Economic Overview Second Quarter 2008

Transcription

1 Economic Overview Second Quarter 2008 Prepared by: Research Division State Tax Department

2 US and West Virginia Economic Trends 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q US Data Gross Domestic Product (billions) 11, , , , , , , , , , ,566.8 % change Employment - Total Nonfarm (ths) % change Unemployment Rate (%) Personal Income (billions) 10, , , , , , , , , , ,665.6 % change Coal Production (millions of tons) % change Consumer Price Index % change Industrial Production % change Federal Funds Rate West Virginia Data Gross Domestic Product (billions) % change Employment - Average Nonfarm (ths) % change Unemployment Rate (%) Personal Income (billions) % change Coal Production (millions of tons) % change Note: Percent changes are year-over-year Sources: Global Insight - U.S. data & WV GSP Bureau of Economic Analysis (BEA) - WV personal income data Energy Information Administration (EIA) - coal data, U.S. & W.V. WORKFORCE WV - WV employment data

3 ECONOMIC OVERVIEW TABLE OF CONTENTS UNITED STATES OVERVIEW Page INTRODUCTION...1 CONSUMER ACTIVITY UNEMPLOYMENT...1 RETAIL SALES AND BUSINESS INVENTORY & SALES PERSONAL INCOME, SPENDING, SAVINGS & CONSUMER DEBT BUSINESS ACTIVITY INDUSTRIAL PRODUCTION & CAPACITY...6 HOUSING & CONSTRUCTION...7 CORPORATE PROFITS... 9 INTERNATIONAL TRADE... 9 PUBLIC POLICY...11 OUTLOOK GRAPHIC & STATISTICAL APPENDIX UNEMPLOYMENT RATE CONSUMER PRICE INDEX...16 PRODUCER PRICE INDEX...17 GROSS DOMESTIC PRODUCT...18 INDUSTRIAL PRODUCTION INDEX...19 HOUSING STARTS...20 CORPORATE PROFITS...21 SELECTED U.S. INTEREST RATES...22 TRADE-WEIGHTED EXCHANGE RATE OF THE DOLLAR

4 WEST VIRGINIA OVERVIEW Page INTRODUCTION...24 LABOR MARKET INDICATORS UNEMPLOYMENT...24 COUNTY UNEMPLOYMENT...24 EMPLOYMENT...25 EARNINGS...25 SELECTED INDUSTRY ACTIVITIES COAL...26 ELECTRIC UTILITIES...26 MANUFACTURING...27 FINANCIAL INSTITUTIONS EARNINGS...28 INTEREST RATES...28 PERSONAL INCOME...28 PUBLIC SECTOR...29 OUTLOOK...31 GRAPHIC & STATISTICAL APPENDIX EMPLOYMENT W.V., REGIONAL & U.S. UNEMPLOYMENT RATES TOTAL EMPLOYMENT...34 EMPLOYMENT BY INDUSTRY - CHART...35 EMPLOYMENT BY INDUSTRY - GRAPH...36 COUNTY UNEMPLOYMENT RATES...37 UNEMPLOYMENT COMPENSATION DATA...38 PERSONAL INCOME W.V. PERSONAL INCOME...39 QUARTERLY PERSONAL INCOME BY STATE (PERCENT CHANGE) QUARTERLY PERSONAL INCOME BY STATE (PERCENT CHANGE Y-O-Y)...41 SELECTED W.V. INTEREST RATES...42 COAL PRODUCTION - U.S. vs. W.V W.V. PRODUCTION , 2008, 5-YEAR AVERAGE AVERAGE COST OF COAL...45 REVENUE GENERAL REVENUE FUND - ACTUAL vs. ESTIMATED GENERAL REVENUE FUND - COMPONENTS...47 CORP. NET INCOME & BUSINESS FRANCHISE TAX - ACTUAL vs. ESTIMATED.. 48 SEVERANCE TAX - ACTUAL vs. ESTIMATED...49 BUSINESS & OCCUPATION - ACTUAL vs. ESTIMATED CONSUMERS SALES TAX - ACTUAL vs. ESTIMATED PERSONAL INCOME TAX - ACTUAL vs. ESTIMATED STATE ROAD FUND - ACTUAL vs. ESTIMATED STATE ROAD FUND - COMPONENTS...54

5 United States Economic Overview Second Quarter 2008 Introduction During the first quarter of 2008, the U.S. economy grew at an annual rate of 1 percent, following a smaller increase of 0.6 percent in the fourth quarter of According to the Commerce Department, the acceleration in first quarter Gross Domestic Product (GDP) reflected an upturn in inventory investment that was partially offset by a deceleration in consumer spending. Consumer spending grew at a 1.1 percent rate in the first quarter, down from the 2.3 percent increase in the previous quarter. The deceleration in spending was attributable to both durable and nondurable goods. Spending on durable goods (i.e., big-ticket items meant to last three or more years) plunged 6 percent, following growth of 2 percent in the fourth quarter of last year. Also, spending on nondurable goods fell by 0.2 percent, following a 1.2 percent increase in the previous quarter. Spending on services rose 3.1 percent, up from 2.8 percent growth in the final three months of Consumer Activity Unemployment. The nation s unemployment rate held steady at 5.5 percent in June, according to the Bureau of Labor Statistics (BLS). Payroll employment fell by 62,000, the sixth consecutive monthly decline. Also, April and May payrolls were revised down by a combined 52,000. So far this year, average monthly job losses have totaled 73,000 compared with an average monthly gain of 91,000 in Meanwhile, the labor force participation rate fell slightly to 66.1 percent in June. In June, private employment declined by 91,000, the same decline as in April and May. Losses were reported within manufacturing, construction, and private services, with the exception of health, education and food services. The manufacturing loss (33,000) was widely spread across industries. The only notable increase was in motor vehicles and parts (up 6,000) due to the late-may settlement of the American Axle strike. Construction fell 43,000, with all areas down (residential down 21,000, nonresidential down 17,000, heavy and civil engineering down 5,000). The declines in manufacturing and construction were steeper than in May while the decline in private services employment (22,000) was a bit less than May's 37,000 drop. The retail sector continued to shed jobs, along with wholesale trade, transportation, and warehousing. The financial sector shed 10,000 jobs, evenly split between credit

