This post may be updated as information become available over the course of the next couple days.
With the New Year comes resolutions, and predictions. This is especially true about the direction of the economy. During our Winter Conference, Wells Fargo Economist Michael Brown shared a few, as noted in the following slides:
The day before this presentation in Asheville, fellow Wells Fargo Economists John Silvia, Jay Bryson and Mark Vitner shared their 2014 Economic Outlook. Overall, they see continued growth in the overall economy, while they are less “excited” about accelerating employment growth, a challenging issue for many places across North Carolina and the rest of the country.
This week, economic outlook presentations hosted by the North Carolina Chamber of Commerce (Monday) and Greater Raleigh Chamber of Commerce (Friday) offered additional perspectives.
NC Chamber/NC Bankers Association Economic Outlook
Most notable presentations during this annual morning meeting and luncheon were a conversation on the future of North Carolina’s military presence, and its economic impact, along with an update from Governor Pat McCrory.
Two of the strongest economic voices in the Mid-Atlantic headlined this event. Wells Fargo’s John Silvia joined Richmond Fed District President Jeffrey Lacker for a comparative presentation of outlooks for the coming year, as well as discussion with the audience.
Several noted economists across the state have updated their outlooks for the coming year.
Dr. Michael Walden shared his seasonal and start-of-year outlook back in December. Dr. Walden anticipates 2.75% growth in 2014 for the national economy, with 100,000 new jobs for North Carolina residents, though many of those will be concentrated in select metropolitan areas, like Asheville, Charlotte, Raleigh and Durham.
Dr. Woody Hall with UNC-Wilmington shared his outlook for Southeastern North Carolina earlier this week during a forum hosted by the Wilmington Area Chamber of Commerce. Hall predicts 2.5% economic growth for the Wilmington-New Hanover County area in 2014, consistent with 2.5% growth this past year.
This morning’s release of state-based employment data was not good for the Tar Heel State. Seasonally adjusted statistics indicate only 1,100 nonfarm payroll jobs created in August, while total unemployed grew by 5,900. North Carolina’s unemployment rate rose from 9.6% to 9.7%, making it slightly higher than South Carolina (9.6%) and keeping it significantly above other states in the Southeastern US.
Overall, 26 states saw their jobless rates go up. North Carolina’s unemployment rate remains among the highest in the nation.
Special Report Quantitative Easing Returns for the Long-Term
At least through the remainder of the year, the Federal Reserve will be engaging in the purchase of Mortgage-Backed Securities in an effort to help improve general economic growth.
This latest round of “Quantitative Easing” was announced last Thursday by Federal Reserve Chairman Ben Bernanke following the latest meeting of The Fed’s Open Market Committee.
Officially, the purpose of Quantitative Easing (QE) is for the Federal Reserve to expand the supply of available money and use it to purchase low-risk securities. As a result, according to the official explanation, holders of other capital will redirect their investments to those with higher risks in an effort to achieve some sort of positive return.
Unlike prior rounds of QE that had specific limits on how much in securities could be bought overall, QE3 sets a monthly limit of $40 billion. At the present, it is intended to last through the end of the year. The Fed will also continue to move its holdings of short-term securities into long-term securities (i.e., Operation Twist) at a rate of $45 billion a month, for a total monthly impact of $85 billion.
While Chairman Bernanke mentioned QE3 being in place through the end of year, he also indicated that the program would be open-ended based on the evaluation of economic benchmarks:
From Wells Fargo Economics Group:
Importantly, the Fed noted that if labor market conditions do not improve “substantially”, it would continue the MBS bond-buying program plus potentially undertake further easing measures. Moreover, the Fed “expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens”. Bottom line, whenever rates do rise, we should expect a more gradual-than-normal tightening process to unfold.
Following the announcement late last week, general market activity was positive going into the weekend. However, with the arrival of less-than-impressive earning reports from several major corporations, along with continued reports suggesting lackluster overall economic performance, markets are trending downward.
Increasing the money supply via QE3 has the potential to facilitate greater inflation, especially with commodities. Initially, crude oil remained near $100/barrel following the QE3 announcement, though its price has dropped into the mid-to-low $90’s due to disappointing economic news. We’ll see later if this is having any impact on actual prices for gasoline.
Wells Fargo Chief Economist John Silvia cut the group’s projection for second half GDP growth to 1.5%, based on a host of negative reports involving most of the elements contributing to overall economic activity. Watch the video to learn more, or find a full summary of the comments here at Diminished Return.
USDA Drought all but over for NC Farmlands
The USDA’s latest weekly report on pasture and range conditions finds that less than 10% of North Carolina’s fields are in “poor to very poor condition,” among the best ratings in the country and significantly better than the State’s modest results last year.
Overall, this is good news for the State’s agricultural economy, which should expect strong fall harvests, good prices in the commodities market, and great potential for winter crops and next year’s growing seasons.
However, we do not know how much distressed inventory being withheld by banks and investors still remains to be processed through the market. With the media home price increasing this year by 9.5%, there may be some reason to believe the worst is behind us, though it is not absolutely certain.
