ODU Forecasting Team Predicts Regional Economic Growth in 2013 Will Lag Behind National Average
January 30, 2013
Vinod Agarwal
Old Dominion University's Economic Forecasting Team is predicting the national economy will grow at a slower rate in 2013 than it did in 2012, and that economic growth in Hampton Roads will continue to lag behind the national average.
The team, composed of College of Business and Public Administration faculty members Vinod Agarwal, professor of economics, Gary Wagner, professor of economics, and Mohammad Najand, professor of finance, presented its annual report Wednesday, Jan. 30, at the Norfolk Waterside Marriott.
The report, which is widely respected as an accurate harbinger of the year ahead for the region, forecasts regional economic growth of 1.68 percent, compared with national real Gross Domestic Product (GDP) growth of 2.1 percent.
The Economic Forecasting Team also paid tribute to Najand, who is resigning from the group to focus on other duties within the business college, including overseeing the Bloomberg Trading Room.
Below are the team's detailed regional and national forecasts. For more information about the Economic Forecasting Team and its projects, see http://bpa.odu.edu/forecasting/.
ANNUAL 2013 ECONOMIC FORECAST AND ANALYSIS FOR THE HAMPTON ROADS MSA
The Hampton Roads MSA (formally the Virginia Beach-Norfolk-Newport News MSA) includes Currituck County, Gloucester County, Isle of Wight County, James City County, Mathews County, York County, Chesapeake, Hampton, Newport News, Norfolk, Poquoson, Portsmouth, Surry County, Suffolk, Virginia Beach and Williamsburg.
Real Gross Regional Product (+1.68%)
The Hampton Roads economy is expected to grow at about the same rate in 2013 that the region experienced in 2012. However, we anticipate that regional growth in 2013 will be slower than our historical annual average of 3.2 percent and slower than that of the nation.
The debt-ceiling crisis in the U.S. and the sovereign debt crisis in the Eurozone created both anxiety and uncertainty in the world economy. As we begin 2013, we continue to face uncertainty due mainly to three factors: across-the-board spending cuts required by the sequester, the continuing resolution that is funding the federal government through March 27 at the same level as 2012, and the debt-ceiling crisis.
The region's economy, as measured by Gross Regional Product, expanded at a rate of 1.63 percent in 2012. However, this growth was not accompanied by commensurate employment growth. While, Department of Defense spending has continued to provide stability to overall growth in Hampton Roads, military spending within the region grew by only 1.62 percent in 2012. This was the smallest growth observed since 2001, and there is a real threat that military spending may actually decline in 2013.
Rising demand in the national economy will be a major factor affecting regional growth. Other important changes in 2013 that are likely to raise regional income in Hampton Roads include growth in port activity, the health care industry and tourism spending. Compared to past economic downturns, the region's recovery process will be unusual in the sense that, despite rising income and expenditures, employment growth in Hampton Roads is expected to proceed at a relatively slow pace. As far as jobs are concerned, local firms, like their counterparts in other areas of the country, appear to have learned to do more with less.
Employment (Non-Agricultural Civilian Employment +0.7%) and Unemployment Rate (Civilian Labor Force 5.6%)
Annual civilian employment is expected to increase by about 5,200 jobs during 2013. Employment growth is likely to be concentrated in firms providing professional and business services, education, leisure and hospitality, and health care services.
The Hampton Roads economy created about 44,700 net new jobs during the period from 2001 to 2007, which yields about 7,500 net new jobs annually. From 2007 to 2010, the recession and its aftermath have been responsible for the loss of an estimated total of 40,000 civilian jobs in Hampton Roads. The regional economy has been able to recover only 7,000 jobs since 2010. Even with the expected gain in jobs in 2013, annual civilian employment in Hampton Roads is expected to be below the level of employment observed in 2004, or at about 748,000 jobs.
The region's unemployment rate is expected to fall from 6.4 percent in 2012 to 5.6 percent in 2013.
Retail Sales (Taxable Sales +3.7%)
Taxable sales include all retail sales except new automobile registrations and gasoline sales. Compared to the pre-recession peak in 2007, retail sales in Hampton Roads fell by 8.6 percent through 2009 and continued to decline slightly, -0.2 percent, during 2010.
