Statewide employment conditions are improving, with net growth in jobs across all industry groups within the state and significant reductions in the unemployment since last summer. Professional and business services provide the largest share of job growth (4.5%).
About 70% of job growth the past 4 years took place in the Raleigh, Durham-Chapel Hill and Charlotte metro areas (MSAs).
Statewide manufacturing job growth lags other sectors, creating issues of disparity with manufacturing-intensive areas of the State.
Commercial real estate activity improving in areas of strong job growth.
Apartment construction in Charlotte is matching demand, while Raleigh’s increased construction rates (compared to demand) provide a slight increase in vacancies.
Single-family housing construction permits continue showing some improvement, but they still fall significantly below pre-recession levels.
Housing market prices, as measured in North Carolina by the CoreLogic HPI, show continued, modest improvement, with the metric appearing close to pre-recession levels. Nationally, the rate of recent growth is faster, but the index remains significantly below pre-recession levels.
The report also included these highlights regarding North Carolina’s key metro areas:
Raleigh experienced 4% year-to-year growth in total nonfarm employment, driven by nearly 10% growth in business & professional services.
Employment growth remains slow in Greensboro and Winston-Salem, reflecting continued challenges in the Triad area.
Asheville and Charlotte experienced strong growth in line with statewide trends (~3% to 4%), with Asheville’s housing market also recovering at a strong rate.
Following requests from several jurisdictions, we asked for and received chart sets for each North Carolina metro (see links below for PDFs):
Last month, UNC-Charlotte’s John Connaughton produced his spring 2014 economic forecast, reporting 2013 gross state product (GSP) growth of 2.5% and 2014 GSP growth of 3%. Agriculture experienced the most significant year-to-year growth in GSP for 2013 (+22.7%), following by entertainment & hospitality (+4.9%), transporting, warehousing & utilities (+4.3%) and business & professional services (+4.1%). Manufacturing was relatively unchanged (+0.1%) and reflected about 20% of the total state economy (second to finance, insurance and real estate). Agriculture is expected to grow another 11% in 2014, with manufacturing projecting 2.7% growth, 2.2% for entertainment & hospitality, and 1.8% for business & professional services. Connaughton also anticipates net statewide job growth of 60,200 jobs (1.5%) in 2014, slightly less than 2013 growth (64,500, up 1.6%). Connaughton found the information sector with the highest rate of growth in 2013 (+7.6%), but he does not anticipate sector growth continuing at the same pace for 2014 (+0.7%), surpassed by transportation/warehousing/utilities (+3.3%), construction (+3.7%), and entertainment/hospitality and business/professional services (+1.7%).
Walden’s LEI Outlook Not Promising
For March, the NCSU Index of Leading Economic Indicators, presented by Dr. Michael Walden, experienced another decline, dropping 1.6% to its lowest level since last August. The overall trend remains positive, and 6% than last March, and is potentially impacted in recent months due to traditional winter slow down and worse-than-usual weather. Permit activity, hours worked and employment earnings all showed declines, as did the number of jobless claims. Click here to review the March report.
PNC Identifies Improved Business Owner Outlook
PNC Bank’s latest survey of NC-based small-and middle-market business owners (click here) provided some room for optimism in coming months. 48% of respondents indicated anticipated growth in sales over the next six months, up significantly from 34% last October. Expectations for increased profit grew slightly from 32% to 37%, while hiring growth expectations grew a little, from 8% to 12%. Increased anticipation for growth was also met with slight reduction in respondents expecting contraction in sales (from 9% to 7%) and profits (from 17% to 16%). An unchanged 8% still anticipate decreasing staff, while 76% anticipated remaining the same. With respect to economic outlook, strong optimism declined with respect to both the national (from 11% to 8%) and in-state economies (from 15% to 10%), with prospects for North Carolina still remaining stronger than nationally. Moderate optimism on the state optimism grew from 41% to 54%, helping reduce pessimism from 42% to 36%. At the same, the survey also showed declines or continued lows in the rates of businesses anticipating upcoming capital investment (53%), pay raises (19%), taking out new loans (14%), and housing price increases (39%). Substantial majority of respondents (70%) do not anticipate increasing prices during the next six months.
Gas Prices, Now and Upcoming
Crude oil prices have subsided some from recent spikes facilitated by unrest in Ukraine, now within a couple percentage points of last year’s mark. As for fuel, prices for unleaded are picking up with the arrival of the spring, though are still a few cents below their levels 12 months ago. The Energy Information Administration (EIA) will release its next short term outlook this Tuesday. Their March report anticipates stable prices for the coming year, with potential for a decline in annual average price for 2015. Locally, Diesel prices also appear to be showing some reduction, at least not growing in relation to recent increases with unleaded.