6 intermediation and insurance carriers. According to Global Insight, more job losses are expected in this sector given rising layoff announcements. High-end professional payrolls were still rising, as professional and technical services added 15,000 jobs, but employment services lost 59,000 jobs, about half of which were in temporary help. However, there were still areas of strength in private services, mainly in healthcare (up 15,000), education (up 15,000), and food services and drinking places (up 16,000). Government services employment rose 29,000, mostly in state and local governments (up 25,000). This may change for the worse given the pressures on state and local budgets, as the st new fiscal year began on July 1. According to Global Insight, June payroll declines were in line with expectations and showed a steady deterioration in the labor market. The jobless rate is forecast to continue rising to a peak of 6.1 percent in the second quarter of Average hourly earnings of all production or nonsupervisory employees on nonfarm payrolls rose by 6 cents in June to $18.01, and were up 3.4 percent over the year (less than the rate of inflation). The average workweek in June remained at 33.7 hours, as average weekly earnings were up 0.3 percent. Over the past year, average weekly earnings were up 2.8 percent. The manufacturing workweek rose slightly to 40.8 hours and factory overtime was unchanged at 3.9 hours. For the second quarter, average hours worked fell 0.9 percent at an annualized rate, similar to the 1.1 percent decline in the first quarter. Total average hours worked (i.e., manufacturing and non-manufacturing) is considered a key component in the measurement of GDP growth. Retail Sales and Business Inventory and Sales. According to the Commerce Department, retail sales rose 0.1 percent in June, following a downwardly revised gain of 0.8 percent in May. Sales used to estimate consumer spending in the GDP accounts (i.e., excluding automotive dealers and building and garden supply stores) rose 1 percent in June. Overall, consumers continued to avoid big-ticket purchases, spending instead on essential and discount items. With $86.1 billion of tax rebates distributed through July 4, expectations for June th sales growth were high, but falling employment, soaring gasoline prices, and declining household wealth led to lower than expected sales. Also, there were downward revisions to both April and May retail sales growth figures. As the economy has soured, purchases of expensive items have been put on hold. Motor vehicles and parts sales fell 3.3 percent month-on-month, as gas prices rose and the number of miles being driven went down. Foreclosures and declining home construction continued to affect furniture and building material sales, which declined 1.4 percent and 0.9 percent, respectively. Struggling retailers fought for their share of the federal-stimulus cash with strong promotional activity, which 2

7 led to a rise in sales at sporting goods stores and clothing stores. Gasoline stations reported a 4.6 percent sales increase due to an increase in seasonally adjusted gasoline prices. Rising food prices contributed to sales gains of 0.7 percent at food and beverage stores. According to Global Insight, the retail sales report for June heightened anxieties about weakness in consumer spending. With the boost from tax rebates, experts had expected stronger growth in retail spending. Uncertainty has grown about how retailers will perform when the crutch of the stimulus checks is removed. The weakness in consumer spending has prevented the Federal Reserve from shifting its attention from downside growth risks to upside inflation risks, indicated by the general consensus for not changing the key interest rate at their last meeting. Business inventories were up 0.3 percent in May, following a 0.5 percent increase in April, according to the Census Bureau. Compared with May 2007, inventories were up 5.2 percent. The slowdown in monthly inventory accumulation was due to a decline in retail inventories and a slowdown in wholesalers stocks. At auto dealers, inventories were cut by 0.6 percent, mostly due to the strike at American Axle that continued to shut down some GM plants until late-may. General merchandise, clothing, and furniture stores showed a decline in inventories due to an increase in sales. Total business sales (i.e., the sum of manufacturing, wholesale trade, and retail trade) rose by 0.8 percent in May, after a gain of 1.5 percent in the prior month. Compared with May 2007, sales were up 6.6 percent. Because of the higher monthly rise in sales, the inventory-to-sales ratio, which measures how long in months a company could sell all current inventory, fell to 1.24 months in May, matching the all-time low for the ratio. The downward adjustment in inventories reflects the concerns over consumers willingness and ability to spend in upcoming months. Retail e-commerce sales totaled $33.8 billion during the first quarter of 2008, an increase of 0.8 percent from the previous quarter and up 13.6 percent from the same period a year earlier. Of total retail sales, e-commerce accounted for 3.3 percent, compared with 3 percent in the first quarter of According to a recent Nielsen Global Online Survey on Internet shopping habits, more than 85 percent of the world's online population has used the Internet to make a purchase, increasing the market for online shopping by 40 percent in the past two years. Among Internet users, the highest percentage shopping online was found in South Korea, where 99 percent of those with Internet access have used it to shop, followed by the UK (97 percent), Germany (97 percent), Japan (97 percent), and the U.S. eighth, at 94 percent. Globally, the most popular and purchased items over the Internet are books, clothing, accessories, and shoes, videos, DVDs, and games, airline tickets, and electronic equipment. While the number of Internet consumers buying books online increased 7 percent in the past 3

