Economic Update (August 6th Edition)

With the plethora of information out there in recent weeks, including release of new GDP and State and Local Employment Data, it doesn’t hurt to take a look at what’s going on.

Don’t forget to check out the Economic Update presentation from our Summer Conference

State & Local Employment – June 2014

These stats were published early last week and reflect the impact of summer transition for education and other academic year-oriented workers. Prior to the recession, these employment reductions would be offset by increases due to summertime employment, often by high school and college students. While that is still the case in selection locations (often tied to resorts and vacation destinations), much of North Carolina does experience employment decline in June, though the unemployment rate remains relatively unchanged due to a corresponding decrease in the active labor force (they’ll be back in the fall, or have retired).

Take a look at the following charts to see how things are going right now for North Carolina Counties and MSAs:

Jun14NCempMSA

 

Jun14NCcounty12mth

 

Jun14NCcountyYr14As you can see, despite the June adjustment, most North Carolina counties have experienced employment growth since the start of 2014, and the majority are ahead of their counts from last June.

Other Sources

The following notes are pulled from a variety of sources, including multiple Wells Fargo Economics reports. You also might want to take a look at the following reports and updates published this summer by prominent NC economists:

Dr. Michael Walden’s Summer 2014 Economic Outlook

Dr. John Connaughton’s Babson Capital/UNC Charlotte Economic Forecast

GDP/GSP (BEA, Connaughton)

  • National: 2nd Quarter up 4% (year-to-year), real GDP 2.4% (up less than 1% compared to revised 1st Quarter); 1.8% growth in 2013; strong export growth, stable trade deficit
  • Statewide: +2.3% in 2013 (first year outpacing National growth since recession); Manufacturing -0.4%

Employment (BLS & NC Commerce, 8/1/14)

  • National (July): Up 209,000, 12-month average at 214,000 (still below break-even), participation still at 63%; increase in health benefit costs still outpacing total benefits, 50% more growth than wages
  • North Carolina (June): Down 26,700 for month, up 57,000 year-to-year; 2013 +1.8%,-0.2% in Manufacturing; Since 2010, strongest growth in Professional/Business Services, weakest in Manufacturing and Construction; private sector real hourly wages declined 4 of last 5 years

Short-Term Economic Outlook (Leading Economic Indicators, Walden)

  • National: Increased 0.3% in July, up 3% in 2014
  • North Carolina: No change for July, up 4.5% year-to-year; unemployment claims down 50%, permits down 13%, employee hours up 5.6%, earnings up 3.5%

Business & Consumer Confidence (Multiple Sources)

  • Small Business Optimism improving, but still below growth point; hiring plans improving; most concerned about impact of regulations
  • Consumer confidence improving, up for July but still below pre-recession levels
  • Spending growth still outpacing income

Retail Sales (Census & NC Department of Revenue)

  • National: +4.3% year-to-year, driven by vehicle sales; +3.6% for 2014
  • North Carolina: Up 3% for 2014

Loan Demand (Senior Loan Officer Opinion Survey)

  • Home loan demand back up to summer 2013 levels (cycle restored), more banks loosening standards
  • Strong demand for auto loans and revolving debt
  • Stronger cyclical demand for commercial & industrial loans (still not at pre-recession levels)

Construction (US Department of Commerce)

  • Total current activity value still below $1 Trillion (pre-recession high, $1.2 Trillion)
  • Residential construction fell slightly in June, still up 7% compared to last year
  • Non-residential construction down nearly 3% in June, still up nearly 5% compared to last year
  • State & local government activity still sluggish (no growth since end of recovery)
    • Analysts consider this a “significant drag” on economic activity

Industrial Output (ISM; Richmond Fed)

  • Nationally: Factory orders up 3%, shipments up 4%, composite index recovering from winter slump
  • Mid-Atlantic (IncludesNC): Strong outlook across all indicators

Non-Manufacturing Output (ISM; Richmond Fed)

