FOR IMMEDIATE RELEASE
June 4, 1997
Contact: Patricia Divine or Sarah Hunter 910/759-5421 or 800/722-1622
Businesses Caught in the Squeeze Says Economist
Winston-Salem, N.C....Businesses are getting caught in the squeeze between wage and price inflation, said Gary L. Shoesmith, director of the Center for Economic Studies at Wake Forest University's Babcock Graduate School of Management.
"The U.S. public has not come to grips with the fact that businesses are carrying most of the burden of the divergence between wage and price inflation," Shoesmith said.
With growth of 5.8 percent in real GDP (gross domestic product) and strong productivity in the first quarter, inflation measured by the GDP deflator rose only 2.2 percent (annualized) over the fourth quarter, reported Shoesmith in the Summer 1997 Quarterly Review, published by the Center for Economic Studies. But wages are 3.9 percent higher than a year ago. Additionally, wage gains have not been matched by gains in productivity; and unemployment remains very low.
Although the Federal Reserve Board did not raise interest rates at their last meeting, "you can bet they still have their finger on the trigger," said Shoesmith. "If interest rates increase this summer, businesses will feel the full brunt. But consumers, receiving higher and higher wage gains, are not nearly as affected. The scary part is that if the economy needs to cool down, it might take a number of rate increases by the Fed, which could further increase the pressure on businesses to cut costs.
"Business profits have been good but they are at risk if the Fed decides to increase rates. If profits begin to suffer, the equity markets will quickly reflect that fact. And that might be the straw that finally breaks the trend in consumer spending."
Profits now are being squeezed between low price inflation and rising unit labor costs. And businesses are carrying higher borrowing costs than consumers.
"The real prime rate--measured as the difference between the prime rate and price inflation--has exceeded six percent for nearly two years," said Shoesmith. "Since 1994, however, the real interest rate burden for consumers--measured as the difference between the prime rate and wage inflation--has steadily declined to near four percent."
The forecast for the United States indicates that short-term interest rates may increase by one-quarter to one-half percent over the next two quarters, with real GDP growth slowing to near 2.5 percent the remainder of this year and in 1998. Inflation is expected to increase only modestly this year and next, averaging 2.1 percent this year and 2.2 percent in 1998.
Business investment posted a sharp increase of 10.2 percent (annualized) in the first quarter of 1997, compared to 3.5 percent in the fourth quarter of last year. As business profits suffer the effects of rising wages and interest rates, investment growth of 6.7 percent is expected for 1997, followed by more modest growth of 4.3 percent in 1998. Job growth is expected to slow to 2.2 percent this year; an increase of 1.9 percent is expected in 1998. Labor markets will remain tight this year. Unemployment for the nation is expected to average 5.3 percent this year and 5.5 percent next year.
For the eight states in the Southeast, job growth was only two percent in the first quarter. If Florida and Virginia had not each posted gains of 3.5 percent, growth might have been even lower. This region is expected to continue to generate jobs at a steady pace, with the forecast showing job growth of 2.3 percent this year and 2.1 percent in 1998. Unemployment is expected to remain below 6 percent through 1998.
For the five states included in the Wall Street Journal Southeast region (Alabama, Georgia, North and South Carolina, Tennessee), nonfarm job growth was only 0.9 percent in the first quarter. The relatively poor performance can be traced mostly to continuing weaknesses in manufacturing, plus a slow quarter for wholesale and retail trade and services. Problems in services occurred in Alabama (-0.03 percent), North Carolina (-1.6 percent) and South Carolina (0.2 percent). The problems in wholesale and retail trade were concentrated in Georgia, which is still adjusting to "post-Olympics reality." In this five-state region, 1.7 percent job growth is expected for 1997, followed by 1.8 percent next year. Unemployment is expected to remain quite low, averaging 4.6 percent this year and 4.9 percent in 1998.
In North Carolina, nonfarm employment increased only 1.7 percent in the first quarter, due primarily to a surprising 1.6 percent decline in service employment. But, since service employment was 6.7 percent higher in the first quarter compared to a year earlier, there is no cause for alarm. North Carolina is expected to have a 2.8 increase in nonfarm employment this year, followed by slightly slower job growth of 2.3 percent for 1998. With a sharp drop in unemployment in the first quarter to 3.8 percent, from 4.3 percent in the fourth quarter, the jobless rate for the state is forecast at 3.9 percent this year and 4.1 percent for 1998. These factors indicate that the "outlook for North Carolina is still very good," said Shoesmith.
Nonfarm job growth in the three major metropolitan areas of North Carolina was reported to be more than 5 percent in the first quarter. Charlotte posted the highest, at 6 percent, followed by the Triangle (Raleigh/Durham/Chapel Hill) at 5.5 percent, and the Triad (Greensboro/High Point/Winston-Salem) at 5.2 percent. This strong job growth occurred despite a tight job market with unemployment rates of 3.2 percent in Charlotte, 2.0 percent in the Triangle, and 3.0 percent in the Triad. "The forecast assumes the three metro areas will continue to attract new workers and generate new jobs, although not at the same pace as the first quarter, " said Shoesmith. In Charlotte, 3.3 percent job growth is expected this year, 2.9 percent in the Triangle, and 2.3 percent in the Triad. Slightly slower growth is expected in each area for 1998. Unemployment is expected to remain very low.
The five metropolitan areas in the southeast MSA forecast--Atlanta, Birmingham, Greenville/Spartanburg, Nashville, Richmond/Petersburg--all had solid job growth in the first quarter. Nashville led the way, with growth of 3.6 percent. Atlanta's job growth, at 3.2 percent, was especially good news since the city experienced a 0.5 percent decline in the fourth quarter. For 1997, job growth in these metropolitan areas is expected to remain even or increase slightly when compared to 1996, combined with very low unemployment. In Atlanta, however, only 2.4 percent job growth is expected, less than half the 1996 rate of 4.9 percent. Birmingham will be an interesting metro area to observe over the next few years since the Mercedes plant is now operating.
For more information or to arrange an interview with Gary Shoesmith, please call Patricia Divine or Sarah Hunter at 800/722-1622 or 910/759-5421. # # #
RSS