ODU Economic Forecasting Team Presents 2011 Regional and National Economic Forecasts at Annual Conference
Old Dominion University's Economic Forecasting Team made its annual presentation of the regional and national economic forecasts on Wednesday, Jan. 26. The forecasts were developed by Gilbert Yochum, professor of economics and interim dean of ODU's College of Business and Public Administration and professors of economics Vinod Agarwal and Mohammad Najand. The annual forecasts are presented as part of ODU's Economics Club of Hampton Roads speaker series.
For more information about the Economic Forecasting Team and its projects, visit: http://bpa.odu.edu/forecasting/.
The team's 2011 forecasts are as follows:
2011 ANNUAL ECONOMIC FORECAST FOR HAMPTON ROADS MSA
(All forecasted changes are relative to calendar year 2010)
The Hampton Roads MSA (formally the Virginia Beach-Norfolk-Newport News MSA) includes Currituck County, Gloucester County, Isle of Wight County, James City County, Mathews County, Surry County, York County, Chesapeake, Hampton, Newport News, Norfolk, Poquoson, Portsmouth, Suffolk, Virginia Beach and Williamsburg.
Real Gross Regional Product (+3.1%)
Hampton Roads economic growth in 2011 is expected to be greater than the growth experienced in 2010 and to be near its half century annual average of 3.2 percent. However, the region's 2011 growth rate is anticipated to be lower than that of the nation.
Rising demand in the national economy will be a major factor affecting regional growth. Extension of the Bush-era tax rates and a temporary reduction in payroll taxes will provide a boost to the national as well as the local economy. Notwithstanding the planned closure of JFCOM later this year, we expect Department of Defense Spending to increase by an estimated 3 percent during 2011. Based on the current timetable for the closing of JFCOM, the 2011 economic-impact on the region will be negative but modest. The major economic effect of the closing on the local economy will be felt during 2012 and 2013. Other important changes in Hampton Roads economic activity that are likely to raise regional income in 2011 are regional growth induced by an expanding national economy, the provision of health services and increased tourism spending.
2010 was a year of recovery for the Hampton Roads economy following on the heels of its first recession, defined as a decline in its annual economic growth, since 1975. The region's economy as measured by Gross Regional Product expanded at a rate of 2.6 percent in 2010; however, this growth was not accompanied by commensurate employment growth. When compared with past economic downturns the region's recovery process will be unusual in the sense that, despite rising income and expenditures, employment growth in Hampton Roads is likely to proceed at a relatively slow pace. As far as jobs are concerned, local firms, like their counterparts in other areas of the country, appear to have learned to do more with less.
Over the course of the decade from 2000 to 2010 the Hampton Roads economy has considerably outperformed the national economy in four important macroeconomic measures; output, employment, wages and income. The principal reason for this good showing has been a doubling of defense expenditures within the region from 2000 to 2010.
Employment (Non-Agricultural Civilian Employment +1.3%) and Unemployment Rate (Civilian Labor Force 7.0%)
Annual civilian employment is expected to increase by about 9,600 jobs during 2011. Employment growth is likely to be concentrated in firms providing professional and business services, education, leisure and hospitality, and health care services.
From 1999 to 2007 the Hampton Roads economy created about 68,000 net new jobs or about eighty-six hundred net new jobs annually. The recession has been responsible for the loss of an estimated 37,100 civilian jobs in the region. Despite an increase in 2010 GRP growth, on a year-over-year comparative basis the region's economy lost about 1,200 jobs in 2010. The decline in jobs through the first and second quarter of 2010 was so severe that despite a gain in new jobs beginning July 2010, the level of net annual jobs declined. The annual mean level of Hampton Roads civilian employment in 2011 is expected to only approach that of 2004, or about 748,000 jobs.
The region's unemployment rate is expected to remain at 7.0 percent.
Retail Sales (Taxable Sales +2.5%)
Hampton Roads taxable sales, retail sales that exclude new auto registrations, fell by 8.6 percent between 2007 and 2009 and continued to decline through the first seven months of 2010. Sales began to recover during the latter half of the year and that growth was more than enough to offset the losses observed through the first half of 2010.
Based on national data, household consumption and saving patterns appear to have stabilized after going through a dramatic one-off proportional reallocation between the two. The decline in household spending was prompted by changes in the availability of and requirements for obtaining credit.
Growing regional economic activity and the net worth of households accompanied by rising household disposable income are expected to result in positive growth in taxable sales during 2011.