  • National: Composite, new orders and employment indices up to pre-recession levels, outlook positive
  • Mid-Atlantic (IncludesNC): Positive movement across indicators, strong expectations for future demand
  • Carolinas: Positive outlook, though softening some; challenge finding qualified workers

Consumer Spending (BLS)

  • 4% growth in personal income and personal expenditures
  • Significant inflation impact on expenditures
    • Core: +2.5% pace
    • Total: +3.0% pace
  • Strong growth in durable growth sales, up 14% in last 3 months, 5.8% year-to-year

Vehicle Sales (Wells Fargo, ESRI)

  • Annualized rate up 1 million in 2014 (16.5 million)

Housing (Multiple Sources)

  • Starts improving, but NOWHERE near pre-recession levels
  • Multi-family > Single-family
  • National and State prices up 5%
  • Millenials aren’t buying house (and maybe won’t)

An Agricultural State (Wells Fargo, Connaughton)

  • 1.6% of GDP (significantly greater than neighboring states), $7.7 Billion in Output (9th largest in US)
  • 28,800 employees (6th highest in US)
  • 2013 saw 16.4% growth in National Output, continued growth expected in 2014
  • North Carolina: 21.6% growth in 2013; forecast 10.9% growth in 2014 (strongest of sectors)

The Fed’s Strategy (Wells Fargo)

  • Eliminate QE asset purchases in October (estimate $2.5T in Treasuries on books EOY, $1.8T in MBS)
  • Need to raise interest rates (inflation, GDP growth); current environment detrimental to security and liquidity-focused investors (savers, Seniors, local governments)
  • Growth in asset purchases mirrors stock market performance since 2009

Summary: Condition & Predictions

  • Wells Fargo: Growth impact with broaden beyond strong present sectors (energy, technology, motor vehicles)
  • Walden (NC State)
    • Total household wealth improving on financial side, housing wealth stagnant
    • Anticipate 2.5% inflation in 2014 (highest since 2011)
    • Localized growth disparities likely to persist
  • John Connaughton (UNCC)
    • 2014: +1.9% GSP Growth , +0.8% in Manufacturing; +1.5% Statewide employment growth (59,700 jobs), +2.6% in Manufacturing
    • 2015: +2.1% GSP Growth, +2.1% Agriculture, +1.4% Manufacturing; +2.4% Employment (101,500 jobs), +5.1% Manufacturing (strongest sector)

 

Wells Fargo: NC Economy “downshift”-ing from early year growth

Michael Brown, an Economist with Wells Fargo Economics Group, will present an economic update at the Winter 2012 NCLGBA Conference in Concord

North Carolina’s strong cyclical tie to national economic trends forced conditions within the state to decline over the past couple months of 2012 compared to growth experienced earlier in the year, according to yesterday’s North Carolina Outlook released by Charlotte-based Wells Fargo Economics Group.

North Carolina’s economy began the year with robust employment growth and improving personal income. As the year has progressed, the downshift in the U.S. and global economies along with heightened uncertainty surrounding fiscal policy has slowed job growth and, as a result, economic output. Given the slowdown around the state, it is not surprising that the employment dynamics have changed little compared to this time last year.

The report was drafted by Senior Economic Mark Vitner, along with Economist Michael Brown and Economic Analyst Sarah Watt. Michael Brown will present the Economic Update at the Winter 2012 NCLGBA Conference in Concord, December 5th-7th (Click Here for Registration Info).

Click Here for Wells Fargo’s latest North Carolina Outlook

Year-to-year employment in North Carolina (as of September 2012) is only up 0.7% statewide (0.1% 3-month rolling average), with the State unemployment rate at a relatively-high 9.6% (compared to 7.8% national rate)

Higher-skilled labor markets (Charlotte, Raleigh/Durham) are outperforming the rest of the state in workforce recovery. However, there is some signs of manufacturing growth, as the state saw 5,000 new jobs in the sector so far for 2012, with growth leaning towards durable goods.

Downward pressure on North Carolina’s economy is closely tied to the current global economic slowdown and increased domestic uncertainty resulting from the Federal “fiscal cliff” situation (see this analysis of Mark Vitner’s October Commentary for more insight).