GasBuddy/FinViz Oil slips a little, Gasoline does not
Crude oil futures slipped a little this past week following news of continued economic uncertainty. Given the breakout of additional violence in the Middle East, including the murder of the US Ambassador to Libya, the fact that prices did not spike upward in light of growing hostilities on the ground suggests that the market for crude is stable, and thus demand is not growing on a global scale.
If global demand is not increasing, or is in fact declining, it is also an indication that China’s economic woes are greater than identified.
With respect to gasoline prices, there is typically a delay between fluctuations in crude to their appearance with respect to end product. At the same time, while corn prices have declined 7% in the past 2 weeks, they are still close to the historic high for the grain.
Consequently, we have yet to see a noticeable drop in prices for motor fuel compared to where they were at peak around the Labor Day holiday.
At the same time, North Carolina prices remain closer to the national average, indicating a peak price situation within the state itself.
QE3 may also play a role in keeping gasoline prices high, especially if greater inflation kicks in. Overall, gasoline prices not only significantly impact local government budgets, but they also have a large influence on disposable personal income. Higher fuel prices in August contributed to an increase in the level of total US retail sales, a situation where greater spending does not necessarily reflect improved economic activity.
Worth Checking Out
Here are some articles worth taking a look at involving NC local governments, or possible strategies for local budgeting and finance:
Several North Carolina economists have offered their perspective on the current condition of business and trade in North Carolina, across the country and around the world. Their general consensus tends to project continued slow growth, far from the level most want to see after the downturn just a few years ago.
Late last year, forecasters were optimistic about what 2012 would bring. Activity in the final quarter of 2011 picked up significantly, including in the Tar Heel State. National Real Gross Domestic Product (GDP) grew at 3%, while North Carolina’s Real Gross State Product grew 3.4%.
Optimism, however, quickly transformed into uncertainty by the end of the first quarter of 2012. According to the UNC Charlotte Economic Forecast, Gross State Product only grew 1.7% from January to March, with 2.5% growth expected for April through June. Substantial volatility in oil prices, causing unleaded gasoline to almost eclipse $4 per gallon this past spring, along with economic unrest in Europe, did not help continued sluggish activity across sectors here in the United States.
On June 27th, the Economics Group at Wells Fargo predicted global GDP growth of 3% for 2012, a level below the 40-year-average established by the International Monetary Fund (3.6%). They following growing consensus from economists that US Real GDP will only grow 2% this year, with growth in China dropping to 8% and Europe likely slipping into a recession due to the impact of more than $3 Trillion in outstanding government debts across the Eurozone.
Although total jobs have increased over the last two years, through May 2012 slightly less than half of the job losses from the recession have been recovered.
Dr. Michael Walden also explained how certain factors are causing North Carolina’s unemployment rate to remain higher than the national average, in spite of noticeable growth in jobs and economic activity in areas like Raleigh, Durham and Asheville.
North Carolina’s elevated unemployment rate appears to have resulted from the state’s reliance on manufacturing as well as its attractiveness to in-migrating households seeking work. If both of these measures in the state had been at national averages, the state’s peak employment rate would have been over 2 percentage points lower.
Wells Fargo economist John Silvia expressed concern about the makeup of current job activity, stating that 44% of new jobs this year came from 4 “low-pay” sections of the economy (service industries, low skill level work).
The UNC Charlotte forecast predicts unemployment in North Carolina will be at 8.6% by year end, with total year GSP growing 2.1%. Unfortunately, their forecast does not expect significant improvement in 2013, with an end of year unemployment rate of 8.3% next year and GSP growth only 2%.
On Tuesday, June 14th, Dr. John Silvia and Michael Brown of the Wells Fargo Economics Group hosted a conference call discussion on their analysis of the state of North Carolina’s current economy.
Their analysis showed that economic growth in North Carolina (based on GDP) is sustained, but not as the pace of prior recoveries. From an employment perspective, Dr. Silvia concluded that the Tar Heel State is encountering “a whole new ballgame.”
The call included a review of a presentation on economic indicators for the State as a whole, as well as four of its metropolitan areas. Silvia and Brown also responded to listener questions, providing some significant insight on the long term future for the State as it moves forward from a prolonged recession and recovery.