8 two years, the biggest increase was in online purchases of clothing, accessories, and shoes, which increased from 20 percent to 36 percent. Internet purchases of videos and DVDs and airline tickets and reservations rose 2 and 3 percentage points respectively over the past two years. According to Nielsen analysts, travel is a category extremely suited to the Internet due to the ability to provide efficient access to a wide range of comparable information. Although certain areas of the travel industry were initially slow to utilize the benefits of the Internet, it is now one of the success stories of online, playing an integral part in the arrangements and experience of today's traveler". According to Forrester Research Inc., U.S. online retail sales reached $175 billion in 2007 and is projected to grow to $335 billion by Business-to-consumer e-commerce is expected to continue its double-digit year-over-year growth rate, in part because sales are shifting away from traditional brick-and-mortar stores and in part because online shoppers tend to be less sensitive to adverse economic conditions than the average U.S. consumer. However, despite this continued growth, online retailers face a number of challenges, as online stores are still broadly perceived as a second choice for shoppers. Also, online retail has become increasingly seasonal and online shoppers spend less time browsing on Web sites. Personal Income, Spending, Saving and Consumer Debt. Consumer spending slowed to growth of 1.1 percent in the first quarter of 2008, compared with growth of 2.3 percent in the fourth quarter of last year. First quarter sales of durable goods fell by 6 percent after growth of 2 percent in the last three months of Also, spending on nondurable goods (e.g., food and clothing) fell slightly following 1.2 percent growth in the fourth quarter. Meanwhile, spending on services rose 3.1 percent, up from growth of 2.8 percent in the previous quarter. Total consumer spending accounts for about two-thirds of total U.S. economic activity. According to the Commerce Department, consumer spending increased 0.8 percent in May. After adjusting for inflation, spending increased 0.4 percent. Real spending on durable goods rose 0.1 percent, despite a 1.3 percent drop in motor vehicles and parts. The overall increase was due to strong gains in furniture and household equipment and "other" durables. Real spending on nondurable goods rose 0.4 percent, with strong gains across-theboard, except for spending on gasoline and fuel oil, which dropped 0.9 percent. Real spending on services also rose 0.4 percent. The gains were widespread, as real spending on recreation (a discretionary category) jumped 1.1 percent because of increases in movie attendance and casino gambling, and real spending on electricity and gas rose 3.5 percent. Combined with upward revisions to March and April, Global Insight expects real consumer spending to advance more than 2 percent in the second quarter. Also, real GDP is likely to grow between 1.2 percent and 1.5 percent, outpacing the first quarter gain of 1.0 percent. 4

9 Personal income rose 1.9 percent and disposable personal income jumped 5.7 percent in May. The Economic Stimulus Act of 2008 boosted the income numbers and most likely played a major role in boosting spending. The government issued rebates of $48.1 billion in May, which, amounts to $577.1 billion annualized. Excluding the rebates, disposable income only increased 0.4 percent. Wages and salaries increased by 0.3 percent, after dropping 0.1 percent in April. Rental income increased by $10 billion and appears to be on the rise, corresponding to declining mortgage payments. The Economic Stimulus Act boosted transfer payments by an annualized $179.6 billion. This increase consisted of payments to those who either did not pay income taxes, or whose rebate exceeded the amount of taxes paid. The economy performed better than expected in the first half of the year, but the outlook remains gloomy. Consumers are facing higher food and energy costs, a slowing labor market, tighter credit, and declining household wealth as house prices and the stock market continue to drop. The concern is that after the economic stimulus relief fades away, the consumer will still be faced with the same underlying problems. Global Insight expects to see both real consumer spending and real GDP declining in the fourth quarter. Since income grew at a faster pace than spending, the savings rate improved to 5 percent in May from 0.4 percent in the prior month. However, this improvement is only expected to be temporary. According to Global Insight, the savings rate is expected to fall back into negative territory in the second half of this year and into Consumer borrowing picked up during the first quarter of 2008, as outstanding consumer credit rose at a 5 percent annual pace, compared with the 3.9 percent pace of growth in the fourth quarter of last year. The overall increase in the first quarter was attributable to revolving credit, which rose 6.8 percent, following growth of 8.2 percent in the previous quarter. Nonrevolving credit growth rose 3.9 percent in the January-March period, compared with growth of 1.3 percent in the prior three months. Consumer credit outstanding grew at a 3.6 percent rate in May, the same rate of growth as in April. Revolving credit expanded by $5.7 billion, following a slight decline in April. Meanwhile, installment credit decelerated from the 6.1 percent growth rate in the previous month. Most of the slowdown in installment credit was attributable to automobile sales. The average amount financed per vehicle dropped sharply from April, as consumers switched to smaller and less expensive cars. Also, the average interest rate offered by auto finance companies jumped from 4.54 percent to 5.71 percent, as auto companies attempted to curtail financial incentives. As a percent of disposable income, consumer credit dropped sharply to 23 percent, mainly because of the rise in disposable income resulting from the fiscal stimulus tax rebates. According to Global Insight, overall consumer credit remained relatively strong during the 5

