Editor’s note: Dr. Harry Davis is the North Carolina Bankers Association economist and is a professor of banking at Appalachian State University. He writes the NCBA’s Business Barometer.
BOONE – The key for economic growth continues to be employment growth which is the biggest driver for consumer spending. Job growth for the year averaged 148,000 a month till the 4,000 decline for the month of August. Jobless claims in September have been falling suggesting job growth.
The unemployment rate is 4.6 percent which is well under the average rate of the past 20 years of 5.5 percent. Employment growth is slowing but is still strong enough to support spending.
Consumer spending accounts for about 67 percent of the U.S. economy and it actually increased in August by the largest amount since October of 2006.
Another plus for consumers is the increase in household net worth to a new record level of $57.9 trillion at the end of the 2nd quarter of this year. Most of the increase was attributable to increases in the value of stocks and bonds. Housing contributed very little to net worth and will be a drag on the number for the rest of this year and into next.
A major plus for the economy so far in this expansion has been corporate profits.
Corporate profit growth has declined from the double digit rates of 2006 but has remained strong. For the third and fourth quarters of this year we will see a further slowing of profit growth down to the 2-4 percent level. The Federal Reserve (FED) will cut rates to 4.25 percent by the first quarter of 2008.
Corporate profit growth, household income growth, additional FED action, and the level of household wealth will grow real consumer spending in the range of 3 percent which will keep the economy growing about 2.25 percent for the rest of the year.
The manufacturing sector of the economy is doing better than most economists projected. The ISM Purchasing Managers Index has been above the important level of 50 for the past 7 months and 46 out of the last 48 months. The credit crunch and problems in the global markets do not appear to be slowing manufacturing activity. Much of this strength is due to the value of the dollar being at record lows against the Euro and other currencies and the resulting growth in exports.
The housing sector continues to be a drag on the economy. New home and existing home sales continue to fall. Existing homes sales in August were at the slowest rate since the summer of 2002 and home prices are falling. Inventories of unsold homes are at 16 year highs. Housing will hit bottom by the end of the year.
North Carolina has experienced rapid population growth in this decade. Between 2000 and the summer of 2005, our increase was 7.88 percent while only 5.33 percent for the nation. Even with the huge increase in population our unemployment rate has dropped over the last two years to the present rate of 4.8 percent. Total employment has increased about 175,000 since January 2006.
North Carolina’s economy will continue to grow at about 2.25 percent for the remainder of the year or at about the same rate as the national economy. We are adding jobs and our unemployment rate should remain near its present level.