Transcript Slide 1
Thomas Jefferson Institute 2007 Innovations in Government Conference: Economic Update December 2007 Overview • Elevated uncertainty with national growth slow through early next year – Lack of home price appreciation/sub-prime lending issues = drag on consumer spending – No recession; further Fed ease is unlikely • Virginia ranked 16th in the nation (job growth) • Northern Virginia not the fastest growing region but creating the most jobs 2 Real GDP Almost Stalled in 1st Qtr; 4.9% in 3rd Quarter Real Gross Domestic Product Quarterly Annualized Percent Change 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 1990 1992 1994 Data through 3rd Quarter 2007. Recessions are shaded. 1996 1998 2000 2002 2004 2006 Residential Building Impact on Real GDP Quarterly Annualized Growth Rate, Real GDP 8 7 6 5 4 3 2 1 0 -1 -2 Residential Investment Contribution to Real GDP Fed’s Preference? Recession or Accelerating Inflation? • “The Federal Reserve sets the nation’s monetary policy to promote the objectives of maximum employment, stable prices, and moderate long-term interest rates. The challenge for policy makers is that tensions among the goals can arise in the short run and that information about the economy becomes available only with a lag and may be imperfect.” • The Federal Reserve has supervisory and regulatory authority over a wide range of financial institutions and activities. It works with other federal and state supervisory authorities to ensure the safety and soundness of financial institutions…. • August 17 action was sector-specific (liquidity in financial markets) • September 18 action acknowledged spillover to the broader economy • October 30/31 cut another 25 bps • December 11 cut another 25 bps to 4.25% December 11 FOMC Press Release • • • Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time. Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth. Probability of Recession = 29% for May 2008 Probability of Recession Index 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2000 2002 Data through May 2008. Source: Chmura Economics & Analytics. 2004 2006 2008 Will the Fed Ease Further? • Inflation is at the top end of the Fed ‘comfort zone’ (argues against easing) – Weaker dollar causes higher import prices – Oil prices • Interest rates are accommodative • Outside of residential market, economy continues to grow Consumers are Still Spending No Inventory Imbalances Retail Sales and Inventory Growth Percent Change from Year Ago 12 10 Retail Sales 8 6 4 2 0 Inventories -2 -4 Nov-95 Nov-97 Data through November 2007. Nov-99 Nov-01 Nov-03 Nov-05 Nov-07 Industrial Production Slowed but Still Growing Industrial Production Percent Change from Year Ago 10 8 6 4 2 0 -2 -4 -6 -8 Nov-95 Nov-97 Data through November 2007. Nov-99 Nov-01 Nov-03 Nov-05 Nov-07 IT Output Still Near 20% Industrial Production Percent Change from Year Ago 60 Computers, Communication Equipment, and Semiconductors 50 40 30 20 Total 10 0 -10 -20 Nov-95 Nov-97 Data through November 2007. Nov-99 Nov-01 Nov-03 Nov-05 Nov-07 Slowdown is Mainly Housing-Related (Production for Housing Materials is Off) % Change From Year Ago 15 10 5 0 -5 -10 -15 -20 Nonmetallic mineral mining and quarrying NAICS=2123 Construction supplies -25 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Data through August 2007. Housing Sector is