Global slowdown is causing a deceleration in export of goods and services from the state to places abroad, though levels are higher than last year. Exports to China have fallen off 4% compared to last year, and the Eurozone debt crisis led exports to Europe to fall 6% in the first half of 2012. Growth in exports to Canada and Mexico helped offset these declines.

Recovery and growth in the durable goods sector also posses some risks:

…the move toward more manufacturing jobs being concentrated in durable goods production has made the state’s manufacturing base more susceptible to a cyclical downturn, which is somewhat troubling as we expect domestic growth to slow in 2013 and for global growth to remain tepid for the next few years. Not only is the durable goods sector more cyclical, but it is also more susceptible to exogenous events, such as shifts in tax policy, geopolitical events and swings in exchange rates.

The outlook draws attention to concerns regarding the “Fiscal Cliff” and its impact within North Carolina, given the strong presence of the military within the state, potential tax policy implications and more:

The impact on the North Carolina economy could be quite severe if all of the scheduled federal spending reductions and tax increases are allowed to go into effect. We do not believe this is the baseline case, rather there will likely be a compromise of some tax increases and more modest spending reductions. Nonetheless, even under this baseline case there will be negative effects on North Carolina, specifically relating to personal income and employment growth.

Impact of an economic slowdown and Federal policy uncertainty could put further pressure on limited personal income growth. While we saw 4% growth for the second quarter 2012, consumer spending could be curtailed following the holiday season into the start of 2013.

With respect to government’s role in North Carolina’s economy, it accounts for 25% of total personal compensation.

The bulk of government income is tied to state and local employees, including school teachers and administrators. It is likely that budget reductions beginning next year will put downward pressure on compensation for these individuals and thus serve as a headwind to income growth for the state. Moreover, around 9 percent of the state’s compensation is derived from federal or military employment. If the sequestration clause from the Budget Control Act goes into effect in January 2013, the Defense Department faces a $492 billion cut to funding over the next eight years.2 This could have some negative repercussions on military-related spending in North Carolina, which is higher on a per capita basis than the U.S. average.

Looking ahead, the outlook sees a mixed landscape for the Tar Heel State. While employment is picking up some, and home prices are improving at a relatively-strong rate, “headwinds” created by declining activity in Europe and China, as well as the uncertainty of the “fiscal cliff” could continue to exert negative pressure on potential growth. Their lackluster projections of 1% US GDP growth for the First Quarter 2013, combined with strong state ties to the overall national economy, could create continued sluggishness, especially in parts of the state that have yet to see significant growth following considerable recession period losses.

The outlook also includes summaries of economic activity and projections for key NC metropolitan areas.

Click Here for Wells Fargo’s latest North Carolina Outlook

Tar Heel State “Weak” in latest Richmond Fed Snapshot

Tar Heel State “Weak” in latest Richmond Fed Snapshot

North Carolina is part of the Richmond District of the Federal Reserve Bank. Each month, Richmond Fed economists prepare an Economic Snapshot of the district and provide detailed information on each of its states, as well as summaries of MSA performance.

Click here to access the latest Richmond Fed Economic Snapshop, released on October 7, 2011

Summary of the District Overall

  • Performance is “sluggish”
  • Net month-to-month job losses of 7,500 in August, fueled mostly by government employment reductions; total jobs still 50,000 higher compared to last year
  • District unemployment rate is lower than National Average, due in large part to strong performance in Washington, DC MSA (i.e., federal government influence)
  • Business conditions “did not change notably”; new manufacturing orders “fell sharply”
  • New housing permits rose, but new housing construction starts fell
  • Revised personal income estimates (via BEA) show a more significant drop in personal income during the official recession period than thought before. Pre-recession incomes were at a higher per capital level, and the level of decline during the recession was greater as well (revised from about 2.5% to 4%)