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.
“The budget passed by the Senate this week does not include any extension of the transitional hold harmless payments for cities and counties. If these payments are to continue this year and beyond, it is imperative that they are extended in the budget the House passes and sends back to the Senate… If the transitional hold harmless payments are not included in the House budget, they will likely expire permanently.”
Potential Unfunded Mandates (via NCLM)
“The Senate budget contains two provisions that would place unfunded mandates on local governments. The first provision would require that if a State transfer of insurance tax revenue to the Worker’s Compensation Fund for Volunteer Safety Workers is not sufficient to meet the actuarial needs of the Fund, the remainder of the cost would be provided through an assessment of funds from those local governments served by volunteer fire departments and/or rescue squads. We have been told that the elimination of the transfer is planned, which would result in the full costs being placed on local governments. The second provision would take over $10 million per year from the Separate Insurance Benefit Trust, which pays for a modest death benefit and accident insurance for local and state law enforcement officers, and use the funds to pay State Health Plan premiums for State law enforcement officers. Local governments would receive none of the diverted funds, but could be required to replenish the Trust.”
Defunding Current Rural Economic Development Initiatives (via NCLM)
“The budget passed by the Senate this week would make significant changes to how the state supports economic development efforts. The bill would eliminate all State funding for the Center for Rural Economic Development ($16,619,194), Regional Economic Development Partnerships($2,151,517), and Councils of Governments ($328,105). It would transfer the economic development responsibilities of these groups to a new Rural Economic Development Division within the Departmentof Commerce and a new Rural Infrastructure Authority. Senate leaders said that the change is intended to remove an ineffective layer of bureaucracy from business recruitment and force Commerce Department officials to work outside of Raleigh.”
Transportation Funding Changes (via NCLM)
“In addition to the transportation reform provisions discussed in a separate article below, the Senate budget includes several additional transportation provisions affecting cities and towns. The budget would reduce public transportation operating support funding by two percent, following a cut of 9 percent over the last two years. It also would eliminate the Small Urban Construction program, which provides $7 million each year for urban projects on the State system. The allocation of State maintenance funding could change as the result of a provision that would require NCDOT to assess the level of congestion on primary highways and use the assessment as one of the criteria for developing its highway maintenance plan. The budget also would adjust MPO/RPO ethics reporting requirements so that only voting members would be covered. This provision mirrors that in SB 411 Ethics Requirements for MPOs/RPOs, which the League has been working on and which passed the Senate prior to crossover.”
Changes to Support for Water Infrastructure (via NCLM)
“Senate budget-writers proposed several policy changes of note in SB 402 Appropriations Act of 2013 that would affect the way the state awards water, wastewater, and stormwater infrastructure funds. First, the budget would consolidate the Clean Water Management Trust Fund and Natural Heritage Trust Fund into a new “Water and Land Conservation Fund.” Second, the proposal would move both the Drinking Water State Revolving Fund and Clean Water State Revolving Fund into a new “State Water Infrastructure Authority.” Both new funds would be overseen by separate nine-member authorities, who would have the ability to set the criteria for awarding grants and loans to local governments for these infrastructure projects. The oversight bodies would also make decisions on those awards. Other provisions in the environment section of the Senate budget proposal would make the same changes to the N.C. Environmental Management Commission that have beendebated in other bills this session, and would allow the state to direct taxpayer dollars to private recycling enterprises.”
Changes to Public School Capital Support from Lottery Proceeds (via NCACC)
“Of greatest concern to counties is the rewrite of the state’s lottery statutes to eliminate the guarantee of 40 percent of net lottery proceeds to county school construction. Removing the statutory intent to guarantee the 40 percent may result in future Legislatures using the county share of lottery proceeds for expenses other than school capital needs.”
House brings forward Tax Reform Plan
The Senate did not include any specifics on tax reform in the budget bill they passed this week, though they did forecast reducing tax revenue by approximately half a billion dollars as a result of some type of adopted reform. Last week, the House presented their proposal, which gained support from Governor McCrory.
Unlike the plan introduced a while back at a press conference by Senator Berger, which has not yet been drafted into legislation, the House plan has been submitted as a Committee Substitute to existing tax reform legislation (click here to view). It’s key components are as follows:
Eliminate tiered personal income tax rates and establish a single rate of 5.9% (rates are currently tiered at 6% to 7.75%)
Expand sales tax to include many services, leaving state rate at 4.5%
Reduce corporate income tax rate from 6.9% to 6.75%
Reduce state corporate franchise tax
Does not eliminate local business license taxes
Reduce Article 40 sales tax rate to 0.4%, and expand its base application
Eliminate franchise tax on electric and natural gas sales, and replace it with application of the local sales tax, with all funds distributed within each County (point-of-sale) to their municipal governments on a per capita basis.
