Second Quarter Update Shows Local Economic Growth Has Slowed

May 22, 2014

Vinod Agarwal

Growth in the Hampton Roads economy has slowed, according to the 2014 second quarter economic forecast and analysis produced by Old Dominion University's Economic Forecasting Team.

Forecasts presented by the team, which is composed of College of Business and Public Administration economics professors Vinod Agarwal and Gary Wagner, are widely respected as an accurate harbinger of the economy for the region.

The report is as follows:

THE HAMPTON ROADS MSA

The Hampton Roads Metropolitan Statistical Area (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 for the region, according to the advance estimates released by the Bureau of Economic Analysis, barely grew in the first quarter, increasing by only 0.1percent (annual rate) after growing at 2.6 percent during the fourth quarter of 2013. The slow growth observed during the first quarter has been attributed partly to adverse winter weather conditions. Decrease in growth has also been due to a downturn in exports and in nonresidential investment, a larger decrease in private inventory investment, a deceleration in personal consumption expenditures and a downturn in state and local government spending. However, personal consumption expenditures that account for more than two thirds of economic activity, increased at a rate of 3 percent compared to an increase of 3.3 percent during the fourth quarter.

The national economy also added 569,000 jobs during the first quarter of 2014, or an average of 190,000 per month. Preliminary estimates provided by the Bureau of Labor Statistics indicate the economy added 288,000 jobs in April 2014. The seasonally adjusted unemployment rate, for the national economy, also decreased from 6.7 percent in December, 2013, to 6.3 percent in April, 2014, after remaining at about 6.7 percent for each of the first quarter's three months. These measures indicate that the national economy continues to improve.

For Hampton Roads, due to the region's heavy dependence on the Department of Defense and a modest expected increase in defense spending, the Real Gross Regional Product is expected to grow by about 2.2 percent, in 2014. Bureau of Labor Statistics data, revised in March, 2014, indicate the regional economy actually added 7,450 jobs in 2013 rather than a gain of 14,950 jobs as previously estimated.

Year-to-date economic data collected through March, 2014, for Hampton Roads show mixed results for the regional labor market. According to Current Employment Statistics (CES), job growth in Hampton Roads was almost flat (slightly negative) during the first quarter of 2014 compared to the same time period in 2013, regardless of whether seasonally adjusted data or the unadjusted data are examined. However, Local Area Unemployment Statistics (LAUS), which are generated through a survey of households, show the number of individuals employed increased by 12,000 during the first quarter of 2014 compared to first quarter of 2013. The labor force also increased by 6,600 and the number of unemployed individuals decreased by 5,400. Consequently, the unemployment rate declined from 6.5 percent to 5.8 percent during the first quarter, of 2014, when compared with the first quarter, of 2013.

In addition, lingering effects of uncertainty caused by sequestration continue to have a negative impact on hotel industry performance. Hotel revenues decreased by 1.8 percent during the first three months of 2014 compared to the same time period, in 2013. Taxable sales during the first quarter of 2014 increased by only 1.7 percent; and new car and truck registrations during the first four months of 2014 grew by 2.6 percent when compared to the same time period in 2013.

Improvements in the national economy and its effect regionally can be seen in port activity performance. During the first four months of 2014, cargo tonnage and twenty foot equivalent units (TEU) at the port of Hampton Roads increased by 10.2 and 8.6 percent, respectively, when compared to the same time period, in 2013. However, the value of one-unit residential building permits saw a decrease of 14.8 percent during the first quarter of 2014.

Employment (Non-Agricultural Civilian Employment +0.2%)

Unemployment Rate (Civilian Labor Force 5.4%)

Employment is expected to increase in the second quarter. Growth is likely to be concentrated in construction as well as professional, business and health care services. The region's unemployment rate will continue to fall and remain considerably below the national level.

Retail Sales (Taxable Sales +2.2%)

As the regional economy continues to recover, taxable sales are expected to increase at a modest pace.

Tourism (Hotel Room Revenue +3.2%)

An anticipated recovery in the national and tourist market areas' economy should lead to an increase in hotel revenue for the second quarter.

Port (General Cargo Tonnage +6.3%)

Strong port performance during the first three months of 2014, during which cargo tonnage increased by 10.2 percent, provides good news for the regions' economy. This trend in cargo tonnage is expected to continue during the second quarter, but at a lower rate.

Housing (Value of One-Unit Family Housing Permits -9.7%)

The number of housing permits issued for one-unit residential homes during the first quarter of 2014 decreased by 14.1 percent compared to the first quarter, of 2013, and the value of these permits decreased by 14.8 percent. However, this decline occurred after substantial growth was observed in both the number and value of one-unit residential housing permits during 2012 and 2013. The decrease in value of these permits is expected to continue during the second quarter but at a lower rate as builders adjust to local residential housing market conditions.

Hampton Roads' existing residential housing market basically stalled during the first four months of 2014. The median price of existing homes through April 2014 has declined by 0.5 percent and the number of existing homes sold declined by about 6 percent. However, the decline in sales volume was primarily due to an 18.2 percent decrease in sales of distressed homes.

Other indicators point to continued improvement in this market during the second quarter of 2014. These include a steady volume in sales of non-distressed homes, relatively small inventory of homes on the market, a decrease in number of days on the market and historically low mortgage rates. Measures of supply and demand indicate that it will take approximately 6.4 months to clear existing inventory based on the current absorption rate, which is about the normal time period for the local residential market.

However, the volume of distressed homes in the local residential market continues to be cause for concern. 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 (between a fourth and a fifth) of 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 Hampton Roads home prices during the second quarter.