10 first quarter. However, the volume of mortgage credit has decelerated sharply. This suggests that to some extent consumers have substituted credit card debt for home equity lines of credit, as the recent downward pressure on home prices has collapsed home equity sources of credit. Business Activity Industrial Production and Capacity. Industrial production rose 0.5 percent in June, following two straight months of declines. For the second quarter as a whole, industrial output fell at a 3.1 percent annual rate, compared with a 0.5 percent increase in the first quarter of Within the manufacturing sector, output fell 3.7 percent, with declines generally across-the-board. Also, core manufacturing was down 3.2 percent during the April- June period. The second quarter output at mines slowed to a growth rate of 1.4 percent, following 3.1 percent growth in the first quarter. Utilities production fell 3.7 percent, after a gain of 9.6 percent during the first three months of In June, manufacturing output advanced 0.2 percent and utility output rose 2.1 percent. The May decline and subsequent June rebound in the utility sector was weatherrelated seasonal fluctuations. Within the manufacturing sector, motor vehicle output rebounded from the American Axle strike. Light-vehicle assemblies rose from a million-unit annual rate in May to a 9.1-million rate in June, which was very close to the prestrike level of production. The high-technology segment showed a strong 1.8 percent gain in June while core manufacturing (i.e., excludes high tech sector and motor vehicles) recorded a 0.2 percent decline. Total industrial capacity utilization rose slightly to 79.9 percent in June, with the operating rate at manufacturers unchanged at 77.6 percent. The operating rate at mines rose to 91.2 percent and the utilities rate increased from 84.9 percent to 86.5 percent during the month. Overall industrial capacity was down compared with the average of the period, but was 1.8 percent above June Manufacturing orders rose 0.6 percent in May, mostly due to oil. Excluding petroleum and coal, orders were nearly flat, reflecting continued sluggishness in the manufacturing sector. However, the advance estimates for nondefense capital goods orders and shipments (excluding aircraft) were revised upward, which has positive implications for the second quarter performance in this sector of the economy. Inventories rose 0.5 percent in May, which was close to the average of March and April. With sales flat and inventories rising, the inventory/sales ratio increased to 1.23 months' worth of shipments in May. 6

11 Housing and Construction. According to the Commerce Department, housing starts rose 9.1 percent to a seasonally adjusted annual rate of 1.07 million units in June. Singlefamily starts were down 5.3 percent while multiple-unit starts surged 42.5 percent. Also, building permits were up 11.6 percent during the month. New building codes enacted by New York City accounted for the large monthly increase in permits and starts. Excluding the Northeast, permits were flat and starts fell 4 percent. According to the report, permits in the Northeast increased by 12,000, with most of this gain coming from New York City. This number was annualized (i.e., multiplied by 12) and added 126,000 to the monthly total, distorting the overall figures. The key statistics in the June report were the single-family permits numbers, which are considered leading indicators of future housing activity. Single-family permits fell 3.5 percent, and were down in three of the four regions. Permits increased 1.4 percent in the West, where they have been trending upward since January. According to Global Insight, June's single-family permits numbers point to further drops in single-family housing starts over the next two to three months nationally, and in three of the four regions. The housing construction outlook worsened at the beginning of the third quarter. Although Freddie Mac and Fannie Mae pose a serious problem for housing, the bigger issue for homebuilders is financing. Many regional banks, which homebuilders depend on for financing, have run into problems because of rising delinquency rates. Another problem for homebuilders is inventories. The number of unsold homes on the market is at or near record highs. Reducing inventories means that housing prices must drop much further, and that builders refrain from putting up new homes. Global Insight projects housing starts to drop more than 15 percent from June levels, and not show a rebound until next year. Starts are forecast to fall below the 1-million mark this year. This last happened in 1945, when the United States was fighting World War II and only 326,000 units were started, according to the Census Bureau's Historical Statistics of the United States, Colonial Times to In the fourth quarter, Global Insight expects starts to drop to an annualized 818,000 units, which would also be a record low. According to the Census Bureau, construction spending fell 0.4 percent in May, as another decline in spending on single-family housing offset small gains in public, nonresidential, and multi-family construction. Spending on nonresidential construction continued to hold up, despite the weakening economy and difficulties within credit markets. th Spending in May increased for the 15 time in 16 months and was up 16.6 percent from a year earlier. Lodging, office, educational, amusement and recreation, transportation, power, and manufacturing all posted year-over-year double-digit gains. Despite these solid numbers, Global Insight expects private nonresidential construction to start contracting later this year because of tight credit, overbuilding, and the side-effects of the economic and housing slowdowns. 7