The changes to the income tax would take effect on January 1, 2014, while the change to the sales tax base and Article 40 rate would take effect on October 1, 2013. The changes to taxation and distribution of tax on electric and natural gas sales would not take effect until July 1, 2014.
According to today’s “LINC IN” email, the League will work on analysis to determine the impact of these changes on individual municipalities. No hold harmless provisions are included in the House plan, as well.
Sequestration Hits Asset Forfeitures
The US Department of Justice Criminal Division distributed guidance to local law enforcement earlier this week (click here to view) that included the following announcement:
Having considered all available alternatives while working to ensure the continued financial health of Assets Forfeiture Fund (AFF), the Department determined that effective May 24, 2013, and continuing for the remainder of the federal government’s fiscal year (September 30, 2013), equitable sharing paid through the DOJ AFF will be reduced by 10 percent of the awarded amount. Computation of equitable shares will remain the same and determinations will be made under our pre-existing policies and guidelines.
Falling crude oil prices contributed to a decline in the U.S. regular gasoline retail price from a year-to-date high of $3.78 per gallon on February 25 to $3.52 per gallon on April 29. EIA expects the regular gasoline price will average $3.53 per gallon over the summer (April through September), down $0.10 per gallon from last month’s STEO. The annual average regular gasoline retail price is projected to decline from $3.63 per gallon in 2012 to $3.50 per gallon in 2013 and to $3.39 per gallon in 2014.
Last summer, gasoline prices averaged $3.76 per gallon during the April through September period – so this is a little good news for drivers.
The latest 12-month graph from Gas Buddy suggests prices are improving significantly for North Carolina going into the busy summer driving season. However, they do remain about 6% higher than our neighbors in South Carolina.
Economic Notes (via Wells Fargo & BLS)
Federal Reserve does not appear to be pulling back on quantitative easing, at least until fall
Existing home sales moved close to annual pace of 5 million in April
Durable good orders improved in April, suggesting that manufacturing slowdown may be short-lived
North Carolina was one of 40 states to see a reduction in the unemployment rate for April, from 9.2% to 8.9% (seasonally adjusted). Overall employment was up 73,300 from last April, while the unadjusted unemployed count managed to drop 20,000 for the month (to 398,000) with 3,000 of those actually dropping out of the labor force.
Enterprise Utility Bill Changed to Study, Passes House
Last month, NC League of Municipalities reported on H708, which would have dramatically limited the use of funds generated by local government enterprise utilities. The League indicated that the Bill would likely be redrafted to establish a Legislative Study Committee to research this ongoing issue and report back to the General Assembly next year.
A few weeks ago, the House Finance Committee approved this substitute, and the House passed the bill on to the State Senate prior to the “crossover” deadline. The language of the legislation does serve as a rebuke of long-established practices by North Carolina local governments and makes clear the interests and intent of the General Assembly.
SECTION 1.(a) The General Assembly finds that the ability of a city or county to efficiently and effectively provide public enterprise services is imperiled by the use by that local government of those revenues for purposes other than:
(1) Paying the costs of operating the public enterprise.
(2) Making debt service payments.
(3) Investing in improvements to the infrastructure of that public enterprise.
(4) Reimbursing the unit of local government for actual direct services provided to the public enterprise.
SECTION 1.(b) The General Assembly further finds that any excess net revenues should be used to lower rates, advance fund debt service, and fund infrastructure improvements of that public enterprise.
Obviously, this means that the matter, which directly impacts finances and budgeting for many North Carolina municipalities and counties, will be further scrutinized and reconsidered again next year. Last year, the General Assembly did pass limits on Electric Utility enterprise transfers, consistent with guidelines long recommended by the Local Government Commission.
First Quarter GDP Okay, Other Indicators Mixed
Overall US Gross Domestic Product grew 2.5% (annual rate) during the first quarter of 2013, according to the Bureau of Economic Analysis’ first report.
Actual Real Final Domestic Sales (End-Use Consumer Activity) grew 1.9% (annual rate) during the first quarter.
Dr. Walden’s August Update of Leading Economic Indicators for North Carolina fell a slight 0.1% compared to July. This also happened to be the year-to-year rate of decline.