However, retail sales began to generally recover in January 2011. Sales increased by 3.2 and 3 percent in 2011 and 2012, respectively. Retail sales in the region are expected to grow by 3.7 percent in 2013 over the levels observed in 2012.
Growth in regional economic activity, rising incomes, consumer confidence and increase in wealth of households are all expected to result in positive growth in taxable sales.
Tourism (Hotel Room Revenue +3.3%)
The recession has had a particularly negative effect on travel and tourism nationwide as businesses attempted to control costs and households adjusted to a significantly tighter credit market by curtailing travel. Hampton Roads tourism industry also experienced tough years in 2008 and 2009. For instance, hotel revenue in Hampton Roads was 9.2 percent lower in 2009 compared to pre-recession revenue in 2007. The recovery has been slow with revenue growing 0.5 percent in 2010 and 1.9 percent in 2011. However, the industry saw its revenue grow by 4.5 percent in 2012. This is attributed to a recovering national economy, a moderate job growth in tourist market areas and almost no change in the number of hotel rooms in 2012. Despite a modest recovery observed in 2012, the hotel industry in the Williamsburg market continues to have serious problems in attracting tourists.
Positive growth in the national economy, particularly in Hampton Roads' main tourist market states, a continued slowdown in additional supply of hotel rooms and appreciation of the Canadian dollar will contribute to higher tourism revenue.
Port (General Cargo Tonnage +4.2%)
As part of the down cycle in international trade created by the recent recession, the Port of Hampton Roads experienced a decline in general cargo tonnage of 16.4 percent in 2009 compared to 2008. Twenty-foot-equivalent container Units (TEUs) declined by almost the same percentage. This decline was likely not a result of structural problems with the port but rather that the recent economic downturn was spread globally. The port saw a modest increase in both general cargo tonnage and TEUs during 2010 and 2011. However, we saw substantial growth in 2012. General cargo tonnage increased at a rate of 12.2 percent, while TEUs expanded at a 9.8 percent clip. For the first time since 2007, the port's share of TEUs handled on the East Coast ports also increased in 2012.
The port has gone through a transition as it prepares itself to improve its relative competitiveness, especially with other East Coast ports. Norfolk Southern's Heartland Corridor, its new service to Greensboro and CSX Corp.'s on-dock rail services at the Portsmouth APM terminal all contributed to its growth in 2012. Other major factors that contributed to its growth were larger ships, access to round-the-clock deep water, new first-in and last-out services and additional business from the region's economic development efforts. These factors will continue to help in the growth of the port in the coming year.
Housing (Value of Single-Family Housing Permits +8.2%)
The residential construction industry in Hampton Roads is expected to continue to grow in 2013. Several factors, most significantly lower new home prices, should help prompt this growth. For example, the median price observed for newly constructed homes in 2012 was $273,950, or 21.7 percent lower relative to its peak in 2006. Likewise by 2010, the number of newly constructed homes declined from its peak of 4,969 homes sold in 2002 to 2,265 homes sold in 2010, which is a 54.4 percent reduction.
Despite the fact that sales of newly constructed homes have been rising since 2010 - sales increased by 12.6 percent in 2012 compared to their levels in 2011 - current sales levels are still about 46 percent lower than those observed in 2002. Low mortgage rates and smaller homes with continued moderate prices should have a positive effect on the new-homes market.
Hampton Roads' existing residential housing market has been improving since April 2012. All indicators point to a continued improvement in this market for 2013.These include: a rising volume of sales, a smaller inventory of homes in the market, a decrease in number of days on the market and low mortgage rates. Measures of supply and demand indicate that it will take approximately 5.8 months to clear the existing inventory based on the current absorption rate, which is about the normal time period for the local residential market.
However, we continue to be concerned with the volume of distressed homes in the local residential market. Distressed homes, whether measured in sales as a proportion of all existing homes sold or measured in listings as a proportion of existing homes currently on the market, continue to represent a significant proportion (nearly a third) of the residential market activity.
Although mortgage interest rates are at their lowest levels in 50 years and household income in the region is recovering, lack of substantial employment growth, relatively tight home loan requirements and a large proportion of distressed market activity are likely to lead to a modest recovery in the Hampton Roads residential real estate market during 2013.