12 Spending on single-family homes dropped 3.4 percent, the second-smallest drop in ten months. Going forward, the declines are expected to continue shrinking, and the housing sector should become a progressively smaller drag on real GDP growth. According to Global Insight, residential investment is forecast to add to economic growth starting in the second quarter of Meanwhile, public construction posted a moderate 0.4 percent gain in May. This category has been essentially flat for the last seven months. Real government construction spending fell in the first quarter, and further declines are expected over the next three to four quarters. May's release on construction spending contained a significant definitional change. The Census Bureau no longer counts spending on private residential improvements to rental, vacant, or seasonal properties as construction spending. This definitional change reduced construction spending by about 3 percent during The release also contained data revisions to most series dating back to January Most of them, which are the result of more complete data, were minor. However, the revised data show manufacturing spending up 17 percent in 2006 (previously 14.4 percent) and 20.7 percent in 2007 (previously 10 percent). New home sales, another bellwether of future housing activity, fell 2.5 percent in May, to a seasonally adjusted 512,000 annual rate. Regionally, sales fell in the Northeast and West, but rose in the Midwest and were flat in the South. Three-month moving averages show that sales continue to drop nationally and in all four regions of the country. The number th of unsold homes fell to 453,000, the 13 consecutive monthly decline. The inventory measure (i.e., the months' supply of new homes at current sales rates) rose slightly to 10.9 months in May. The average price of a new home increased 0.5 percent from April and was 5.4 percent above May Despite the decline in the number of unsold homes, inventories remained bloated at the end of May, as half of completed new homes were still for sale after 8.5 months, the highest reading since According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 6.32 percent in June, up from 6.04 percent in May. In June 2007, the rate averaged 6.66 percent. Existing home sales rose 2 percent in May, to a 4.99-million-unit annual rate. Singlefamily home sales rose 1.6 percent to 4.41-million units while co-ops and condos increased by 5.5 percent, after falling 5.2 percent in April. Regionally, sales were up in the West, Midwest and Northeast, but down in the South. Banks in the West have been selling foreclosed homes at deep discounts. The median price of homes fell 16 percent from May 2007 to May 2008 out West, more than twice the national rate. As a result, sales in the West have risen 15 percent since October of last year. Nationally, the median price of an existing single-family home was down 6.8 percent year-over-year while the average price fell 7.2 percent. The housing inventory fell from the 10.7 months of supply at the current sales rate in April to a 10.4-months of supply in May. Normally, the supply would be between 5 and 8

13 6 months. It is uncertain if sales are rising enough to bring inventories down, which is necessary for the housing market to improve. A tight credit market, job losses, low consumer sentiment and record high gasoline prices do not provide the conditions necessary to sustain strong sales growth for existing homes. Corporate Profits. According to the Quarterly Financial Report, profits of manufacturing companies were up 1 percent from the first quarter of 2007 to the first quarter of The increase was attributable to nondurable goods, which posted increases in the food and beverage and tobacco products industries. Also, chemical manufacturing and petroleum and coal products posted increases in quarterly profits. Within the durable goods category, primary metals, machinery, transportation equipment and furniture all posted declines during the first quarter. Mining profits were up 23 percent during the period while wholesale trade industry profits fell 27 percent. According to Global Insight, first quarter 2008 profits nationwide rose by 1 percent from the year-earlier period. However, a decline in profits is forecast for the remainder of this year and for most of International Trade According to the Commerce Department, the U.S. trade deficit in goods and services narrowed in May to $59.8 billion, from $60.5 billion in April. The trade deficit had been expected to widen in May because of higher oil prices, but instead it narrowed slightly as the volume of petroleum imports plunged 10.5 percent to the lowest level since September Even allowing for weaker U.S. demand for gasoline, which would tend to reduce the need for imported oil, import volumes were exceptionally low in May. According to Global Insight, oil import volumes are unlikely to remain low in the coming months, and higher oil prices are projected to translate into a larger trade deficit. Exports had rebounded sharply in April, after a dip in March, and they kept their upward momentum in May. The $1.4-billion rise in exports was led by a $1.2-billion increase for industrial supplies. Goods exports rose 0.7 percent in both volume and value, so the gains were not price-driven. On the import side, the overall import bill rose by $0.7 billion. The increase would have been larger except for a decline in imports of petroleum and products. The largest import increase ($1.5 billion) was in consumer goods, particularly TVs, toys and games, apparel, furniture, and household appliances. This suggests that imports were brought in to profit from consumer spending driven by the economic-stimulus payments that began to be paid out at the end of April. In contrast, the stimulus payments have not prevented a steep decline in spending on light vehicles. Weak sales and production levels for vehicles were reflected in a drop in imports of autos and parts during May. Combining the April and May data, foreign trade will most likely make a large positive contribution to GDP growth in the second quarter. Export volumes surged on robust global demand and the weaker dollar while import volumes fell on weak growth in U.S. 9

