January 2009 -The U.S. economy faces its greatest crisis since the Great Depression. The economic peril confronting the nation is pervasive, as the credit market contagion seems to have spread from Wall Street to Main Street. The Southeast’s economy is no exception. This article focuses on the economic conditions of the Southeastern region of the United States: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee and Virginia. Not surprisingly, this region’s economy is in the grips of the national recession with no obvious end in sight.

The Southeastern economy experienced little or no growth during the first half of 2008, housing markets in the region showed no signs of recovery from their extended decline, credit markets continued to contract and pricing pressures increased--especially as related to food and energy-intensive items. Consistent with the rest of the U.S. economy, the economic performance of the Southeastern United States in 2008 kept in line with significant negative trends in manufacturing and industrial sectors. On a year-over-year basis, three of the 11 states in the region actually added jobs. However, personal income declined, and the Southeastern merger and acquisition activity was lower and in line with the general merger and acquisition trends across the nation. In the greater economy, manufacturing employment fell by 51,000 during September, bringing the total decline in manufacturing and factory-oriented jobs to 442,000 nationwide, of which 114,000 were specific to the manufacturing sector during the past 12 months. The regional unemployment rate increased to slightly above the national average of 6.1 percent to 6.3 percent for the year. These indicators suggest the Southeast is suffering from the recessionary trends that the rest of the country is experiencing and, at best, suggest a high level of uncertainty as to the prospects of improvement within the foreseeable future.

Job creation and unemployment
The 11 states encompassing the Southeastern region suffered a sizable decrease in jobs during the last 12 months. Eight states saw an average job decline of 42,155 jobs per state, with Tennessee (70,092), Florida (61,938) and Alabama (54,280) leading the way. The total job count in the Southeastern region was approximately 273,000 fewer jobs when compared with the end of the third quarter of 2007. On a percentage basis, the region suffered an aggregate average total job decline of 1.3 percent per state. It was led by Alabama, with a 2.6 percent decline, and Tennessee, with a 2.4 percent decline. This reduction in jobs coincided with a rise of 1.6 percent (from 4.7 percent to 6.3 percent) in regional unemployment during the same time. The Southeastern unemployment rate increased from 4.7 percent in 2007 to 6.3 percent in 2008 with Mississippi (7.8 percent), South Carolina (7.3 percent) and Tennessee (7.2 percent) having the region’s highest unemployment rates, while Virginia (4.3 percent), Arkansas (4.9 percent) and Louisiana (5.2 percent) had the lowest. The Southeastern unemployment rate rose above the national unemployment rate in 2008 (6.3 percent, compared with 6.1 percent) after being statistically even in 2006 (both 4.6 percent).

Perhaps of greater consequence, job loss in the Southeastern region manufacturing sectors in particular was up 4.6 percent in 2008 compared with 2007. This is significantly greater than the 0.6 percent overall decrease when including all industries. This marked the 19th consecutive quarter that the Southeastern region posted declines in total manufacturing employment. Comparatively, national manufacturing shed 392,000 jobs in the first nine months of 2008. Employment decreased 0.4 percent between September 2007 and September 2008. Manufacturing employment in the Southeastern region has declined more than 36 percent since 1990, while national manufacturing employment has declined only 20.8 percent. Specific industries with the largest number of job losses from September 2007 to September 2008 were Florida’s construction industry (71,900 jobs, down 12.8 percent) and manufacturing (22,200 jobs, down 5.7 percent). Similarly, South Carolina experienced substantial declines in construction (17,700 jobs, down 15.8 percent) and in manufacturing (7,900 jobs, down 3.1 percent). The precipitous loss of manufacturing jobs in the Southeast region is alarming. In light of the sluggish growth in personal income (described below) this trend suggests that, along with the rest of the nation, the region is struggling in this current sharp economic downturn.

Industry-specific
The largest private sector employers in the Southeast include the manufacturing, trade, transportation and utilities industry; the professional and business services industry; and the leisure and hospitality industry. Between 2007 and 2008, employment levels within each of these industries were uneven in the Southeast--trade, transportation and utilities decreased by 1.3 percent; professional and business services decreased by 0.8 percent; and leisure and hospitality decreased by 0.3 percent. The Southeast region’s largest increase in total number of jobs was in government, which had a total employee increase of more than 1,100 between September 2007 and September 2008.