Copies of the presentation, along with information on accessing a replay recording of the conference call (good until July 15th), are available for download:
Below is an itemized summary of conference call highlights:
From Presentation on Overall North Carolina Economy
Don’t have enough data for all NC metro areas, but do have enough consistent data for a certain set
Economic growth (based on GDP) is sustained, but not as the pace of prior recoveries
Poses a challenge for businesses and governments
Employment performance reflects “a different ballgame”
NC Coincident Index currently shows 1.3% growth
Total NC GSP grew 4% in 2010, diversified across most sectors (due to diversified economic mix)
Government GSP grew 1%
Information grew most at 7%
Manufacturing grew 6% (doing well on output, not as much on job growth)
Slide 8 (NC employment cycle) shows that statewide employment is still 7% below pre-recession peak level, has remained there for about 18 months
Labor market is changing
Most growth in Professional and Business Services employment (5%), Leisure and Hospitality (2.5%) and Finance (2%); Government down almost 2%; statewide employment change in last year up little less than 1%
Raleigh is best performing of metros on relative employment; Greensboro performing below state average
Personal income growing since 2009Q4 (up 4.2% in 2010)
Charlotte and Raleigh have per capita income higher than state average, rest of metros at or below average
NC has among least disparities of per capita income between metropolitan areas
Most significant job growth and income is in Professional and Technical Services, followed by Health Care (reflective of education)
Personal income cycle (for the employed) has broken back above pre-recession area (after long, deep decline)
Office absorption doing well
MSA Discussion (Asheville, Charlotte, Raleigh and Greensboro)
Significant contraction with business and professional services (fewer retirees moving in), but continued growth in hospitality and leisure
Employment still 6% below pre-recession peak (trough lasting 24 months so far)
Asheville is a “drive to” destination, and gas prices will impact tourism
Nearly 6% growth in past year with professional and business services; declines with goods production, education, health services and government
Total employment still 8% less than pre-recession peak (has lasted about 24 months)
Some recent good news with job growth (Freightliner adding 600 jobs)
Some “headwinds” toward stability
MB: Based on current (slow) pace of recovery, it is likely that it will take “several years” for employment to return to pre-recession peak levels
JS: Charlotte will see a “quick blip” from the Democratic National Convention next year, creating unusual numbers created by temporary employment
2.5% gob growth in past year, 9% for professional and business services, all sectors listed have seen growth or minimal decline (even government grew 2%, mostly on local level due to minimal tax base disruption)
Continue to see attractive environment for high-paying jobs
Employment cycle shows road to recovery, now 2% below pre-recession peak, though moving positively
Stagnant overall job activity in last year (slight increase); and layoff announcements continuing that reflect structural changes (10.3% unemployment rate)
Employment cycle shows that MSA is still more than 8% below pre-recession peak (almost reached 10% decline); long recovery a reality
Q&A (did best to capture their comments; did not inject commentary, so this what they said)
JS = John Silvia & MB=Michael Brown
It is important that North Carolina “deal with the hand its dealt” and “aspire for better times”
Current economy reflects modest employment gains, especially for modest and low skilled workers
Consumer spending is more modest
More than likely, state income and sales tax revenue will grow at a more modest rate than in the past, poses challenges
Home prices are down, and building permits are weak; mean that property tax bases will not be growing
Advantages for NC: well-educated, tech-savvy population; good climate; low (general) business costs
Economic growth within the state right now is “subpar”
Tourism growth will be limited by economic growth in general, will directly impact locations dependent on this industry (i.e., Asheville)
JS: Important to consider “pace of economic growth” compared to “pace of growth of commitments”; not where it was expected
Changes in structural unemployment? JS: Challenge today is that high school graduates do not have the skills they need for employment, even in manufacturing (computer literacy); big current challenge is lack of computer literacy amongst older population
Challenge for the unemployed include developing new skills and relocating
JS: “How do you get people to understand that they may have to move? What is your alternative?”
Greater magnitude problem for North Carolina since WWII
JS: Recovery losing steam? Market projected that economy would get back to 3% growth, and that’s not happening. Economy has lost steam due to several issues (Europe, gas prices, natural disasters); we do have sustained growth, but we have to deal with a 2% to 2.5% situation (unlike the past); don’t need to “dream” about a different hand
JS: Distribution of post-recovery jobs are very skewed; reflect competitive strengths and market preferences
We can compete on the basis of smart jobs, not unskilled
JS: Non-residential construction is improving (not overbuilt, seeing growth w/architectural buildings); state and federal governments see need for infrastructure development (Yadkin River Bridge); residential construction still in a 2-3 year (if not longer) “work out” period
JS: Seeing the same pattern with employment that NC has shown for last 20 years (pockets of decline in isolated, rural areas); NC has tried to help these areas, but they are just not economically competitive (if that means moving, that means moving)
JS: Inflation is rising, but this is not Jimmy Carter inflation; we’re seeing 3% inflation, higher rate than many retiree portfolios focused on cash and treasuries; don’t worry about deflation or hyperinflation, but focus on impact of 3% inflation
JS: Manufacturing output is growing, and it has higher value than before
JS: For younger people, goal is to encourage them to get at least a technical education (will provide sufficient opportunity, even better than 4-year schools)
MB: From an economic development perspective, educational composition of workforce is important to attracting jobs; climate is favorable to reducing supply chain disruption
MB: Does the (local) population have the skills sets for the jobs of tomorrow?
JS: “Hope” is not a strategy; there are some opportunities for older workers in their hometowns, but there are no guarantees on anything; more than likely, they need to get more education and move (started getting a little frustrated here); America has always been a country of movers; we need to get this across to people, including high school students (what to do? where to go?)
JS (on Agriculture): People like to eat and drink wine, so there is opportunity; dollars to doughnuts, this state can do it; challenge is dealing with technology involved and global competition; world is moving up the protein chain (opportunity for us)
JS (on inflation): Food and energy prices are coming up; significant impact on middle and lower income citizens; composition of spending by income category is different; less exposure to inflation the more income you earn
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:
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: