Contact: Julie A. Palm or Patricia B. Divine (336) 758-4454 or (800) 722-1622, [email protected]
Economic events of the past three months - including the hedge-fund collapse and another steep drop in the Dow Jones industrial average caused by Russian financial troubles - have led some economists to predict a recession for 1999.
But Wake Forest University professor Gary L. Shoesmith says two key develop-ments have moved the U.S. economy from "sinking sand to firmer ground." First, he says, Japan has begun to address its banking crisis, and second, the Federal Reserve Board has dropped the federal funds rate a total of 75 basis points, which allows weaker economies to lower their interest rates without further currency devaluations and loss of capital.
Shoesmith, who is director of the Center for Economic Studies at the Babcock Graduate School of Management, says that other recent steps also will help prevent the U.S. economy from sinking into recession. They include a Fed-brokered hedge-fund bailout, the significant appreciation of the yen, an International Monetary Fund bailout for Brazil and movement in Japan toward an economic stimulus package.
"While there are no guarantees against more negative surprises, the U.S. expansion is much more secure," Shoesmith says.
Even though the likelihood of a recession has been significantly reduced, the economy is expected to continue its gradual slowdown because of the increasing gap between price and wage inflation and the continuing Asian situation.
Increasing wage inflation and the inability of many companies to raise prices because of foreign price competition have stifled corporate profits, which are now 6.2 percent below third-quarter 1997 levels. Productivity growth improved in the third quarter but not enough to fill the growing gap between wage and price inflation. Shoesmith says the situation will almost certainly lead to layoffs and a reduction in capital investment, which will in turn slow the growth of aggregate income and consumer spending. Under these circumstances, unemployment is projected to rise - a scenario that could actually please the Fed, which Shoesmith says would be more comfortable with unemployment around 5 percent, instead of the 4.6 percent reported in the third quarter.
The preliminary report for the third quarter shows gross domestic product increased 3.3 percent, in large part because of growth in consumption and residential investment. But during the quarter, nonresidential investment dropped, breaking a string of increases in business investment during the past several years.
About 1 percent of the 3.3 percent GDP growth was due to inventory building - another sign that growth will slow in the coming quarters, Shoesmith says. Excluding inventory investment and net exports, final sales to domestic purchasers (a measure of U.S. demand) increased at a fairly healthy 3 percent.
The U.S. economy continued its growth in the third quarter, and the 1990s expansion is now the longest peacetime expansion since World War II. The forecast indicates quarterly real gross domestic product growth of roughly 2.5 percent next year, and GDP is expected to be a robust 3.6 percent for this year. Inflation (as measured by the GDP deflator) was only 0.9 percent in the third quarter. For all of this year, inflation will be about 1 percent. In 1999, expect inflation to increase to near 1.6 percent as wage inflation continues to effect companies and the dollar loses value against Asian currencies as the crisis there subsides, Shoesmith says.
Short-term interest rates are expected to creep upward next year, assuming that inflation rises. But even with projected increases, short-term rates will remain remarkably stable by historical standards.
In the third quarter, nonfarm job growth slowed to 1.9 percent. For 1998, 2.5 percent job growth is expected, followed by 1.9 percent in 1999. With job growth slowing, U.S. unemployment is expected to rise to near 5 percent by the end of next year.
In the Southeast, job growth has gradually slowed this year, and in the third quarter nonfarm job growth stood at 1.9 percent for the eight-state region of Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee, Virginia and West Virginia. And, Shoesmith notes, much of the region's job growth occurred in Florida, which added 69,000 of the 113,000 jobs created in the region last quarter. The overall weakness in the region is tied to a recession in the manufacturing sector. Since the first quarter, 23,600 manufacturing jobs have been lost in the Southeast, with Alabama, North Carolina and Tennessee taking the hardest hits.
Shoesmith forecasts job growth of 2.8 percent for the region this year and 2 percent next, with most of the growth in the wholesale trade, retail trade, finance, insurance, real estate and services sectors. Unemployment is expected to increase slightly in 1999 but remain near 4 percent, or slightly below the national average.
The Wall Street Journal's five-state Southeast region more clearly illustrates the effects of declining manufacturing employment. In the third quarter, manufacturing employment fell 2.3 percent, which held nonfarm job growth to just 0.7 percent in the five-state region of Alabama, Georgia, North Carolina, South Carolina and Tennessee.
The strongest sectors in the region continue to be finance, insurance and real estate, with construction also contributing a large number of jobs to the area this year.
Job growth for the five-state area is expected to be 2.3 percent in 1998, dropping to 1.5 percent in 1999. Unemployment is forecast to remain at or below 4 percent through next year. Shoesmith expects Georgia and South Carolina to lead the region with respect to job growth.
In North Carolina, the third-quarter unemployment rate dropped to 3.3 percent, or 1.3 percent below the national average. And job growth slowed to just 0.9 percent, in large part because of a drop in manufacturing employment, but also because of declines in the construction and service sectors. The lackluster third-quarter performance will likely look better in the spring because the state's job growth data are routinely revised upward when benchmark figures are released.
North Carolina has been plagued by tight labor markets, but still manages to continue expanding employment. There are a number of reasons for this, but perhaps the most important is that many jobs in the state are filled using nationwide searches.
In the first half of next year, job growth in the state is projected to return to near 2 percent with unemployment remaining below 3.5 percent.
North Carolina metropolitan area job data have shown severe ups and downs in job growth that are mainly attributable to seasonal adjustment problems that will be revised in the spring, Shoesmith says. But examining the figures along with other not seasonally adjusted data series suggests that the state's metro areas have experienced declines in job growth, with Charlotte especially hard hit by the recession in manufacturing.
The forecast shows the Raleigh/Durham area continuing to lead the state in terms of job growth, with rates of 4.1 percent this year and 3.5 percent in 1999. Charlotte should look for gains of 2.2 percent in 1998 and 2 percent in 1999, and the Greensboro/Winston-Salem/High Point Triad is expected to have gains of 1.1 percent, then 1 percent. Unemployment rates are expected to remain low in all three metropolitan areas.
The job data for major metropolitan areas in the Southeast also show seasonal adjustment problems, but reviewing the data together with not seasonally adjusted figures indicates that job growth in Atlanta, Greenville and Richmond is similar to last year. Birmingham and Nashville have seen rates slow because of the recession in manufacturing. The forecast generally shows unemployment rates below 3 percent for the metropolitan areas.
For more information or to arrange an interview with Dr. Gary L. Shoesmith, please call Julie A. Palm or Patricia B. Divine at (336) 758-4454 or (800) 722-1622.
The Quarterly Review is available online at http://www.mba.wfu.edu/ces/. The entire report and individual charts may be viewed and printed.
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