in Recession (Near 14Year Low, Down 46% From January 2006) Total Housing Starts and Permits Millions of Units, Annualized Rate 2.3 Permits 2.1 1.9 Starts 1.7 1.5 1.3 1.1 Oct-95 Oct-97 Data through October 2007. Oct-99 Oct-01 Oct-03 Oct-05 Oct-07 National Forecast 2006-2007 Actual 2007-2008 Forecast Qtr 4 Qtr 1 Qtr 2 Qtr 3* Qtr 4 Qtr 1 Qtr 2 Qtr 3 Quarterly Annualized Rates 2.1 0.6 3.8 3.9 2.0 2.4 2.7 2.6 Real Gross Domestic Product Consumptions Expenditures 3.9 Residential Investment -17.2 Nonresidential Investment -1.4 Equipment and Software -4.9 Government Expenditure 3.5 Net Exports, Goods & Services -597.6 (Billions of 2000 Dollars) Consumer Price Index 2.0 3.7 -16.3 2.1 0.3 -0.5 1.4 -11.9 11.0 4.7 4.1 3.0 -20.1 8.0 5.9 3.7 1.5 -10.0 1.8 2.2 3.4 2.2 -3.5 2.3 2.3 -1.1 3.0 -0.3 2.8 2.3 -0.3 2.8 4.2 2.2 2.0 2.2 -612.4 -574.1 -546.4 -510.4 -497.5 -486.0 -477.9 Percentage Change from a Year Ago (%) 2.4 2.6 2.4 2.8 2.8 2.7 2.6 Yields (%) Federal Funds Rate Prime Rate 10-Year Treasury 30-Year Conventional Mortgage Source: Chmura Economics & Analytics Note: Yields reported for the average of the quarter 5.2 8.2 4.6 6.2 5.3 8.3 4.7 6.2 5.3 8.3 4.8 6.4 5.1 5.1 4.7 6.6 4.5 7.5 4.5 6.3 4.25 7.25 4.7 6.3 4.25 7.25 4.7 6.4 4.25 7.25 4.9 6.6 Summary of US Growth • Housing contribution to GDP turns slightly positive in 3rd quarter but housing starts remain flat through 2008 • No more Fed ease • Overall GDP at 1.9% in 2007 (2.9% in 2006) • Risks: – Oil rises further – International investors pull out of bond market – Subprime mortgage leads to broader credit crunch State Rankings, Employment Year-over-Year October 2007 5 4 VA 1.5%, 56,000 jobs # 16 3 2 1 0 -1 -2 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 Utah +4.2%, 51,400 Wyoming +3.4%, 14600 Ohio -0.02%, -11,500 Michigan -1.5%, -75,000 Employment in VA Back Above National Pace Employment Growth Percentage Change From a Year Ago 5.0 Virginia 4.0 3.0 2.0 1.0 0.0 -1.0 United States -2.0 -3.0 Jan-95 Jan-97 Data through October 2007. Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Employment Growth by Sector Percent Change, Year Ending October 2007 4.0 3.2 2.0 1.9 1.5 1.2 0.6 1.2 0.6 3.3 Virginia US 2.1 2.1 1.8 1.8 1.1 3.2 1.5 1.8 0.9 0.5 0.4 0.4 1.5 1.0 0.6 0.0 -0.3 Government Other Services Leisure Educ/Health PBS FIRE Information Retail Wholesale TWU -1.4 Manufacturing Total Construction -1.4 -2.0 Employment Growth by Sector Percent Change, Year Ending October 2007 4.0 3.2 2.0 1.9 1.5 1.2 0.6 1.2 0.6 3.3 Virginia US 2.1 2.1 1.8 1.8 1.1 3.2 1.5 1.8 0.9 0.5 0.4 0.4 1.5 1.0 0.6 0.0 -0.3 Government Other Services Leisure Educ/Health PBS FIRE Information Retail Wholesale TWU -1.4 Manufacturing Total Construction -1.4 -2.0 Initial Claims are Flat in Virginia Virginia: Initial Unemployment Claims Six-Month Moving Average 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Jan-95 Jan-97 Data through October 2007. Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Northern Virginia Slows to State Average (20,000 jobs) Percentage Change From a Year Ago 8.0 Northern Virginia 6.0 4.0 2.0 0.0 Virginia -2.0 -4.0 Mar-91 Mar-93 Mar-95 Data through October 2007. Mar-97 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Employment by Sector 5.0 Percent Change, Year Ending October 2007 3.2 3.0 3.0 3.2 2.5 1.61.5 1.0 1.9 1.8 1.8 1.8 1.5 1.6 1.2 0.6 2.6 1.61.5 1.0 0.9 0.70.6 0.6 0.1 -0.3 -1.0 Northern Virginia Virginia -1.4 -3.0 Government Other Services Leisure Educ/Health PBS FIRE Information Retail Wholesale TWU Manufacturing Construction Total -2.6 4th Quarter 2006 -7.0% (Benchmark) Covered Employment and Wages = -0.1% Labor Market to Remain Weak in NVA Northern Virginia: Monthly Initial Unemployment Claims Six-Month Moving Average 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Jan-95 Jan-97 Data through October 2007. Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Housing Permits Off 46% From Peak Virginia: Single-Family Building Permits Six-Month Moving Average 4,000 3,500 3,000 2,500 2,000 1,500 Jan-95 Jan-97 Jan-99 Jan-01 Data through October 2007. Source: Chmura Economics & Analytics, U.S. Census. Jan-03 Jan-05 Jan-07 NVA Housing Activity; Off 58% From Peak Virginia: Single-Family Building Permits Six-Month Moving Average 4,000 3,500 3,000 2,500 2,000 1,500 Jan-95 Jan-97 Jan-99 Jan-01 Data through October 2007. Source: Chmura Economics & Analytics, U.S. Census. Jan-03 Jan-05 Jan-07 Permits Fell 72% in the Early 1990s Northern Virginia: Single-Family Permits Six-Month Moving Average 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Jun-88 Jun-90 Jun-92 Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Data through May 2007. Source: Chmura Economics & Analytics, U.S. Census. Home Prices Have Risen Appreciation Rate 30% 25% 20% 15% 10% Washington MSA 5% U.S. 0% 2000 2001 2002 2003 2004 2005 Data through 2nd Quarter 2007. Source: Chmura Economics & Analytics, Office of Federal Housing Enterprise Oversight 2006 2007 …Making Homes Less Affordable Washington MSA Appreciation Rate Affordability 60% 50% 45% U.S. 50% 40% Affordability Washington MSA 35% 40% 30% 30% 25% 20% 20% Appreciation Rate Washington MSA 15% 10% 10% U.S. 5% 0% 0% 2000 2001 2002 2003 2004 2005 Data through 2nd Quarter 2007. Source: Chmura Economics & Analytics, Office of Federal Housing Enterprise Oversight 2006 2007 Imbalances Still Exist…13 Month Supply Northern Virginia Home Sales vs. Inventory 30,000 Active Inventory 25,000 20,000 15,000 10,000 5,000 Home Sales 0 Jan-99 Jan-00 Jan-01 Jan-02 Source: MLS Data through September 2007.C Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Retail Sales Have Slowed Considerably Retail Sales: Percent Change Year-Over-Year, Six-Month Moving Average 20 Northern Virginia 16 12 8 4 0 -4 Virginia -8 Jan-95 Jan-97 Jan-99 Data through October 2007 Jan-01 Jan-03 Jan-05 Jan-07 Employment Annual Percentage Change Actual Northern Virginia Hampton Roads Richmond Petersburg Roanoke Lynchburg Charlottesville Danville Bristol Blacksburg Harrisonburg Winchester Non-MSAs VA-Totals Chmura Economics & Analytics. Forecast 2004 2005 2006 2007 2008 4.5% 3.2% 2.6% -0.5% 1.5% 2.5% -3.3% -1.0% 0.6% 2.1% 3.3% -2.8% 2.5% 3.7% 1.5% 2.0% 1.5% 2.5% 3.2% -1.2% 1.1% -0.1% 0.1% 1.9% 0.9% 2.3% 2.4% 0.4% 1.8% 1.9% 2.5% 2.7% -4.3% 0.8% 1.2% 3.8% 5.6% 1.4% 1.7% 1.9% 1.6% 1.9% 1.8% 0.6% 2.2% 0.9% -0.7% 0.7% 1.9% 1.4% 1.0% 1.6% 2.7% 1.6% 1.5% 1.3% 0.6% 1.9% 0.2% 0.7% 1.0% 1.7% 2.9% 0.5% 1.8% Take Aways • U.S. growth remains sluggish through first half of 2008 • No more Fed ease… accelerating inflation is an issue • Virginia continues at national average • Construction employment dragging down Northern Virginia employment growth • Recession not in forecast for early 2008 40