14 domestic spending. According to Global Insight, foreign trade is expected to add almost 2 percentage points to GDP growth in the second quarter, resulting in overall GDP growth of more than 2.0 percent. Among major U.S. trading partners, the deficit with China expanded to $21 billion in May, up from $20.2 billion in April. The deficit with Europe narrowed to $7.9 billion from $8.5 billion in April and the with deficit with Mexico fell to $6.6 billion. Also, the deficit with Japan decreased from $7.6 billion to $5 billion. The trade deficit with Canada, the largest U.S. trading partner, narrowed to $5.4 billion in May. Surpluses were recorded with Australia, Hong Kong, Singapore, and Egypt. The deficit in the current account balance, which is the widest measure of U.S. trade, including goods and services, income, and net unilateral current transfers, expanded to $176.4 billion in the first quarter of 2008 from $167.2 billion in the fourth quarter of last year. An improvement in the deficit on non-oil goods and services offset a smaller income surplus and a wider deficit on government transfers. However, the overall current-account deficit still worsened by $9.1 billion, as the oil deficit increased by $10.3 billion. The overall goods and services balance was little changed in the first quarter, at $174.9 billion, compared with $173.8 billion in the fourth quarter. The non-oil goods and services deficit shrank due to a combination of much slower growth in U.S. demand, solid growth in overseas economies, and a declining dollar. However, the rising price of oil is raising the oil import bill. In the first quarter of 2008, the oil deficit overwhelmed the non-oil improvement and widened the trade gap. According to Global Insight, this trend is expected to continue for the remainder of In the rest of the current account, the income surplus narrowed to $29.8 billion, from $36.3 billion in the fourth quarter. The reason for the income surplus is because the United States earns a much higher rate of return on its foreign assets (largely direct investments) than the rest of the world earns on U.S. assets (largely portfolio assets like Treasuries or government agency bonds). However, in the first quarter, U.S. receipts on overseas investments fell, offsetting a drop in U.S. payments on foreign investments in the United States. Since oil prices have risen much higher in the second quarter than in the first quarter (when the average price was still below $100/barrel), the overall current-account deficit is expected to widen further over the rest of the year. Global Insight expects the deficit to exceed $200 billion in both the third and fourth quarters. 10

15 Public Policy The Federal Reserve Board voted to leave interest rates unchanged at its June 25, 2008 FOMC meeting. Previously, the Fed lowered the federal funds rate target by 25 basis points to 2 percent at the end of April. This marked the seventh rate cut by the central bank since September Also, the discount rate was lowered by the same 25 basis points in April, from 2.5 percent to 2.25 percent. The discount rate is charged on the Federal Reserve Bank s short-term, overnight loans to banks in sound financial condition. The Federal Open Market Committee (FOMC) meeting minutes from June indicated that overall economic activity continued to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters. The Committee expects inflation to moderate later this year and next year. However, in light of continued increases in the prices of energy and some other commodities, uncertainty about the inflation outlook remains high. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. According to Global Insight, the Fed is expected to hold interest rates steady throughout the remainder of this year. The consumer price index (CPI) increased 1.1 percent in June, the largest monthly increase since June 1982, mostly due to an acceleration in energy prices. Overall energy prices surged 6.6 percent, after rising 4.4 percent in May. Gasoline prices jumped 10.1 percent in June. Also, heating oil and natural gas were up 10.4 percent and 4.9 percent, respectively. Over the first six months of this year, energy prices rose at a 29.1 percent annual pace. The rise in food prices picked up in June, increasing 0.8 percent following a more moderate 0.3 percent gain in May. Sharp increases in the prices of fruits and vegetables and dairy products, along with higher restaurant prices, contributed to the overall rise in food prices. During the second quarter of 2008, overall consumer prices advanced at a 7.9 percent annual rate, compared with a 12-month (unadjusted) increase of 5.0 percent. Excluding food and energy, "core" consumer prices rose 0.3 percent, following a 0.2 percent increase in May. Increases in primary residence and owners equivalent rents, which together comprise nearly 40 percent of the core index, picked up in June. Also, public transportation costs rose 3.8 percent and airfares were up 4.5 percent. During the second quarter, core consumer prices rose 2.5 percent. According to Global Insight, core inflation is only expected to continue rising through mid-2009, as the surge in energy and other commodity costs are passing through to overall consumer prices. 11

16 According to the Congressional Budget Office (CBO), estimates show that the federal government recorded a budget deficit of $268 billion in the first nine months of fiscal year 2008, $148 billion more than in the same period a year earlier. Roughly $79 billion of the higher deficit was attributable to the distribution of the tax rebates enacted in the Economic Stimulus Act of Outlays grew by more than 6 percent, outpacing revenues, which only rose by 1 percent from the first nine months of fiscal year In the first nine months of the fiscal year, receipts fell about $16 billion below the same period in Excluding the effects of the tax rebates, total receipts were up by about $35 billion (i.e., 2 percent) above the first nine months of Revenues from individual income and payroll taxes for the first nine months of the fiscal year showed year-over-year gains. Withholding for individual income and payroll tax receipts increased by about $59 billion (i.e., 4.5 percent), an indication of continued increases in wages and salaries. In the April-June quarter, withholding rose by about 3 percent. Nonwithheld receipts of income and payroll taxes increased by $21.5 billion, or 5 percent, in the first nine months of the fiscal year. However, most of that increase occurred during the February-May tax filing season and stemmed from economic activity in Refunds of individual income tax receipts rose by $65 billion, with about $51 billion of that gain resulting from rebate payments. Net corporate receipts declined by about $41 billion (i.e., 15 percent) during the first three-quarters of the fiscal year. Receipts fell by 13 percent in the April-June quarter, the period when most firms made their first two quarterly payments for tax year The decline may indicate continued weakness in corporate earnings. Some of that quarterly decline may also be attributable to the effects of enhanced business depreciation provisions enacted in the Economic Stimulus Act of The other, smaller sources of receipts (i.e., Federal Reserve, excise taxes, customs duties, estate and gift taxes, and miscellaneous fees and fines) all increased during the first nine months of the fiscal year, with overall gains of about $11 billion. Nearly half of that increase came from payments to the Treasury by the Federal Reserve, mainly due to increases earlier this year in the yields on its portfolio of securities and gains on its holdings of assets denominated in foreign currencies as the dollar has depreciated. After adjusting for shifts in the timing of certain payments, spending through June was about 7 percent higher than in the first nine months of In the absence of rebate payments, which added an estimated $28 billion to the outlay total through June, spending would have increased by about 6 percent. Defense outlays were up by 10 percent over this period while nondefense spending, excluding rebate payments, rose by 5 percent on an adjusted basis. 12

