www.csb.uncw.edu/cbes Economic Barometer CAMERON SCHOOL OF BUSINESS H. DAVID AND DIANE SWAIN CENTER FOR BUSINESS AND ECONOMIC SERVICES Volume IV, Issue 2 April 2012 Inside this issue: Labor Market Improvement Household Demand Household Demand Continued Business Demand Learn about our benefactors, H. David and Diane Swain at www.csb.uncw.edu/cbes 2 2 3 4 The Outlook 5 Population Change Unemployment Rates Unemployment Rates Continued Employment and Wages 5 5 6 6 Retail Sales 7 Occupancy Tax Collections Single-Family Homes 7 8 Mixed Signals Observers have become more upbeat on the economy over the past couple months, based largely on a firmer tone to the labor market. Still, a number of other indicators suggest that overall demand has yet to strengthen decisively. What s going on? Growth in real GDP has picked up a bit in the past two quarters, but from a very weak pace over the first three quarters of 2011, as shown in the table below. Quarter Growth in Real GDP 2011 Q1 0.4 Q2 1.3 Q3 1.8 Q4 3.0 2012 Q1 e 2.5 e--estimate Annual rate, in percent It is worth noting that the economy needs to grow nearly 2.5 percent at an annual rate to avoid slack from growing in labor and other resource markets. In other words, based on standard relationships, growth over the past two quarters has been about in line with the economy s potential to grow, perpetuating a recovery that has been one of the most anemic on record. The chart above, showing four-quarter growth, illustrates the weak recovery. Historically, recoveries from deep recessions have been brisk. However, growth in the current episode has been subdued even when compared to the characteristically mild upturn that followed the mild recession of the early 2000s.
Page 2 Economic Barometer Labor Market Improvement Despite tepid growth, the unemployment rate has fallen 0.8 percentage points since last September. At the same time, initial claims for unemployment insurance a closely watched weekly indicator of the labor market have dropped to their lowest level in four years. As shown in the chart below, initial claims are approaching an area that characterized the strong jobs market of the mid-2000s. Are the labor market data telling us that the economy is actually a good bit stronger than otherwise meets the eye? There are a couple reasons to believe that the labor market readings over recent months have been overstating strength in the economy. Most obvious is the unusually mild winter of 2011-2012. This has not only helped the construction industry, but other sectors as well. Less apparent is the likely catch up that has taken place from the recession years of 2008 and 2009. During these years, employers slashed payrolls by much more than implied by the plunging economy. Employers facing massive uncertainty about the extent of the economic collapse and losses of access to credit went into survival mode, managing their businesses with extremely lean workforces. Indeed, the unemployment rate rose a full percentage point above what would have been suggested by the economy, weak as it was. Since last fall, employers have been returning to a more normal alignment of their payrolls with their production schedules. As a result, roughly 70 percent of the labor shortfall of 2008 and 2009 has been made up. These factors suggest that prospectively the labor market will more closely track the vigor in aggregate demand. Household Demand Turning to aggregate demand, household consumption spending closed out last year on a sluggish note, but has firmed a bit in the opening months of this year. Much of the recent expansion in consumption owes to solid growth in outlays on durable goods, including motor vehicles. Indeed, spending on consumer durables has risen above the pre-recession peak, shown in the chart on the next page. No doubt the improved jobs market has enabled some households to step up their spending on these big-ticket items. Also making a contribution has been improving access to consumer credit. Further, it is likely that pent-up demand has played an important role, something that will likely run its course before long.
Volume IV, Issue 2 Household Demand Continued Page 3 Limiting any improvement in household spending will be household net worth, shown in the chart below, which is being held down by ongoing declines in home prices. The continuing overhang of residential properties both listed and shadow inventories is depressing prices and keeping new home construction at levels not far from recession lows. Moreover, the run up in fuel prices recently is sapping the purchasing power of household earnings and will be restraining consumer demand.
Page 4 Economic Barometer Business Demand In the business sector, corporate profits continue to reach new record levels, as shown in the chart below. Moreover, firms are experiencing improving credit availability and are sitting on mountains of cash. At the same time, returns on new investments appear attractive, whether financed with cash or credit. Nonetheless, businesses have been cautious in ordering capital goods. This can be seen in the next chart. Orders for investment goods have flattened out over recent months, after a run-up that was fueled in part by replacements postponed by the recession. Reportedly, a high degree of concern about the tax, mandate, and regulatory climate have imparted a reluctance by businesses to undertake projects that otherwise would be deemed worthwhile and would get the green light. Furthermore, business construction in the nonresidential property market will remain stagnant until the excess capacity caused by previous overbuilding combined with slack in the economy is absorbed.
