ODU Forecasting Team: Regional Economy Picked Up Steam in First Quarter of 2013

May 21, 2013

Vinod Agarwal

The Hampton Roads economy picked up steam in the first quarter of 2013, according to Old Dominion University's Economic Forecasting Team.

The ODU team's economic forecast is widely respected as a harbinger of the year ahead for the region. The team's updated forecast and analysis of the economy after the first quarter of 2013 are given below. For more information about the Economic Forecasting Team and its projects, see http://bpa.odu.edu/forecasting/.

SECOND QUARTER 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 Domestic Product, according to the advance estimates released by the Bureau of Economic Analysis, increased at an annual rate of 2.5 percent in the first quarter of 2013. This increase was much larger than the 0.4 percent increase observed for the fourth quarter of 2012. The larger increase in Real Gross Domestic Product observed during the first quarter was primarily due to a 3.2 percent increase in Personal Consumption Expenditures. However, defense spending during the first quarter of 2013 and the last quarter of 2012 decreased by 11 and 22 percent respectively.

The national economy also added 618,000 jobs during the first quarter of 2013, or an average of 206,000 per month. Preliminary estimates provided by the Bureau of Labor Statistics indicate that the economy added only 165,000 jobs during the month of April 2013. Seasonally adjusted unemployment rate for national economy has also decreased from 7.8 percent in December 2012 to 7.5 percent in April 2013. These measures indicate that the national economy continues to improve but at a slow pace.

For Hampton Roads, due to sequestration and the region's heavy dependence on Department of Defense, we expect Real Gross Regional Product to grow by about 1 percent in 2013. Bureau of Labor Statistics revised data in March 2013 indicate that the regional economy actually added 6,100 jobs in 2012 rather than a gain of 5,300 jobs as previously estimated.

Year-to-date economic data through March 2012 for Hampton Roads continue to show some improvement in the labor market. Regional economy had about 13,000 more jobs, an increase of 1.8 percent, in the first four months of 2013 compared to the same time period in 2012. However, seasonally adjusted data also show that since December 2012 Hampton Roads economy added only 1,200 jobs or 300 per month. The unemployment rate has declined from 7.0 percent to 6.2 percent during first quarter of 2013 when compared with the first quarter of 2012.

In addition, due to uncertainty caused by sequestration and the increase in payroll tax, taxable sales during the first quarter of 2013 decreased by 0.8 percent when compared to sales during first quarter of 2012. New car and truck registrations during the first four months of 2013 have also decreased by 2.5 percent when compared to the same time period in 2012. Sequestration and the resulting decrease in travel by Federal employees, especially military personnel and defense contractors, have had a negative effect on the performance of the hotel industry. Hotel revenues increased by only 0.7 percent during the first three months of 2013 compared to the same time period in 2012.

Improvements in the national economy and its effect on the regional economy can be seen in the performance of the port activity. During the first four months of 2013, cargo tonnage and twenty foot equivalent units (TEU) at the port of Hampton Roads increased by 6.3 and 6.2 percent respectively when compared to the same time period in 2012. Finally, value of 1 unit residential building permits saw an increase of 19.5 percent during the first quarter of 2013.

Employment (Non-Agricultural Civilian Employment +1.2%)

Unemployment Rate (Civilian Labor Force 6.0%)

Employment is expected to increase in the second quarter at a lower rate compared to the growth observed for the first quarter. Employment growth is likely to be concentrated construction, professional and business services, and health care services. The region's unemployment rate will continue to fall and remain considerably below the national level.

Retail Sales (Taxable Sales +1.8%)

As the regional economy continues to recover, we expect that taxable sales will increase at a modest pace.

Tourism (Hotel Room Revenue +1.4%)

An anticipated recovery in the national and tourist market areas' economy should lead to an increase in hotel revenue for the second quarter. However, sequestration and resulting reduction in travel by federal government employees will dampen growth.

Port (General Cargo Tonnage +3.8%)

The strong performance of the port during the first three months of 2013, during which cargo tonnage increased by 6.3 percent, provides good news for the regions' economy. We expect this trend in cargo tonnage to continue during the second quarter but at a lower rate.

Housing (Value of 1-Unit Family Housing Permits +16.2%)

The number of housing permits issued for 1-unit residential homes during the first quarter of 2013 increased by 8.9 percent compared to first quarter in 2012 and the value of these permits increased by 19.5 percent. This growth is indicative of the builder's confidence in the regional economy as well as a substantial reduction in the inventory of existing homes available for sale. We expect that the value of these permits will continue to increase during the second quarter.

The Hampton Roads' existing residential housing market has been improving since April 2012. All indicators point to a continued improvement in this market for the second quarter of 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 6.3 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 as listing of existing homes currently on the market, continue to represent a significant proportion (between a third and a fourth) 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 home prices during the second quarter.