2013 ANNUAL NATIONAL ECONOMIC FORECAST
(All forecasted changes are relative to calendar year 2012)
Real GDP (2.1%)
Real GDP is projected to grow at 2.1% in 2013, which is slightly slower than in 2012 and below our 30-year average growth rate of 2.7%. This slower-than-average growth is, for the most part, the result of the continuing adjustments in household balance sheets and financial markets in the wake of the 'Great Recession.'
Real disposable income has improved since the end of the recession, but it has not rebounded at a pace that is commensurate with past recessions. This is largely due to the structural adjustments that continue to occur in labor markets, particularly in the construction and financial services sectors.
Household deleveraging, which began in 2008, remained steady in 2012. However, household debt, particularly mortgage debt, remains well above the levels of a decade ago. It is unlikely to expect consumer spending to increase at the rate that would be necessary for a more rapid (above average) economic recovery until the ratio of debt-to-income begins to approach its historical norm.
Based on after-tax profits and cash-on-hand, firms ended 2012 in their best financial position since the recession's end. Bank delinquency rates, with the exception of mortgages, have returned to pre-recession levels and the tightening of credit standards slowed considerably in the second half of last year. Combined with interest rates that are at or near all-time lows, the demand for mortgages, automobiles, and commercial and industrial loans all increased in the latter-half of last year. Once confident that increases in consumer spending are sustainable, firms are well-positioned to increase investment spending and accelerate the recovery.
A worldwide economic slowdown that began in the middle of 2012 is expected to continue at least for the first half of 2013. This reduced the demand for U.S.-produced goods and services and should slow the rate of exports next year. Import growth is also expected to slow in 2013 as growth in the U.S. economy slows. The deteriorating economic conditions of our major trading partners, the trade-weighted appreciation of the dollar late in the year and the ongoing concerns within the Eurozone suggest that net exports will likely be a drag on U.S. growth in 2013, predominantly early in the year.
Policy uncertainty, primarily from the federal government in the form of the "fiscal cliff" and debt limit negotiations, negatively impacted the economy in 2012. The American Taxpayer Relief Act of 2012 (the "fiscal cliff" deal) resulted in short-term fiscal tightening that will contribute to slower job growth in 2013 via expiration of the payroll tax reduction. In addition, uncertainty concerning the country's debt limit and solutions to our longer-term fiscal imbalances remains a serious barrier to restoring consumer and business confidence.
Payroll Employment (1.15%)
We forecast the national economy to add more than 1.5 million jobs in 2013, which represents a 1.15% increase over the 134 million jobs in place at the end of 2012. Labor market conditions remain fragile and job growth since the recession's end has remained well below levels experienced during previous recoveries. The expiration of the payroll tax reduction, continued structural adjustments and policy uncertainty are the driving factors that should contribute to slower employment growth in 2013.
Unemployment Rate (7.6%)
The unemployment rate is expected to decrease in 2013, but will continue to remain well above its historical average of 5.7% over the past 25 years. Long-term unemployment and the U6 unemployment rate, which measures individuals who have dropped out of the labor force over the past 12 months and individuals who are employed part-time due to the economy, both began to improve for the first time since the recession in the second half of 2012. Thus, while labor markets conditions are continuing to improve, the aforementioned factors contributing to slower job growth in 2013 will delay a more rapid recovery in the unemployment rate.
Consumer Price Index-U (1.73%)
Inflation is forecasted to remain slightly below the Federal Reserve's target rate of 2% in the near-term. Excess capacity in the economy, low capacity utilization and a slowing worldwide demand for U.S. goods and services should keep inflation risks low.
Three-Month Treasury Bill Rate (Year Avg. 0.20%)
Ten-Year Treasury Note Rate (Year Avg. 1.95%)
30-Year Conventional Mortgage Rate (Year Avg. 3.80%)
The Federal Reserve has publicly announced that monetary policy will remain "highly accommodative" as long as the unemployment rate remains above 6.5% and inflation expectations remain well-anchored. Moreover, a third round of quantitative easing began in September 2012 in which the Federal Reserve committed to purchasing $40 billion a month in mortgage-backed securities and $45 billion in other longer-term Treasury securities. We expect both short-term and long-term interest rates to remain near their 2012 levels as long as Federal Reserve policy remains unchanged.