EDITOR’S NOTE: We were asked not to post the Federal Reserve presentation during the Winter NCLGBA Conference due to a media blackout in advance of presentations made after the first of the year. This update includes more recent outlook reports and analysis from multiple parties, including the Richmond Fed.
While GDP growth in 2015 may revert to its post-recession average of around 2 ¼ percent, there are reasons to believe that growth could rise to between 2 ½ and 3 percent this year.
We have seen pickups at other times during this expansion, only to see them subside, but the recent strength in consumer spending and the decline in the saving rate suggest the current higher growth rate can be sustained. Many labor market indicators also have strengthened.
The economy still faces some challenges, however, including sluggishness in the housing market, potentially weaker exports and declines in government spending.
Inflation is currently below the FOMC’s target of 2 percent but is likely to move closer to 2 percent after energy price movements subside.
The FOMC has no pre-set timetable for raising the federal funds rate target. Policymakers should strive to look through transitory phenomena to assess the appropriate path for interest rates.
For more, watch the video of his comments, watch the video below:
The North Carolina Index of Leading Economic Indicators, published by NC State’s Michael Walden, finished the year with a 1% decline in December, primarily driven by sluggish wage activity. For the year, the state saw growth in construction permits issued and hours worked, along with a sharp decline with unemployment claims. While Dr. Walden does not believe the economic conditions indicate upcoming deceleration, lack of earnings growth may continue to pose a problem with limiting the rate of growth.
January’s revenue report from the General Assembly’s Fiscal Research Division shows current FY 2015 revenues approximately $200 million below budgeted target (-2%). Sales tax (+6.2%) growth and above-target corporate income tax revenue (+$57 million) are helping offset but have not completely made up for loss of personal income tax revenue (-11.3% compared to last year, 2.7% below target). These trends reflect the impact of personal and corporate income tax rate reductions and personal income tax restructuring.
For fiscal year 2015, Fiscal Research predicts continued economic growth, including:
3.2% GDP Growth
3.8% growth in total personal income, 2.6% growth in wages
6.1% growth in retail sales
Last week’s memo from Fiscal Research on revenue projections forceasts total State tax revenues growing $586.4 million (+2.9%) for FY 2015. However, the forecast would still fall 1.3% below budget ($271 million), primarily due to lower-than-projected wage growth. FY 2016 revenue growth is projected at 3.2% ($680 million).
Southern States Outlook
Wells Fargo Economic also took a look at the Southern Region, which also shows widespread economic growth and a positive outlook for the coming year. Here are some highlights:
Most state close to or above 3.9% national wage growth level
3.6% GDP growth in 2014; 4.0% projected in 2015
Oil price decline will have some impact, but stronger diversification will lessen impact and retain potential for growth
Technology continues to be a strong growth sector
Increasing urbanization led by inward migration of younger households (job opportunities, lifestyle, etc.)
New industries, led by aerospace and automobiles, rebuilding manufacturing sector
Traditional industries also seeing improvement (including furniture and textiles); business deals in sector back to pre-recession levels for region
The latest Small Business Optimism Index did fall unexpectedly by 2.7%, a likely indication of early-year uncertainty and continued worry over healthcare and benefit costs. At the same time, 15% of firms indicated plans to hire in the first quarter of 2015, and 25% reported higher compensation to start the new year.
Oil & Gas Price Review
Crude oil prices have rebounded back to above $50/bbl, likely an indication of the impact of reduced supply by some producers, especially the United States. Gasoline prices have also rebounded back to over $2.15/gallon for unleaded in most North Carolina markets. These prices are at least $0.10/gallon more than neighboring states, with South Carolina prices still close to $2.00/gallon or less.