Tourism (Hotel Room Revenue +2.4%)
Nationally the recession had a particularly negative affect on travel and tourism as businesses tried to control costs and households adjusted to a significantly tighter credit conditions by curtailing travel. Hampton Roads' tourism industry experienced tough years in 2008 and 2009. The region's hotel revenue was 7.3 percent lower in 2009 when compared with 2007. Hotel revenue continued to decline through the first five months of 2010. This situation was reversed in June and revenue rose through the remainder of 2010. The revenue gain was more than enough to offset losses seen in the first five months of the year. Overall, hotel revenue increased during 2010 by about 1 percent.
We anticipate a better year for the Hampton Roads tourist industry than that experienced in 2010. Positive growth in the national economy, particularly in Hampton Roads' main tourist market states, will contribute to higher tourism revenue. The number of Canadian visitors is also expected to increase due to rising Canadian income and an appreciating Canadian dollar.
Port (General Cargo Tonnage +3.2%)
As part of the down cycle in international trade created by the recent recession, the Port of Hampton Roads experienced a decline in general cargo tonnage of 16.4 percent in 2009. This decline was likely not a result of structural problems with the port but rather that the recent economic downturn was global.
Simultaneous with the recovery of the global and national economies, global trade is expected to increase helping to boost general cargo tonnage at the region's port by an estimated 3.2 percent in 2011. In addition to an increase in trade, the port of Hampton Roads is expected to experience two positive events that are likely to enhance its relative competitiveness, especially with respect to other east coast ports. First, Norfolk Southern's new Heartland Corridor became fully operational in September 2010. The new rail corridor decreases intermodal travel distance from the port of Hampton Roads to Chicago by approximately 250 miles making the region more competitive when vying for Midwest ocean cargo. The initial effect of the corridor's opening is likely to be relatively small when compared to subsequent years as shipping lines begin to adjust their scheduling to take full advantage of the reduced shipping time and cost saving opportunity offered by this improvement in the port's rail infrastructure. Second, the leasing of the Portsmouth APM terminal by the Virginia Port Authority is likely to result in a substantial diversion of port general cargo away from existing facilities to the new terminal.
According to Virginia Port Authority data, the new terminal is roughly ten percent more efficient in cargo movement than the older terminals which, like the rail infrastructure improvement, is apt to result in an increase in the port's competitive position, especially relative to its east coast rivals.
Housing (Value of Single Family Housing Permits +2.0%)
The residential construction industry in Hampton Roads is expected to have a small but positive increase in 2011. The value of single family housing permits increased substantially during the first six months of 2010 as builders took advantage of the extension of the first time home buyers tax credit. Evidence on inventory of new homes suggests that builders of new residential homes have been reacting rationally in reducing the supply of new homes in keeping up with the declining demand of such homes. However, forecasted increase in employment during 2011 along with a small current inventory of new homes is likely to lead to an increase in demand for new homes.
Mortgage interest rates are near their lowest level in fifty years. Employment, wages, household income and wealth are rising and the monthly expense of owning a home is relatively lower than renting. However, relatively tight home loan requirements particularly for jumbo mortgages, the large number of foreclosures and large inventory of unsold houses will likely depress prices in the Hampton Roads residential real estate market through 2011. The region's unsold inventory of houses continues to rise despite the level of new home construction being near its thirty year low. Measures of supply and demand both indicate that the local housing market has an excess supply and on the basis of current absorption rate it will take approximately 9.4 months to clear the inventory of existing homes. Normal time period to clear the existing inventory is 5 to 6 months. Consequently, existing home prices of in the region are expected to decline by about three to five percent during the year given the persistent excess supply in the market.
There is evidence in the Hampton Roads housing market that federal tax rebate incentives have helped to marginally increase sales, however these rebates have not eliminated the excess supply in the market that is driving house prices lower. Further, given the time limits on the tax rebates they may have served to affect the timing of a purchase and not to have increased overall demand.
2011 ANNUAL NATIONAL ECONOMIC FORECAST
(All forecasted changes are relative to calendar year 2010)
Real GDP (3.4%)
The U.S. economy continues its recovery from the recent recession. Economic growth is projected to increase in 2011 although the level of national output is not expected to approach its potential given the economy's level of unemployed labor and capital resources. With the creation of two million jobs, employment is likely to grow at its most rapid pace since 2007. However, the level of employment will remain considerably below its 2008 peak.