17 Total spending for the three major entitlement programs (i.e., Social Security, Medicare, and Medicaid) grew more slowly in the first nine months of 2008 than in fiscal year 2007 as a whole, increasing by an average of 5 percent through June compared with 7 percent last year. The slower pace this year is partly due to smaller cost-of-living adjustments for Social Security benefits and reductions in Medicare payments to prescription drug providers to correct for overpayments made in Excluding rebate payments, outlays for other programs and activities rose by about 5 percent through June. Several programs experienced much faster growth, particularly veterans medical care, unemployment benefits, and food and nutrition programs, each of which posted double-digit gains relative to the first nine months of Those increases were partially offset by higher receipts from federal oil and gas leases and by proceeds from the 2008 spectrum auction. Outlays for net interest on the public debt were up by 3.5 percent relative to those outlays in the first nine months of 2007, primarily because of the rising cost of inflation-indexed securities. On March 3, 2008, the CBO released its most recent set of budget projections for fiscal years 2008 through According to those projections, the budget deficit is expected to rise to $357 billion in From 2009 to 2011, the deficit begins to improve. Thereafter, the federal government is projected to record budget surpluses from 2012 through Outlook According to Global Insight, second quarter 2008 GDP growth is forecast to show an increase of 1.8 percent. According to preliminary data, the first half of 2008 turned out better than expected. As a result, the GDP growth forecast for 2008 is higher than previously forecast (at 1.6 percent, rather than 1.4 percent), but the growth forecast for 2009 was lowered from 1.3 percent to 0.9 percent. The fiscal-stimulus package has (at least temporarily) given consumers some relief from soaring energy and food costs. Global Insight expects consumer spending to rise 2.7 percent at an annual rate in the second quarter (3.5 percent growth excluding the auto sector). However, as the stimulus effect fades, declines in consumer spending and GDP are likely in both the fourth quarter of 2008 and the first quarter of Also, a downturn in nonresidential construction spending and state and local government spending is projected by the end of this year. A sustainable economic recovery is not expected until mid-2009, as house prices bottom out, the Fed's low-interest-rate reductions become more effective, and financial institutions begin to lend more freely. 13

18 UNITED STATES GRAPHIC & STATISTICAL APPENDIX UNEMPLOYMENT RATE CONSUMER PRICE INDEX...16 PRODUCER PRICE INDEX...17 GROSS DOMESTIC PRODUCT...18 INDUSTRIAL PRODUCTION INDEX...19 HOUSING STARTS...20 CORPORATE PROFITS...21 SELECTED U.S. INTEREST RATES...22 TRADE-WEIGHTED EXCHANGE RATE OF THE DOLLAR

19 U.S. CIVILIAN UNEMPLOYMENT RATE (SEASONALLY ADJUSTED QUARTERLY RATES) Rate Rate Forecast January February * March April May * June July August * September October November * December *Global Insight forecasts Source: U.S. Department of Commerce, Bureau of Economic Analysis 15

20 CONSUMER PRICE INDEX GROWTH RATES Rate CPI Forecast * * * * (1.5) *Global Insight forecasts Source: Bureau of Labor Statistics 16

21 PRODUCER PRICE INDEX GROWTH RATES Rate PPI Forecast * * * * (3.3) *Global Insight forecasts Source: Bureau of Labor Statistics 17

22 GROSS DOMESTIC PRODUCT GROWTH RATES Rate GDP Forecast Current Current Real Dollar Real Dollar Growth Growth Growth Growth Rate Rate Rate Rate * * * (1.7) * (0.7) *Global Insight forecasts Source: U.S. Department of Commerce, Bureau of Economic Analysis 18

23 INDUSTRIAL PRODUCTION % Change J 2006 M M J S N J 2007 M M J S N J 2008 M M January 0.1 (0.4) 0.2 February (0.1) 0.7 (0.4) March 0.2 (0.1) 0.1 April (0.7) May (0.1) 0.0 (0.2) June July August September (0.4) 0.3 October (0.1) (0.4) November (0.2) 0.4 December Source: Federal Reserve Board 19

24 HOUSING STARTS ANNUAL PERCENT CHANGE % Change Actual Forecast (31.4) (21.3) (23.7) 4 (3.5) 4 (26.0) (27.9) * (33.4) * (31.9) * (28.9) * (21.9) 2 (9.3) 3 (18.9) 4 (24.8) *Global Insight forecasts Source: U.S. Census Bureau 20