Initial jobless claims and manufacturing job hours and earnings for North Carolina workers all declined, offsetting gains seen in construction permits. The index also countered national leading indicators, which increased 0.7% for the month.
The state economy is essentially “treading water”, with no clear direction up or down. The manufacturing sector has certainly slowed, but residential housing is showing some promising signs. Investors may be waiting for clearer signs from the upcoming election results.
The seasonally-adjusted national unemployment rate for August was 8.1%, according to this morning’s report from the Labor Department’s Bureau of Labor Statistics. They report a 96,000 increase in total nonfarm employment for the month, moving the monthly average for 2012 to 139,000 (down from 153,000/month in 2011).
Including agricultural employment, total employment declined by 119,000 jobs in August to 142.1 million.
The total labor force contracted by 368,000 (seasonally-adjusted) reducing the participate rate to 63.5%. This is the lowest percentage since September 1981.
Private-sector employment grew overall nationally by 103,000 jobs, all of it due to service sector growth (+119,000). Goods-producing industries lost 16,000, with manufacturing (major component to North Carolina workforce activity) declining by 15,000.
To help generate even greater job gains, the Fed is expected to keep policy highly accommodative. Fed Chairman Bernanke in hisJackson Hole speech last week signalled a preparedness to introduce additional ease if conditions warranted. Thus, next week’s Federal Open Market Committee (FOMC) could see the central bank extending the forward guidance (as to the maintenance of the current range for fed funds) to “sometime in 2015” from the reference to “late 2014” as indicated following the last FOMC in August. The disappointing August job gain will likely prompt discussion at the FOMC about the need for another round of asset purchases.
The Richmond Fed’s Region Focus is a quarterly publication highlighting their research on various economic and statistical topics. Their latest issue (published this week) includes an interesting article on residential migration, an activity that often dramatically-impacts local government operations and finances.
While the article is written from the premise of trying to figure out if common arguments for recent decline in migration (underwater mortgages, telecommuting, etc.) are relevant with respect to actual data, the work really is a more effective means of understanding some common characteristics associated with migration and the demographic variables that influence its growth or decline, especially at the local level.
The commercial real estate market did not see as much valuation volatility as the housing market did during and after the economic crisis in 2008 caused in part by the proliferation of risky mortgage-backed securities. However, the commercial property market could still pose a threat, and would have possibly over the last couple years if not for the Federal Reserve’s two prior rounds of quantitative easing. The latest commercial property chart book from Wells Fargo offers some background on the subject, which may be of interest to cities with high levels of commercial property.
The huge mountain of commercial real estate loans maturing around the middle of the decade has been one of the motivating forces behind the Fed’s monetary policy strategy, which has driven long-term interest rates down to historic lows and removed
much of the near-term interest rate risk. Lower interest rates have also made it possible to refinance and restructure a larger proportion of maturing and potentially problematic loans maturing later in the decade. Moreover, the drop in Treasury yields has also pushed liquidity into other areas, including stocks and real estate. Furthermore, higher stock market valuations have allowed insurance companies and pension funds to allocate a larger portion of their investment portfolio to real estate. A healthier equity market has also made it easier for REITS to raise funds.
However, investors should remember that all magic comes with a price. Ben Bernanke outlined what he believed the costs of the Fed’s asset purchase program have been and by his account they have been manageable. The yield curve has narrowed and inflation premiums, as measured by TIPS, have remained relatively low. This analysis misses one key point, which is the large increase in the demand for liquidity arising from the uncertainty surrounding the Fed’s unprecedented policy moves. Investors’ increased preference for liquidity has manifested in a number of ways, including significantly higher prices for assets with more certain cash flows. No cash flow is more certain than Treasuries, which means the Fed’s measure of potential costs may be flawed.
The drive for liquidity is also affecting commercial real estate. Demand has soared for well-located properties with strong tenants in deep, liquid markets like New York and San Francisco. While that sounds perfectly logical, it means that the most significant gains in commercial real estate values have been limited to a relative handful of projects in a small number of markets.
In other words, while the commercial real estate sector may seem somewhat healthy, it could be thrown into turmoil very easily. Future Federal Reserve policy, especially in light of sluggish overall economic growth and employment activity, could have profound impact.
Crude oil prices remained between $94-$98/bbl for the week after Labor Day, and average North Carolina prices for regular unleaded stayed at or close to the $3.80/gallon mark influenced prior to the holiday by summer driving, rising corn prices and storm activity in the Gulf of Mexico.
Corn prices remain a concern with respect to their impact on ethanol.They are below highs experienced in mid-to-late August, but still at an oppressive price in trading.
