAGR of 24 percent between 2003 and 2007, whereas the region’s total manufacturing exports grew at a 14 percent CAGR during the same period. The export concentration to China has grown the most in the machinery and fabricated metals sectors to reach 37 percent and 33 percent, respectively, by the end of 2007. Chemicals and computer products were the top two exports to China during this time by dollar volume.

Contribution to GDP
An analysis of gross state products and their contributions to national GDP illustrates an interesting contrast between the various state economies. Southcentral states like Arkansas, Alabama, Lousiana, Mississippi and Tennessee fell in the bottom or second quintile in terms of GDP growth, much like most Midwestern states as presented in the previous regional manufacturing article in March 2008. On the other hand, southern and southeastern states like Texas, Oklahoma, Georgia and Florida came in on the top or fourth quintile in terms of year-over-year growth in gross state products. However, durable good manufacturing made significant contributions to the growth in the gross state products of Alabama, Lousiana and Tennessee, coming in at 33 percent, 29 percent and 18 percent, respectively. This is primarily fueled by the aggressive attraction of FDI by these states, especially in durable goods and automotive sectors. Manufacturing also made strong contributions of an average 21 percent in the southern states of Texas, New Mexico and Oklahoma, a fact that can be expected based on the strength of the traditional oil and gas, metals and construction industries in the region.

Labor issues
The national unemployment data released by the Bureau of Labor Statistics continues to show shrinkage in the nation’s manufacturing payrolls, with national unemployment reaching 5 percent on average through the first four months of the year. Unemployment rates for most southern and southeastern states are at par with the national level, with the exception of Oklahoma and New Mexico faring much better at an average 3.5 percent while Tennessee and Mississippi fared much worse at more than 5.6 percent.

For the year ending March 2008, Florida, Georgia and Tennessee were among states with the highest increase in unemployment rates, with a net increase of an average 1.2 percent. This can be attributed to the severe housing construction downturn across the country, especially in Florida, along with a general macroeconomic downturn that has affected the broader U.S. economy. However, Texas, Arkansas, Mississippi and Oklahoma registered steady to strong declines in unemployment rates. The Texas economy showed continued strength and gained 40,000 jobs in the first quarter of 2008, with the highest increase in the natural resources and mining sector. MM

KeyBanc Captial Markets
For more information, contact Eric Klenz at 216/689-3974 or Arindam Basu at 216/689-4262. Or, go to www.key.com/kbcm.

Disclosure Statement KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., member NYSE/FINRA/SIPC, and KeyBank National Association (KeyBank NA), are marketed. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank NA. Banking products and services are offered by KeyBank NA.

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