Volume IV, Issue 2 Page 5 The Outlook With this background in mind, economic growth will continue to run faster than the sub-2 percent pace of 2011. However, neither the household nor the business sector can be counted on to provide the lift needed to sustain the progress in the labor market that has been enjoyed since last fall. Budget pressures at all levels of government and accompanying fiscal restraint will pose headwinds to growth, as they have for a while. On the monetary side, the Fed s unprecedented degree of monetary stimulus will likely remain in place for another two years or longer. However, drawing to an end by mid-year will be the Fed s maturity extension ( Operation Twist ) program, which will place a little upward pressure on intermediate- and long-term benchmark interest rates. In these circumstances, returning to normal is still some distance away. The persistence of economic slack will continue to keep inflation in check. Population Change Data from the 2010 U.S. Census show population growth rates over the last decade in the counties of Southeastern North Carolina in excess of 25 percent. Brunswick County was the second fastest growing county in the state over the past decade. New Hanover County was the ninth largest county, and Wilmington was the eighth largest city. The rankings for New Hanover County and Wilmington are unchanged from 2000. Population growth in the state was almost double that of the nation. Source: Bureau of the Census, U.S. Department of Commerce. Unemployment Rates The national unemployment rate has been consistently lower than that for the state and the Wilmington MSA (Brunswick, New Hanover, and Pender Counties) since the third quarter of 2008. Rates in both the state and the MSA have been falling since late 2011. The national rate was relatively stable over the same period. Given projected growth rates in national, state, and local economic activity, it is highly unlikely that unemployment rates will change much over the next 12-18 months. Source: Division of Employment Security, North Carolina Department of Commerce.
Page 6 Economic Barometer Unemployment Rates Continued Employment and Wages Of the ten largest employers in the Wilmington MSA in the third quarter of 2011, only three sectors (health care and social assistance, professional and technical services, and public administration) show employment gains over the third quarter of 2007. The three sectors losing the most jobs over the same period were construction, manufacturing, and administrative and waste services. Employment changes in the MSA reflect the impacts that the national recession had on the MSA economy. Source: Division of Employment Security, North Carolina Department of Commerce.
Page 7 Economic Barometer Retail Sales Following steep declines in 2009, retail sales in area counties and in the state have risen over the past two years. For the year ending January 2012 (February 2011-January 2012), sales are up from their comparable year-earlier levels. Sales have grown more rapidly in area counties than statewide. Growth has been especially strong in Pender County. Retail sales had recouped much of the losses that they experienced during the most recent recession. Source: North Carolina Department of Revenue. Following two consecutive years of rather large decreases, room occupancy tax collections in New Hanover County rebounded dramatically in 2010 and 2011. For the year ending January 2012 (February 2011 - January 2011), they are up 7 percent. Tourism activity is recovering from the hits it suffered during the most recent recession. Occupancy Tax Collections Source: New Hanover County Manager s Office.
H. David and Diane Swain Center for Business and Economic Services H. DAVID AND DIANE SWAIN CENTER FOR BUSINESS AND ECONOMIC SERVICES Computer Information Systems Building, Suite 1004 University of North Carolina Wilmington 601 South College Road Wilmington, N.C. 28403 Phone: 910-962-2237 Fax: 910-962-3579 E-mail: mackethanj@uncw.edu Single-Family Homes The market for existing single-family homes in the area served by the Brunswick County Association of Realtors (BCAR) has been relatively stable since the end of 2006. Since year-end 2008, the same can be said for the area served by the Wilmington Regional Association of Realtors (WRAR). Since stabilizing, both areas show an annual cycle with virtually no growth. In general, average prices in the BCAR area have exceeded those in the WRAR area, and both have been above those for the state. Even though sales have probably stabilized, home prices will likely continue to fall, although they are falling less rapidly than they were 9-12 months ago. Source: North Carolina Association of Realtors. WWW.UNCW.EDU/CBES Dr. Gary Miller Chancellor, UNCW Larry Clark Dean, Cameron School of Business Dr. William Sackley Director of SCBES Dr. William (Woody) Hall Senior Economist Dr. Thomas Simpson Executive in Residence Barb Biehner Program Director Jennifer Mackethan Administrative Assistant Jennifer Murphy Graduate Research Assistant The H. David and Diane Swain Center for Business and Economic Services at UNC Wilmington is the business research and outreach division for the Cameron School of Business. Center staff collect and analyze local, state, and national economic data that impact our region and its growth. The H. David and Diane Swain Center for Business and Economic Services also provides professional and executive educational opportunities for organizations and professionals with major emphasis on business training, entrepreneurship and real estate. For more information about The H. David and Diane Swain Center for Business and Economic Services, visit our Web site, www.uncw.edu/cbes or contact Jennifer Mackethan at mackethanj@uncw.edu.