The 2011 national forecast is really part of a multi-year story about continued economic adjustment to the credit crisis originally set in motion by declining house values. Despite a return to stability in the relation of household saving to income, growing household spending and relatively strong output growth, tight credit conditions and a glut of both residential and commercial real estate have limited the growth of construction employment, an important component of recovery from post World War II U.S. recessions. Tight credit conditions are the result of declining bank real estate asset values prompted by falling residential and commercial property prices. This cycle, and the resulting lack of bank credit expansion, is expected to continue through 2011 as banks work to rid themselves of non-performing real estate assets.
As in 2010, small business firms that tend to rely on bank credit will find it difficult to obtain financing as banks adhere to a stricter level of loan standards, which have been ratcheted-up over the past two and a half years, and high margin requirements. Larger firm access to the bond market and high liquidity levels will allow them more degrees of freedom than smaller businesses when financing capital purchases. As a result, employment growth, the bulk of which is normally associated with small business, will be more than normally dependent on the expansion of larger firms.
Net export growth, or the change in exports minus the change in imports, is likely to be relatively flat in 2011. Although 2011 exports are likely to experience strong growth, higher energy costs and a recovering domestic economy are expected to result in an increase in the value of imports offsetting any potential for a positive export boost to the economy.
The federal government's fiscal position is expected to be slightly positive as the fading effect of the original Obama administration stimulus plan, particularly aid to states, is offset by new legislation that includes both increased spending and reduced taxes. The net result is likely to provide a mild boost to aggregate demand.
This year's continued economic recovery will be noted for the on-going deleveraging of banks as the banking system slowly heals by unwinding its negative positions and making provision for its real estate loan write-downs through 2011. The Federal Reserve will attempt to protect bank profits thorough its Treasury bond purchase program, or QEII, in order to speed this healing process along. Growth in bank lending is expected to be flat through at least the first half of 2011 as banks implement higher lending standards and hoard reserves in order to positively influence their Tier 1 capital ratios. Tightened lending standards and the resulting lack of bank credit, particularly in real estate, is likely to be a key reason why GDP does not grow at the relatively rapid rate usually experienced at the end of past recessions.
Payroll Employment (1.5%)
2011 employment is expected to increase as the economic recovery broadens its jobs base creation to manufacturing. Despite fairly strong employment growth that is expected to approach two million jobs, total employment will only approach levels seen in the early part of the decade. Growth in construction employment, a historically important antidote to past recessions, will be muted.
Unemployment Rate (9.4%)
The unemployment rate, though likely to be less than 2010, will remain high. The return to the labor force of workers previously discouraged in their job search and now encouraged by an increase in job opportunities, combined with new entrants to the labor force, will keep the unemployment rate above nine percent.
Consumer Price Index-U (1.9%)
Assuming the U.S. Department of Energy's oil price forecast of $93.42 per barrel, the CPI is expected to increase at an accelerated rate from its 2010 level. Rising output will place some upward price pressure on the CPI, however, production is expected to remain below the economy's output capacity. There has been, and will continue to be, some upside risk of price inflation created by the unusually large monetary base supported by the Federal Reserve. Despite this relatively large monetary base, the considerable difference between potential and actual output, rising productivity, falling per unit labor costs, and historically low industrial capacity utilization are expected to hold inflation risks to a minimum.
Three-Month Treasury Bill Rate (Year Avg. .3%)
Given that inflation continues to be relatively muted during early 2011, the Federal Reserve Board is expected to maintain its efforts at keeping short term rates low in order to protect bank profitability and insure ready liquidity in the financial system.
Prime Rate (Year Avg. 3.6%)
As with other short-term rates, the prime rate will follow the course of the bill rate as risk premium spreads remain at near normal levels.
Ten-Year Treasury Bond Rate (Year Avg. 3.8%)
During much of 2010 the long-term Treasury bond rate hovered near historical lows as risk-averse international investors sought safety from default, particularly default of European government bonds. This "search for safety" process may well repeat itself in 2011 due to continued problems associated with financing the government debt of a number of Euro Zone members. However, the most significant force behind the relatively low long term rates is the Federal Reserve's bond purchase program which will likely end in June. At the end of this effort rates are likely to rise over the second half of 2011. In addition, economic growth will put upward pressure on these rates. An important note of caution is necessary here. Given the exceedingly large current monetary base, this market bears close watching by investors because it will quickly appear oversold at any hint of serious inflation.
30-Year Conventional Mortgage Rate (Year Avg. 5.3%)
Long-term mortgage rates will follow and be affected by many of the same market factors as those influencing the ten-year T-Bond rate. We expect the risk premium for mortgages to remain near its current level of roughly 1.5 percent.