25 CORPORATE PROFITS ANNUAL PERCENT CHANGE % Change Actual Forecast * (5.5) * (2.9) * (4.8) * (7.5) *Global Insight forecasts Source: U.S. Department of Commerce, Bureau of Economic Analysis 21

26 SELECTED U.S. INTEREST RATES 8 6 Rate Jan Feb Mar Apr Ma Jun Jul Discount Prime 90-Day T-Bills 20-Year Bonds Line 5 July 21, 2008 Prime Rate 5.00% 90-Day Treasury Bills 1.52% Federal Discount Rate 2.25% 20-Year Treasury Bonds (7/14/2008) 4.62% 22

27 U.S. DOLLAR REAL TRADE-WEIGHTED EXCHANGE RATE AVERAGE Rate * 3* 4* 1* * *Global Insight forecasts Source: U.S. Department of Commerce, Bureau of Economic Analysis 23

28 West Virginia Economic Overview Second Quarter 2008 Introduction As measured by the coincident index published by the Federal Reserve Bank of Philadelphia, the West Virginia economy declined by 0.4 percent in the second quarter of 2008 compared to the corresponding period of The index is a measure of current economic activity that combines indicators for non-farm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements. West Virginia was one of fourteen states that exhibited declines in the index. The indexes for Ohio and Pennsylvania were also down at 0.7 percent and 0.9 percent, respectively. With the majority of states showing growth, the overall national index increased by 1.4 percent. Although the index reflected a decline, West Virginia total non-farm employment grew slightly in the second quarter of Total non-farm employment for the April to June period was 0.4 percent above the level for the corresponding period of However, the job growth was attributable to increases in the service-providing sector that offset job losses in the goods-producing sector. Due to a five to one ratio of service-providing jobs to goods-producing jobs, an increase of 0.7 percent in service related jobs more than offset a decline in goods-producing jobs of 1.4 percent. Within the goods-producing sector, a 3.8 percent increase in mining jobs dampened the job losses in construction and manufacturing of 2.3 percent and 2.9 percent, respectively. Labor Market Indicators Unemployment. West Virginia s unadjusted unemployment rate rose four-tenths of a percentage point to 5.5 percent in June. The total number of unemployed workers in West Virginia rose from 41,500 in May to 45,600 in June. Total unemployment was up 7,500 over a year ago. County Unemployment. Thirty-six counties had unemployment rates above the State unadjusted rate of 5.5 percent in June. Six of these counties had unemployment rates of 7.5 percent or above. Pocahontas County had the highest unemployment rate, 8.9 percent, followed by Mason County with a jobless rate of 8.5 percent. Other counties with unemployment rates of 7.5 percent or above were Clay, McDowell, Roane and Wetzel. Monongalia County had the lowest unemployment rate, 4.0 percent, followed by Putnam County with a jobless rate of 4.3 percent. Hampshire, Kanawha and Preston counties all had unemployment rates of 4.6 percent. 24

29 Employment. Total non-farm payroll employment rose by 900 to 766,000 in June as gains in the goods-producing sector more than offset losses in the service-providing sector. Employment in the goods-producing sectors rose by 1,300 due to a seasonal gain of 800 in construction employment and an increase of 500 jobs in natural resources and mining. Manufacturing employment was unchanged from May to June. The employment level in the service-providing sectors fell by 400 over the month due to seasonal declines attributable to the end of the school year. Employment declined by 3,400 in the government sector and by 700 in educational and health services. The largest gains were in the leisure and hospitality and professional and business services sectors with increases of 1,500 and 1,200, respectively. Employment rose by 600 in the trade, transportation and utilities sector while the financial activities and other services sectors posted gains of 200 each. Information employment was unchanged over the month. Over the past year, total non-farm payroll employment in West Virginia rose by 1,600, as a gain of 3,800 in service-providing sectors more than offset the loss of 2,200 in goods-producing sectors. Major gains were reported in educational and health services, 2,300; professional and business services, 1,900; and natural resources and mining, 800. Other sectors with year-over-year gains were government and leisure and hospitality. Manufacturing employment fell by 2,100 with losses reported in both durable goods and nondurable goods industries. Employment in the trade, transportation and utilities sector fell by 1,000 while employment in the construction sector fell by 900. Other sectors with declining employment were other services and information. Employment was unchanged over the year in the financial activities sector. Despite the national economic downturn, Global Insight expects West Virginia s employment growth to improve over last year by a very small margin. Manufacturing and construction are both expected to post declining payrolls in 2008, but education and health services will add more new jobs, mainly because an expanding health-care industry is needed to serve the State s large number of retirees. Employment growth is expected to steadily climb each year until 2011, averaging 0.9 percent during The main catalyst to the recovery is the professional and business services sector, which is expected to post an average annual growth rate of over 3 percent through The manufacturing sector will stabilize and begin adding to payrolls toward the end of 2009 due to expected employment growth in wood products, fabricated metals and transportation equipment manufacturing. As the housing market recovers, construction employment will as well. Earnings. Hourly earnings for private sector production and nonsupervisory employees fell from $15.20 in April to $15.19 in May, the last month for which data is available. The May 2008 average was above the May 2007 average of $ Average weekly earnings were $ in May, down from $ in April but above May 2007's average earnings of $ The average number of hours worked per week in May 2008 was 34.5, unchanged from April but up from the 34.4 average of a year ago. 25