Strong sales in autos and housing promise to keep the U.S. recession from becoming deep or severe, according to Wake Forest University professor Gary L. Shoesmith.
The auto and housing industries usually lead the U.S. economy into recession before business investment declines, but the recession that the National Bureau of Economic Research now says started in March has not followed that pattern. Heavy incentives from auto dealers and a series of interest-rate cuts by the Federal Reserve have kept auto and home sales from declining thus far.
Other numbers confirm the recession that was all but guaranteed as a result of the Sept. 11 terrorist attacks. During the third quarter, real gross domestic product declined 1.1 percent, business development dropped 9.3 percent and consumer spending increased only 1.1 percent. Consumer confidence has dropped to recession levels, and the unemployment rate for October increased 0.5 percent to 5.4 percent.
Most economists believe the recession will unfold as a V-shaped downturn, marked by a steep drop during the next two quarters and a sharp recovery during the first half of 2002. Shoesmith, who is director of the Center for Economic Studies at Wake Forest's Babcock Graduate School of Management, says he expects neither.
"Given the state of auto and home sales, there is little reason so far to expect a sharp downturn," Shoesmith says. "As for the second half of the V, such an optimistic forecast ignores the fact that consumers are now carrying a record amount of revolving charge and auto debt, which is in addition to first- and second-mortgage debt."
Shoesmith expects this recession to mirror the one from 1990-91 when consumers also faced then-record debt levels. Consumers usually focus on lowering personal debt during recessions. During the early 1990s recession, consumers continued paying down those debts into 1993.
"There is a good chance that the recovery will be relatively weak for more than a year as households retire debt," Shoesmith says.
United States: Real GDP growth should see modest declines during the next three quarters, with a relatively slow recovery in the second half of 2002. Real GDP, which grew at 4.1 percent in 2000, should increase 1 percent this year and decline 0.7 percent next year.
Inflation should recede gradually through next year, and short-term interest rates should start easing upward next year.
Shoesmith expects employment to suffer most from the recession. Three more quarterly declines are expected in nonfarm job growth. After 2.2 percent job growth last year, 0.4 percent is expected for all of this year, followed by a decline of 0.9 percent in 2002. Unemployment is expected to peak at just above 6 percent before gradually declining late next year.
Southeast U.S.: Florida should help the region perform better than the rest of the country during the recession, but much of the rest of the eight-state region is at the mercy of the struggling manufacturing sector.
Within the region, Florida, Georgia and Virginia are expected to weather the recession best. Alabama, North Carolina, South Carolina, Tennessee and West Virginia-the region's other five states-are expected to see declining employment numbers for two to three quarters.
Southeast employment should see modest declines for the next two quarters before beginning a gradual recovery during the first half of 2002. Job growth, which was 2.6 percent in 2000, should be 1.4 percent for 2001 and 0.4 percent for 2002. Unemployment should increase from the third quarter's 4.1 percent to 4.6 percent in the first half of 2002 before slowly declining.
North Carolina: Gains in construction, wholesale and retail trade, and service industries more than offset losses in manufacturing to yield a surprising 2.2 percent employment gain during the third quarter. That performance isn't expected to continue, and manufacturing losses should prevent positive job growth.
Unemployment has increased 1.5 percent over the past year and was at 5.2 percent during the third quarter. The state's jobless rate for October was 5.5 percent, reflecting a 6.2 percent drop in seasonally adjusted nonfarm employment figures in October.
The forecast shows a gradual recovery during the second half of 2002 after three quarterly declines in nonfarm employment. That would leave job growth, which was 2.1 percent in 2000, at 0.8 percent for 2001 with a decline of 0.5 forecast for 2002. Unemployment should increase to near 6 percent by mid-2002, averaging 5 percent this year and 5.7 percent next year. Unemployment was 3.6 percent in 2000.
N.C. metropolitan areas: Charlotte and Raleigh/Durham continue to endure the national recession well, while the Greensboro/Winston-Salem/High Point Triad struggles with manufacturing job losses.
Charlotte and Raleigh/Durham had job growth of 1 percent and 0.7 percent, respectively, for the third quarter. The Triad, with 22.1 percent of its jobs in manufacturing, had a 0.9 percent decline, the area's second straight quarterly loss.
The job-growth trends are expected to continue. Unemployment should peak near 5.5 percent in both Charlotte and the Triad and near 3.5 percent in Raleigh/Durham.
Southeast metropolitan areas: Only Birmingham suffered a year-over-year decline in employment among the five cities, which also include Atlanta, Greenville/Spartanburg, Nashville and Richmond. Richmond gained the most at 1.8 percent, and Atlanta had only 0.2 percent growth with losses in construction, manufacturing, and finance, insurance and real estate. Greenville also had 0.2 percent job growth but also saw its jobless rate jump from 3.7 percent to 4.7 percent.
Each of the five cities is expected to outperform the nation in job growth and unemployment into next year. Richmond and Atlanta should lead the other three cities.
For more information or to arrange an interview with Dr. Gary L. Shoesmith, please call Eric Whittington or Julie A. Palm at (336) 758-5030 or (336) 758-4454.
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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