Editor’s note: Dr. Harry Davis is the economist for the North Carolina Bankers Association and is a professor of banking at Appalachian State University.

BOONE, N.C. – The economy is finally beginning to show signs of sufficient growth to be called an expansion. GDP growth is running about 3% on an annualized basis. Unfortunately, the present rate of economic growth is about one half the average rate in the post World War II period.

Job growth has been very slow until February. In 2010, the economy added about 90,000 jobs per month on average. In February 193,000 jobs were added which was the largest increase since March of 2010. While the unemployment rate has dropped from 9.8 percent to 8.9 percent in the last three months ending in February, the decrease was helped by the fact that thousands of people simply stopped looking for a job and are therefore not counted as unemployed. Job growth needs to rise above 200,000 per month to significantly decrease the unemployment rate.

There are several positive metrics for the economy. The Consumer Confidence Index rose significantly in January and February though it did fall in March due largely to higher energy prices and unrest in the Middle East. The ISM Index, which is a measure of manufacturing activity, has remained above 50 for the past 20 consecutive months. An index reading above 50 signifies that the manufacturing sector is expanding.

Export growth has been particularly strong which has helped the profitability of multinational companies. S&P companies are expected to have one of the most profitable years in history in 2011. They are sitting on one of the largest amounts of cash in about 50 years that will hopefully be used to increase employment and capital investment this year.

The housing sector continues to struggle. Housing starts plunged in February to a rate of 479,000 annualized units. New home sales crashed in the same month to an all time record low of only 250,000 annualized units. Home prices fell in the three months ending in January and offer little hope at this time for improvement. Any significant increase in home prices is two years away.

Consumer spending has recently become a bright spot for the economy. It has been growing at an annualized rate of about 4% for the past several months. Fortunately, most of the growth is coming out of income and savings instead of increases in consumer debt. Consumers continue to deleverage with the ratio of household debt to income falling from a high of 131 percent in 2007 to 116 percent at the end of 2010. Indeed, consumer debt fell monthly for nearly two years till October of last year. The savings rate remains in the 4-5 percent range.

The national economy should grow about 3.5 percent this year. That rate should be sufficient to push the unemployment rate to about 8% by yearend. Structural unemployment will continue to be problem.

The state economy will grow about 2.75 percent for the year. The state unemployment rate which is nearly 10% will drop to about 8.9 percent by yearend. The state budget problems will continue and be a drag on employment growth into 2012.

(c) NC Bankers Association

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