Income
According to the latest Bureau of Economic Analysis data, the growth in personal income within the Southeastern region was among the lowest in the nation. All 11 states were below the national average in terms of personal income growth, with the only notable exception being the metro Atlanta area. Personal income in the Southeast grew 2.2 percent including the federal economic stimulus payments and 0.8 percent without. Because the income tax rebates were targeted to lower-income families, they had their greatest impact in Mississippi (where they contributed 2.8 percentage points to personal income growth) and other lower-income states such as Alabama, Louisiana and Arkansas.

Bankruptcies
In part and as a result of the faltering strength of the capital markets for most of the year, the number of business bankruptcies rose in the Southeast. As a result of the credit crunch experienced late last year and currently ongoing, available credit remained scarce, squeezing businesses in the region and creating tangible challenges in regard to remaining liquid. There were 6,816 Southeastern business bankruptcy filings in 2007, up from 4,431 from September 2005 through September 2006. The total number of business bankruptcies filed in the United States during the first two quarters of 2008 was 18,456, up from 12,985 during the same period a year ago. Although there was also a national increase in the number of business bankruptcies filed during that same period between 2006 and 2007, the Southeastern region saw a larger increase than the rest of the United States--22.5 percent of national total compared with 24.1 percent of regional total. The largest increase in filings was in Virginia (52.3 percent), Florida (51.1 percent) and South Carolina (43.1 percent), while the lowest increase was in Louisiana (6.6 percent), Georgia (21.2 percent) and Tennessee (26.1 percent).

Mergers and acquisitions
The overall weakness of the capital markets in 2008 also contributed to the dismal year for M&A activity in the United States. The Southeast was no exception. 2008 M&A activity in the region was down significantly from 2007, representing the lowest levels of activity in terms of both quantity of deals and total transaction values. With 1,601 closed deals, the Southeast accounted for 18.8 percent of total deals completed in the United States from September 2007 through September 2008, down from 2,139 total deals and 19.9 percent of the nation’s deal flow in 2006. The 1,601 deals closed in 2008 were valued at a combined $88.9 billion, down from $275.2 billion in 2006. Of the total $88.9 billion of deals completed in 2007, the Southeast accounted for 15.1 percent, up from 5.3 percent in 2006.

A measure of the M&A market’s strength is the multiple of cash flow that buyers are paying for business acquisitions. In 2008, acquisition multiples paid for businesses in the Southeast also deteriorated. After paying a median multiple of 12.0x LTM (last 12 month) to EBITDA (earnings before interest, taxes, depreciation and amortization) for businesses in 2007, the median multiple at which transactions were completed in the Southeast in 2008, across all industries, was 11.2x LTM to EBITDA. Multiples paid in the Southeast in 2008 compared negatively with the national median of 11.8x LTM to EBITDA. FFJ

National City Investment Banking Group
National City Capital Markets is a full-service investment banking firm based in Cleveland with offices in New York, Philadelphia, Cincinnati, Chicago and St. Louis. National City provides strategic solutions, including M&A advisory, capital raising (debt and equity), business restructuring, valuation and strategic alternatives analysis to corporate and private equity clients across a broad range of industries. It has an industry-focused business model with expertise in the industrial (metals, automotive, building products, specialty chemicals and packaging), business services, consumer products and health care segments. For additional information, contact Sean Dorsey, senior managing director, at 216/222-9117, or Geoffrey Frankel, managing director and co-head of the industrial group, at 216/222-2609.

National City Capital Markets (NCCM) is a trade name under which corporate and investment banking services of National City Corp. and its subsidiaries, including NatCity Investments Inc. and National City Bank, are marketed. National City Capital Markets is not a legal entity. Securities products and services are provided by NatCity Investments Inc., member FINRA and SIPC, and its licensed securities representatives, who may also be employees of National City Bank. Banking products and services are offered by National City Bank.