Regional Manufacturing Outlook
Wednesday | 05 August, 2009 | 9:30 am

South and Southeast

By Provided KeyBanc Capital Markets

August 2009 - Recent macroeconomic data and investor sentiment across equity, debt and commodity markets suggest that the worst of the current recession, now over 18 months long, might be behind us. Southern and Southeastern region manufacturing and production indices have rebounded since November-December of 2008 and point towards a much slower rate of contraction in the local economies. New orders have been up in the last 2-3 months, depending on individual states, but the pace of durable goods manufacturing remains very slow compared to its historical average.

Most of the metal-oriented manufacturing in the region is geared towards structural construction, infrastructure, and increasingly in automotive industries. While residential construction has been one of the biggest drawbacks of the Florida market, the rate of decline has now slowed down compared to other markets like Arizona or California. The pullback in commodities since July 2008 has stemmed the flow of investments into expansionary projects in the sector like ThyssenKrupp’s and Nucor’s new steel mills, as well as other oil & gas sector investments. However, the transplant automotive manufacturing corridor in the region is expected to gain significant market share from Detroit’s restructuring woes, and could account for a higher equilibrium in unit production and employment as the sector moves to a more normalized build rate.

Southeast Region Purchasing Managers’ Index (PMI)
Manufacturing activity in the Southeast region has been showing signs of a steady pickup, especially in new orders, for the first four months of the year. Although overall activity still signals continued contraction in real levels (as suggested by readings under 50), the pace of contraction has clearly slowed from the sheer level of demand destruction seen in the fourth quarter of 2008. New Orders increased 2.8 points in April, marking the 5th consecutive month of increase from its historical low in November 2008.

Dallas-Fed Manufacturing Indices
The pace of durable good manufacturing has sequentially slowed every month for the last six months, registering an annualized 7.4% decline for the month of March. However, the most dramatic slowdown in the region has been in fabricated metals manufacturing, with an average annualized rate of 35% every month since October 2008. This puts in perspective the speed and intensity of decline in demand for manufactured goods, especially those catering to automotive and housing sectors.

Flow of International Trade
The Southeast region is at the forefront of a large part of the nation’s international trade. The above chart shows the extent to which exports and imports both declined in the last five-six months as the global economy slowed down drastically.

Extent of International Trade
Chemicals overtook computer and electronic products as the largest product group in total dollar exports originating from the Southern and Southeastern regions in 2008. In percentage terms, petroleum and coal products have shown one of the strongest increases recently, growing at a 44 percent CAGR in the last five years. In 2008, the Southern and Southeastern regions accounted for 31 percent of the total manufactured goods exported by the U.S., with Texas comprising of 16% of that total.

Manufacturing Employment
The manufacturing employment situation clearly worsened every month between October 2008 and March 2009. The national average manufacturing employment level declined almost 10 percent year-over-year as of March 2009. The pace of decline jumped in the first quarter of the year, after having posted a 6.2 percent annual decline as of December 2008. The brunt of the decline was borne by primary metals and other durable goods manufacturing companies, especially those tied to the automotive and construction sectors.

The Southern and Southeastern region has a significant durable goods manufacturing footprint, especially in structural steel, oil & gas metal products, and automotive. In addition to the malaise in construction and automotive, including roughly 40 percent lower transplant automotive volume sales, a 60 percent drop in the price of crude oil led to sharp pullbacks in investments in the sector during the last six months. The region experienced an average 9.2 percent drop in manufacturing sector employment, with Alabama faring the best due to its recent focus on attracting various foreign manufacturers with significant financial incentives.

Housing Prices (Case-Schiller Index)
Although home prices across the nation continue to decline, the second derivative, i.e. rate of decline took a breather in February and March. The S&P/ Case-Schiller 10-city and 20-city composite for the country did not set a new record annual decline for the second consecutive time in March. A large inventory overhang of unsold and foreclosed homes continues to exert pressure on prices or new and existing homes across all regions. The Dallas market has demonstrated strength of late, with the smallest annual and sequential declines in average prices, at 5.5 percent and 0.3 percent, respectively. On the other hand, the Florida housing markets, especially Miami, remain stressed with nearly 30 percent and 3 percent annual and sequential declines, respectively, in March.

Although home prices across the nation continue to decline, the second derivative, i.e. rate of decline took a breather in February and March. The S&P/ Case-Schiller 10-city and 20-city composite for the country did not set a new record annual decline for the second consecutive time in March. A large inventory overhang of unsold and foreclosed homes continues to exert pressure on prices or new and existing homes across all regions.

Housing Permits (New Home Construction)
The states covered in this report accounted for 34 percent of the total housing permits and over 35 percent of single-family home permits in the U.S. over the 12 months ending March 2009. Builders have drastically cut back on breaking ground for new homes, as total number of permits issued in the first quarter declined 47 percent in the region compared to 1Q08. The Census Bureau data suggest a slight pickup in permits for new single-family homes in the last couple of months, although construction of multi-family homes and apartments remains very slow.

Rethinking "American" Cars
The region has become a significant force in automotive manufacturing and vehicle assembly over the course of the last 5-7 years. Alabama has been a clear leader in attracting foreign carmakers to set up manufacturing and assembly lines. Manufacturers have able to attracted largely by the absence of legacy unionized labor costs as well as rich tax incentives offered by these states. What originally started with a few strictly assembly plants of foreign names is gradually transforming into a hub of hundreds of parts manufacturers, Tier-1 suppliers, and component manufacturing plants across four states.

The largest vehicle assembly plants in the region are in Alabama:
1. Mercedes-Benz: $1 billion plant capable of assembling 174,000 vehicles annually, focuses on M-Class SUV, R-Class Grand Sports Tourer, and all new GL-Class luxury SUV
2. Honda: $1.3 billion plant capable of producing 300,000 vehicles and V6 engines
3. Hyundai: $1.4 billion plant capable of producing 300,000 vehicles and engines

For more information, contact Eric Klenz at 216-689-3974 or Arindam Basu at 216-689-4262, or go to

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 N.A."), are marketed. Securities products and services are offered by KeyBanc















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