Observations on North Carolina

  • Conditions “remained weak in recent months, with mixed conditions in labor and housing markets”
  • State did gain 16,500 jobs in August, with the net made entirely possible by the rehiring of public school teachers (+16,800), Year-to-year total employment is up more than 21,000, while government employment is down 14,700.
  • State unemployment rate is above 10% and is higher than the national and Richmond District rates
  • Housing construction activity is up from recent droughts, still below last year’s (depressed) levels
  • Revised personal income estimates from BEA show a similar trend to the Richmond District as a hole. Unfortunately, while District PCI has already rebounded to eclipse pre-Recession levels, North Carolina PCI is still approximately 2% below full recovery (not including inflation). Overall drop as a result of the recession to per capita income (from highest point to lowest point) was revised from 4.1% to 6.5% (and this does not take into account the impact of inflation.

Silvia suggests “Wobbly Legs” holding up our economy

Earlier this week, John Silvia, the Charlotte-based Chief Economist of the Wells Fargo Securities Economics Group, gave a presentation to Cornell’s School of Hotel Administration that outlined concerns he had over current economic conditions. A “Special Commentary” containing information from the presentation is available below:

Special Commentary – Four Wobbly Legs Beneath the Throne of Economic Growth.

Silvia specifically pointed to four specific areas of uncertainty that could prove to be the difference between the start of long-term economic growth, a return to malaise, or the resumption of declining positions:

  • While aggregate job numbers might indicate an increase in employment opportunities, the distortion effect of the stimulus has focused most growth toward the public sector. In addition, job opportunities in skilled trades have disappeared in several parts of the country, creating a serious problem for groups of people “in the middle” that will either need retraining or relocation. Silvia’s commentary suggests that job supplies will not return back to pre-recession levels for two to three years, an estimate less austere than the five to six year estimate made recently by the Federal Reserve’s Open Market Committee.
  • Generally speaking, the future of the housing market will reflect significant corrections with respect to inventory, types of future construction, and reset of actual values due to manipulative impact of past financing and subsidy programs.
  • The growth and permanent presence of a true global market have served to minimize price changes in “core” products and services. As a result, many businesses believe they do not have the pricing power they possessed in the future, potentially minimizing the opportunity for continued significant growth in corporate profits. Therefore, recent growth in profits will likely subside, with no certainty that growth rates will be significant over an extended period of time.
  • The utilization of expanding Federal deficits and issuing unprecedented levels of Federal debt in an attempt to offset the negative impacts of the economic downturn have not created the desired impact. Silvia contends that permanent shifts in the structure of our economy and its influencing factors have changed the reliability of the “multiplier effect” associated with the Keynesian economic approach preferred in the public policy arena since the Great Depression.

On the final of these points, Silvia offers explicit warnings with respect to the actions being taken by politicians and public policy experts:

What have we observed as lessons for decision-makers from the events of the past year? From our viewpoint, there are three problems, or biases, that have hindered effective decision-making over the past year. First, and most critically, is the overconfidence bias of both public and private decision-makers. This is most readily seen in the public sector with the assertion on the economic multiplier effect and the prediction of jobs and growth. In reality, our economic models are not perfectly specified or perfectly rational. Instead, real-world decisions exhibit bounded rationality—we look for an answer that works, satisfices, not the perfect answer.7 We have limited resources of time and ability to try all solutions. Therefore, we find a solution that works, if only temporarily, or imperfectly. We “sacrifice.” Unfortunately, the multiplier approach that was used to guide public policy as a rule of thumb was a critical mistake given the implications of the size of the deficit in a global capital market as examined above as well as the special role of credit constraints in the current recession/recovery period. Private market decision-makers simply cannot rely primarily on such rules of thumb as an indication for future top-line revenue gains.

