Economic Forecast

 Download

Thank you to our Platinum-level Economic Development Fund sponsors, Bank of America and Classic Graphics for their generous support.

The Economic Forecast, brought to you by UNCC and the Charlotte Chamber, is an initiative designed to provide analysts and decision makers in the private and public sectors with timely information about the current and near-term health of the Charlotte-Mecklenburg economy.

Supported by the Charlotte Chamber of Commerce and developed by Harrison Campbell in the UNC Charlotte Department of Geography and Earth Sciences, The Economic Forecast serves as a barometer for the Charlotte area.

Updated quarterly with the most recently available data, these indicators are designed to track and predict changes in the local business cycle.

Uncertainty Slows Progress

Released September 26, 2011

Despite substantial gains in Charlotte’s leading economic index during the middle months of this year, our jobs picture has been slow to develop. Although there have been modest gains over the year, much of it has recently eroded. Depending on the indicators under consideration, at current rates of growth it might take from two to five years to return to the economic levels of four years ago. Continued troubles in real estate, uncertainty surrounding federal debt ceilings and, more recently, financial troubles in Europe are but a few factors that could spin the wheels of an economic recovery that until recently appeared to be gaining traction.

August Leading Index
Charlotte’s leading economic index increased each month, February through June, but has recently slipped and now stands at 111.4 (2004=100). What still remains to be seen is whether strong gains in the leading index during mid-year will translate to job growth toward year’s end as we would expect (see bar chart in Figure 1). This, of course, would be welcome news given recent declines in monthly employment (see below). Also shown in Figure 1 is that our leading index remain s above its own twelve-month moving average which is a good sign that there is, to date, little solid evidence of a double-dip recession on the near horizon.

On the brighter side, first time claims for unemployment are moving in the right direction (Figure 2). After smoothing and seasonal adjustment unemployment claims fell 1.1 percent in August and are about 8,000 fewer (14.8 percent) than August of 2010.  This is especially encouraging since the county’s labor force is virtually unchanged from this time last year even though our unemployment rate is now a full percentage point higher at 11.0 percent. This suggests that fewer members of the labor force have been discouraged from work and that a large proportion of the area’s labor force is actively seeking work. Reductions in first-time unemployment claims are among the few bright spots in this month’s report.

Another indictor to make a positive contribution to the August leading index was the U.S. leading index, gaining 0.3 percent and continuing its four-month upward trend, though The Conference Board who produces the index expects sluggish growth nationally through the end of the year (Figure 3). Average workweek hours in manufacturing, our measure of local production, slipped 0.2 percent in August but is up 2.1 percent over the year which is generally a good sign for future production and employment. Although manufacturing is a smaller part of the local economy than in years past, the measure is a good leading indicator because it is famously cyclical and employers typically extend work hours before expanding payroll employment. So, it is a good sign that average workweek hours are similar to 2007 levels.

Shown in Figure 4 new vehicle registrations, our measure of local consumer confidence is, as they say, all over the map. After adjusting for seasonal fluctuations in new car sales, the last twelve months have been tumultuous ones for this indicator. After smoothing, August car sales actually fell seven percent even though they have increased 6 percent over the year. Just the same, while well below their 10,000 per month pace of several years ago, the fact that new vehicle registrations have fluctuated between about 2,100 and 5,300 on a month-to-month basis this year suggests consumers remain cautious about large purchases, undoubtedly sitting out this period of substantial uncertainty.

Obviously, one area of concern continues to be in the real estate market – both residential and, to some extent, commercial – and many believe any economic recovery cannot last until these troubles have passed. As shown in Figure 5, the surge in residential building permits March-May has given way and recently permits for new residential construction are about one-third their 2007 levels. Over the past six months, average sales prices have fallen 0.5 percent and the number of sales is down nine percent from the same six-month period last year. Despite mortgage rates at all-time lows (about 4.5 percent on a 30-year mortgage), it has not been enough to lure would-be buyers back to the market. Apparently, consumers are more concerned with paying down personal debt than they are taking on new or existing homes. New home sales, and thus permits for new construction, will take time to regain lost ground and will be impacted by overall unemployment and the back log of homes in foreclosure. Thus, there is much downward pressure on the housing market that will likely take a year or more to lessen.

Current Conditions
Data comprising the coincident index provide us with a mixed picture about job growth and retail sales (Figure 6). Modest job gains during 2Q11 have recently been lost and August employment slipped an additional 0.4 percent but are up 0.7 percent since this time last year. In addition, retail sales continue to struggle being just as like to decline on a month-to-month basis as they are to increase. The most recent retail sales numbers (June) indicate a 2.0 percent increase over May and, like employment, have gained a modest 0.7 percent from the same period last year. Combined, these indicators lead to a revision of June’s Coincident index and an overall decline of 0.4 percent in August. Charlotte’s Coincident Index now stands at 101.4 (2004=100), down 2.2 percent over the year.

One way to view the current local economic situation is to compare trends in Charlotte’s coincident index with its own 12-month moving average (also shown in Figure 6).  As a general rule, the local economy is expanding when the coincident index is above its 12-month trend line.  Conversely, growth is slowing when the coincident index falls below the 12-month trend. Recent declines in the coincident index have caused it slip below its own 12-month average.

Outlook
There remains considerable uncertainty in the economic environment, especially at the national level. In spite of a series of new job announcements locally in past six months consumer confidence continues to be weak. Consumer confidence in the South Atlantic region slipped 9.2 percent in August while national consumer confidence dropped 24.8 percent to 44.5, levels not seen since March 2009. If trends in Charlotte’s leading index materialize, we should see modest job growth resume by year’s end. However, if the recent dip in the leading index shown in Figure 7 is the start of a trend, then any year-end job growth might be short-lived.

Some of the factors contributing to the recent trends are local manifestations of national problems: declining home prices, lackluster job creation, stubbornly high unemployment (currently 11.0 percent in Mecklenburg), etc. and showing no signs of significant improvement in the short-run. Further, many of these problems have been compounded by federal and international uncertainties: Congressional squabbling over deficit spending limits, looming financial crisis in Europe, especially Greece, Ireland, Portugal and new worries about Italy and Spain, and a Chinese economy, though while growing at the enviable rate of 8 percent annually, is insufficient to halt what some fear to be another international crisis in financial markets.


What is not clear at this point is whether the generally upward trend in our local leading index shown in Figure 7 can be sustained in light of such uncertainty. One possibility is that declines in our leading index of the last two months are simply “blips” in an upward trend that will reverse itself in the months to come. If so, we should expect modest job growth to resume. On the other hand, if the last two months are the start of a new downward trend, the outlook locally and nationally, are not as bright as they were even a few months ago. Clearly, we are in a wait-and-see period which, in the aggregate, is part of our nation’s economic problem.

So, while Charlotte’s leading economic index correctly predicted improved business conditions that started 1Q10, recent movements in the leading index should be closely monitored. Given trends in the leading index over the last six to nine months, we should expect modest improvements in employment and/or retail sales during 4Q11. In 22 of the last 29 months, our leading index has increased, sometimes quite markedly though the leading index “went south” in July and August. Given these trends, we have down graded Charlotte’s near-tern outlook to an annual rate of about 2.6 percent through 1Q12.


~ Harrison S. Campbell, Jr., Associate Professor of Geography
University of North Carolina at Charlotte

Appendix Data