Inventory reductions amounting to $65.5 billion during the first half of 2001 failed to drive the nation's gross domestic product growth into negative territory, and it appears increasingly likely that the U.S. economy will avoid recession, according to Wake Forest University professor Gary L. Shoesmith.
Drastic cuts in production designed to clear inventories have pushed manufacturing into a recession, but consumer spending has remained strong, growing at 2.5 percent during the second quarter. Interest-rate cuts by the Federal Reserve have allowed consumers to take advantage of the real cost of borrowing for households, which hasn't been this low since 1980.
Consumer confidence has dipped but remains higher than in 1990, just before the last recession. Retail sales, excluding auto sales, increased 0.2 percent in July, and total spending on durable goods is still increasing. Housing starts also have remained strong, and reductions have left inventories relative to sales at very low levels. That should allow future consumer spending patterns to prompt quicker increases in production and jobs.
Despite those promising indicators, it's still too early for the Fed to celebrate, according to Shoesmith, who is director of the Center for Economic Studies at Wake Forest University's Babcock Graduate School of Management. Declining business investment in equipment and software and continuing inventory reductions could still push the economy into recession, Shoesmith says.
"But the positives far outweigh the negatives," Shoesmith says. "Very low real borrowing costs, tax rebates, lower inventories and strengthening consumer confidence should be more than enough to keep the economy moving forward."
Shoesmith predicts that once threats of a recession clear, Fed policy-makers will be lauded.
"Fed policy will be credited for creating plenty of room for noninflationary growth in the economy and room for growth in the stock market," Shoesmith says.
United States: GDP growth, which was revised for 2000 from 5 percent to 4.1 percent, should continue to see modest growth. Growth of 1.5 percent is forecast for the third quarter, with 1.7 percent growth expected for this year and 2.1 percent next year. Those figures could go higher if manufacturers begin adding to inventories.
Inflation has leveled off at 2.3 percent, where it is expected to remain through 2002. A 6.5 percent drop in manufacturing jobs during the second quarter contributed to a small decline in nonfarm employment for the quarter. Job growth should gradually increase to near 1.5 percent by the end of 2002. Unemployment increased to 4.5 percent in the second quarter, but the jobless rate is forecast to remain below 5 percent, which Shoesmith says is still quite low by historical standards.
Southeast U.S.: Florida's job growth of more than 3 percent during each of the first two quarters of 2001 allowed the eight-state region to post modest job-growth gains. Florida accounted for 62 percent of all jobs created in the region during the first half of 2001.
The region, which also includes Alabama, Georgia, North Carolina, South Carolina, Tennessee, Virginia and West Virginia, managed job growth of 1.2 percent in the second quarter. Without Florida, second-quarter job growth for the region was 0.4 percent.
The Southeast should remain ahead of the nation in job growth through 2002. The region should average 1.7 percent this year and 2 percent next year, compared to 0.7 percent and 1.2 percent, respectively, for the nation.
Unemployment in the region was 3.9 percent during the second quarter, compared to 4.5 percent for the nation, and the Southeast should maintain the approximate 0.5 percent advantage. Southeast unemployment should average 4 percent in 2001 and 4.1 percent in 2002.
North Carolina: The state may have eased through the nationwide slowdown with second-quarter job growth of 0.4 percent, but areas that depend heavily on manufacturing-especially textiles and apparel-have taken severe hits. North Carolina has lost more manufacturing jobs this year than any state in the Southeast.
The state should see job growth of 0.9 percent this year and 1.4 percent next year to remain slightly ahead of national rates. Unemployment reached 5 percent in the second quarter and should remain near that figure-roughly 0.5 percent ahead of the nation-through 2002.
N.C. metropolitan areas: Charlotte and Raleigh/Durham are gaining service-sector jobs to help offset manufacturing job losses, but the same is not true for the Greensboro/Winston-Salem/High Point Triad.
Second-quarter employment in the Triad declined (-0.3 percent) for the first time since 1991. Triad job losses aren't limited to manufacturing, as the area has slowly lost banking jobs. The area's unemployment rate has increased nearly 2 percent since 1999.
Charlotte and Raleigh/Durham should see job growth rates between 2 percent and 3 percent through 2002, while the Triad trails at 1.5 percent. Unemployment is expected to level off soon in all three areas and slowly decline through next year.
Southeast metropolitan areas: Effects of the economic slowdown are apparent in all five areas-Atlanta, Birmingham, Greenville/Spartanburg, Nashville and Richmond.
In Richmond, unemployment increased 0.7 percent during the second quarter. In Atlanta and Nashville, job gains have been cut in half during the past five quarters. In Birmingham and Greenville/Spartanburg, job growth slowed to 0.4 percent and 0.6 percent, respectively, in the second quarter.
Unemployment remains below national rates and should remain near second-quarter levels, which range from a high of 3.6 in Greenville/Spartanburg to a low of 2.7 in Richmond. Job growth is expected to gradually improve in all five cities.
For more information or to arrange an interview with Dr. Gary L. Shoesmith, please call Eric Whittington or Patricia Divine at (336) 758-5030 or (336) 758-5421.
The Quarterly Review is available online at www.wfuces.org. The entire report and individual charts may be viewed and printed. Also available at the Web site is a state-of-the-art, menu-driven Southeast economic database. The database includes detailed national, regional, state and metropolitan area data on employment, average hourly earnings, housing permits and exports, plus leading and coincident indicators.
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