Second, there is a confirmation bias, certainly in public decision-making and, unfortunately in the media, where evidence in support of the suggested or enacted program is exulted and signs of failure ignored. The whole concept of “saved” jobs is a classic example of this bias. We cannot recall any discussion about stimulus “saving” jobs in either undergraduate or graduate courses. This concept presents a false target for success, especially given the real structural challenges for the labor market as highlighted in our earlier discussion. Moreover, “saving” public-sector jobs today by issuing more debt that must be repaid out of future generations and, therefore, cost future private-sector jobs, is a misleading enterprise. Politicians make political decisions, not economic ones, and awarding jobs to “what is” today at the cost of “what will be” tomorrow is not good economic policy. For the media, there is too much of a tendency to decide the answer before looking at the evidence. Political biases dictate the choice of sound bites and anecdotes, while the public fails to get the careful discussions and analysis it needs to make informed decisions.

Finally, there is a sunk cost problem where policymakers up the ante in their commitment to a program even as the program is a failure. Military escalation abroad and climbing Mt. Everest are classic examples of this bias.8 In public policy, continued large public subsidies to agencies and even private companies as well as consideration of a more of the same, just another stimulus program, reflects this bias. There is very little honest discussion in public circles on the failures of these programs—which is understood given the penalties to any public servant who ever admits a mistake. Many thoughtful analysts doubt the wisdom of another stimulus program given what we know as the high level of uncertainty of success.
For decision-makers, the problem remains to develop a set of guidelines for strategic decision-making given the wobbly nature of the outlook for economic growth and the high level of uncertainty, not simply of risk, in the environment. Finally, private decision-makers must also be aware of the decision-making traps that appear to have affected the effectiveness of decision-making in recent years.

Finally, there is a sunk cost problem where policymakers up the ante in their commitment to a program even as the program is a failure. Military escalation abroad and climbing Mt. Everest are classic examples of this bias.8 In public policy, continued large public subsidies to agencies and even private companies as well as consideration of a more of the same, just another stimulus program, reflects this bias. There is very little honest discussion in public circles on the failures of these programs—which is understood given the penalties to any public servant who ever admits a mistake. Many thoughtful analysts doubt the wisdom of another stimulus program given what we know as the high level of uncertainty of success.For decision-makers, the problem remains to develop a set of guidelines for strategic decision-making given the wobbly nature of the outlook for economic growth and the high level of uncertainty, not simply of risk, in the environment. Finally, private decision-makers must also be aware of the decision-making traps that appear to have affected the effectiveness of decision-making in recent years.

You can download a copy of this Special Commentary (PDF) below:

Special Commentary – Four Wobbly Legs Beneath the Throne of Economic Growth

April Home Sales Driven by Tax Credit Deadline

Existing homes sales for April increased more than 15% from prior levels (annualized rate, 5.8 million units), activity in large part due to the end-of-month expiration of special recovery-focused homebuyer tax credits.  This morning’s latest report from the Wells Fargo Economics Group offers some observations on what April’s spike in activity could mean for the coming summer and beyond. Their conclusions include:

  • (April) was the fastest pace of sales for existing homes since November 2009—the month in which the tax credit was first set to expire. Sales are expected to slip in coming months as the effect from the tax credit goes away. The inventory of existing homes for sale grew in April lifting the month’s supply for all homes to 8.4 months. With supply growing and demand expected to fade, it is a bad picture for prices.
  • After housing prices fell precipitously in the recession, the tax credits helped put a floor under prices. But prices, in the shadow of the tax credits, seem poised for a decline.
  • Fading demand is evident in new mortgage applications, which fell 34.1 percent between the last week in April and the second week in May. The drop comes even as conventional 30-year mortgage rates fell below 5 percent during the same period.

April Inflation (CPI) Update

The Bureau of Labor Statistics released their April 2010 update for the Consumer Price Index earlier today.  For a summarized version, please take a look at this commentary from Wells Fargo Economics Group.

CPI reports are developed at the national level, as well as for regions of the US. Recent performance indicates that inflation is growing at a slightly-higher rate in our region of the country than the national average.

The Wells Fargo Economic Group report also mentions that while aggregate CPI is relatively unchanged compared to last month, and is less than 1% for the past year when excluding food and energy, does show some significant growth with respect to food (0.2% in the past month) and medical care (5% annual rate, based on performance of last 3 months).