US Secretary of Agriculture Tom Vilsack expressed optimism following release of future export estimates should remain above and near record levels set in the recent past.
This year, total farm exports are expected to reach $136.5 billion, close to a record level set last year. The record is expected to be set again in 2013, when exports are projected to reach $143.5 billion.
Export value growth has been 50% since 2009, influenced by increased demand from developing countries along with higher food prices.
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%.
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:
The Economics Group of Wells Fargo Securities published a Special Commentary this morning on current Credit Quality. The information included in this report not only indicates the present environment for personal and business financing, but also includes information that can be used to develop an overview understanding of the current national economy.
Overall findings with the current report are not promising in terms of indicating potential short-term economic expansion or growth. Here are some highlights:
Consumer credit balances have declined significantly over the 18 months, with April experiencing a modest $1 Billion increase. Revolving debt (i.e., credit card) balances are down nearly 10% compared to 12 months ago. Credit card delinquency rates are now below 6%, continuing to decline from historic highs reached in the past 2 years.
Consumer spending is picking up with a modest 2.6% increase compared to 12 months ago. Median home prices are also still 1% below where they were a year ago, though this is an improvement from the 15% decline experienced in recent months.
Total bankruptcy filings picked up slightly in the first quarter of 2010 due to a similar increase in personal filings. Levels are still below historic highs in 2005, prior to the implementation of bankruptcy reform laws.
Consumer inflation remains stable at 2.2%. However, inflation for businesses (as measured by the Producer Price Index) is now at 5.5%.
Private Wages & Salaries did pick up their growth rate slightly in the first quarter of 2010 at 1.5% (annual rate).
Total loan delinquency rates are still growing, now 7.5% for the first quarter of 2010. Commercial delinquencies are not at 9.2%, continuing growth to levels last seen during the S&L Crisis of the early-1990’s. The largest annual growth in delinquencies has been in residential real estate loans, while the past quarter saw the largest growth coming from agricultural loans. Delinquencies are growing across all real estate categories, declining this past quarter for commercial & industrial and consumer loans.
Annual retail sales growth reached 5.2% in April, though future forecasts of consumer activity have declined in most major purchase categories (homes, auto, appliances). Only about 11.3% anticipate personal income increases over the next 6 months.
The Delinquency Plus Foreclosure rate declined to 14.01% for the first quarter of 2010, coming off record highs of around 15% in 2009. This is entirely due to a drop in historically-high delinquencies, while foreclosures continue to grow (now 4.63%).
Approximately 16.4% of Subprime loans are now in foreclosure
Media reports often focus on a singular statistic or metric of overall performance that the reporting agency will direct attention to within the first paragraph or two of an executive summary. Hence, the initial response from traditional outlets is that First Quarter GDP grew at 3.2%, signifying four consecutive quarters of growth (technically brining an end in the eyes of economists to our recent/current recession).
However, this 3.2% calculation of GDP growth is based on numerous factors that are not easily explained. The Wells Fargo report did identify some quarterly growth in a key area of interest to local governments, final sales (1.6% compared to last year). This should translate into higher sales tax revenues at the state or local level (with the exception of business lost to online sales or non-taxed markets).
Wells Fargo also examined the GDP Price Index, which indicates quarterly growth of less than 1%, indicating that inflation is relatively under control. However, aggregate measures of inflation are not universally applicable, especially at the consumer level when considering that individuals experience different needs with respect to fuel, energy, medical care and housing.
Based on the Chained Dollar Value of GDP (adjusted for inflation), here are some other observations:
Quarterly GDP growth for the 1st Quarter, compared to the 4th Quarter of 2009, was less than 1%
The total Chined value of GDP ($13.255 Trillion) is still less than this value at its height in the 2nd Quarter of 2008 ($13.415 Trillion)
Growth in personal consumption is leaning more toward goods (durable and nondurable) and less toward services
Private Domestic Investment grew 3.5% in the last quarter, and is up 7.7% compared to the 1st Quarter of 2009. However, due to the significance of the stock market and housing market collapses, this portion of GDP is still down 19.4% compared to pre-crash values in the 1st Quarter of 2008.
Government expenditures (chained, adjusted for inflation) actually declined 0.5% compared to the last quarter. Federal spending continued to climb (+0.3%), while state and local spending declined for the third consecutive quarter (-1%)
Overall personal consumer inflation for purposes of GDP over the past year (+2%) is slightly higher than inflation applicable to state and local government (+1.7%) – This is based on the price deflator measure promoted by Dr. David Ammons