Contacts: Eric Whittington or Patricia B. Divine
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It will take more than a modest one-quarter of a percent hike in interest rates by the Federal Reserve Board to cool the 8 1/2-year U.S. economic expansion, according to Wake Forest University professor Gary L. Shoesmith.
The Fed raised the federal funds rate by 0.25 percent on Nov. 16 to curb potential inflation, but consumer spending has continued to increase faster than disposable income and consumer confidence remains strong.
"Given that consumer spending represents two-thirds of the economy, the Fed's measly 25 basis-point increase is not likely to put much of a dent in what will be the longest post-World War II expansion this coming February," says Shoesmith, director of the Center for Economic Studies at Wake Forest's Babcock Graduate School of Management.
Consumers have basically shrugged off the rate increase, according to Shoesmith. Housing starts remain above 1.6 million units per year, and the drop from 1.8 million units annually during the first quarter is due more to a shortage of labor and materials than fear of higher interest rates. Auto sales, another sector sensitive to interest rates, soared to 17.3 million units during the third quarter.
"If the Fed wants to see a slowdown to 3 percent real gross domestic product growth in the coming year, it will take more rate hikes and/or a sharp drop in stock prices," Shoesmith says.
Real GDP grew 5.5 percent during the third quarter, thanks to gains in consumer expenditures and business investment in equipment and software. Among personal consumption items, durable goods scored the biggest increase.
Shoesmith says the manufacturing sector, which has endured decreasing employment numbers for the past six quarters, could be primed for a rebound. Inventories relative to sales hit a new low during the third quarter, exports are picking up and the average workweek is nearing 42 hours.
The Fed continues to view tight labor markets as the biggest threat to the economy, but unit labor costs for the third quarter suggest that wage inflation as compared to productivity is not a serious concern.
"In all, 8 1/2 years into the expansion, the U.S. economy is still in very good shape," Shoesmith says.
United States: Shoesmith forecasts real GDP growth of 4.1 percent for the fourth quarter, with growth of 3 percent to 3.5 percent in each quarter through 2000. The forecast is for 3.9 percent growth on an annual basis for 1999 and 3.6 percent for 2000.
Christmas retail sales should continue their pattern of increases from recent years.
Retail sales for 1998's fourth quarter were roughly 6 percent higher than in the fourth quarter of 1997, and each of this year's first three quarters witnessed year-over-year retail sales growth of 8 percent to 10 percent.
Inflation, which declined slightly during the third quarter, is expected to increase gradually through the end of next year but remain below 2 percent. Short-term interest rates are expected to increase 0.5 percent by the end of 2000. Modest increases also should be expected in long-term interest rates, which have increased roughly 1 percent over the past year in anticipation of higher inflation next year.
Nonfarm job growth should remain steady after posting 2 percent increases in each of the past two quarters. Similar quarterly rates for job growth next year should result in a 2.2 percent growth rate for 1999 and 2 percent for 2000. That would mean another 3.2 million jobs. Unemployment is expected to increase slightly but remain below 4.3 percent.
Southeast region: The eight-state region stood one full percentage point ahead of the nation in nonfarm job growth for the third quarter (3 percent to 2 percent). Florida posted a 4.6 percent job gain during the quarter to lead the region, which also includes Alabama, Georgia, North Carolina, South Carolina, Tennessee, Virginia and West Virginia.
Every state except Alabama enjoyed job growth figures of 1.8 percent or better, and the region should continue to outperform the country in job growth. The forecast calls for 2.6 percent growth in the region both this year and next, compared to growth of 2.2 percent this year and 2 percent next year for the nation.
The region's 3.7 percent unemployment rate remains 0.5 percent lower than the country's, with Virginia and North Carolina the lowest in the region and West Virginia and Alabama the highest. Unemployment should remain below 4 percent in all but West Virginia and Alabama through 2000, Shoesmith says.
The Wall Street Journal Southeast region: Employment growth in the five-state region was better in the third quarter at 2.1 percent but still off from last year's 3 percent pace. The region of Alabama, Georgia, North Carolina, South Carolina and Tennessee should see growth of 2.1 percent this year and 2.2 percent in 2000.
Construction, wholesale/retail trade, finance/insurance/real estate and services industries each had job growth of 2 percent or less. Manufacturing had a 1.7 percent decline, but transportation/public utilities posted a 3.8 percent gain and government enjoyed a 7.5 percent jump.
Georgia and South Carolina remained the most consistent with regard to job growth. Georgia, averaging 3 percent job growth over the past four quarters, should stay out front with 3.2 percent job growth projected for this year and 3.1 percent in 2000. South Carolina should slow from 2.7 percent growth this year to 2.2 percent next year, while the other three states should have growth rates of less than 2 percent both this year and next. Unemployment should remain stable.
North Carolina: Hurricane Floyd's effects helped produce some odd third-quarter figures for the state. North Carolina had 1.9 percent job growth despite declines in construction, manufacturing, wholesale/retail trade, finance/insurance/real estate and services. The state also had a seasonally adjusted gain of 20 percent in government employment for the third quarter.
Floyd's impact resulted in the job declines in the five major sectors and for the massive number of government payroll jobs related to the cleanup. Whether Floyd has a lasting impact won't be known until fourth-quarter data are reported in March, Shoesmith says.
Real income growth, which usually hovers between 4 percent to 5 percent, grew only 1.4 percent in the second quarter and 1.2 percent in the first, suggesting a noticeable slowdown. Final conclusions will be reserved for March, when the state's job figures are routinely revised upward.
Job growth should be 1.7 percent this year and 1.9 percent next year, down from 1998's 3 percent. Real personal income should follow the same pattern, with unemployment expected to remain in the range of 3 percent to 3.2 percent.
N.C. metropolitan areas: With this issue, the Quarterly Review shifts to not seasonally adjusted (NSA) job data to analyze the three metro areas. The NSA data seem to confirm an economic slowdown, perhaps indicating that extremely low unemployment finally is taking a toll on job creation.
Unemployment declined in all three areas during the third quarter, with jobless rates of 2.3 percent in Charlotte, 2.2 percent in Greensboro/Winston-Salem/High Point and 1.5 percent in Raleigh/Durham. Revisions of job data next March will provide a better vantage point, but the best forecast is for a marked slowdown in all three areas, which typically account for more than half of the state's growth.
Southeast metropolitan areas: NSA data show Atlanta and Greenville leading the group in job generation, with Atlanta at 3 percent to 3.5 percent and Greenville at 2 percent to 2.5 percent. Job growth has slowed in Birmingham and Nashville, while job growth in Richmond appears to accelerating. Atlanta should remain above 3 percent through 2000, followed by Greenville and Richmond in the 2 percent to 2.5 percent range.
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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