Economic Forecast

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Thank you to our Platinum-level Economic Development Fund sponsors, Bank of America and Wachovia/Wells Fargo for their generous support.

The Economic Forecast, brought to you by UNCC and the Charlotte Chamber, is an initiative designed to provide analysts and decision makers in the private and public sectors with timely information about the current and near-term health of the Charlotte-Mecklenburg economy.

Supported by the Charlotte Chamber of Commerce and developed by Harrison Campbell in the UNC Charlotte Department of Geography and Earth Sciences, The Economic Forecast serves as a barometer for the Charlotte area.

Updated quarterly with the most recently available data, these indicators are designed to track and predict changes in the local business cycle.

Bingo! Charlotte Index Hits the Mark
Released June 7, 2010

Charlotte’s economy is now on the upswing. At the risk of sounding self-congratulatory, the Charlotte Business Growth Index has once again correctly predicted the area’s economic turning point. Since last August, we’ve been predicting that growth would resume in the first quarter of 2010. There is now evidence that growth has resumed and employers are feeling more optimistic. Though modest, we expect the current trend to last throughout the year.

Are there still reasons for concern? Will unemployment drop noticeably? Most economists would say “yes” and “no”, respectively. However, since the beginning of the year, our leading index has increased 3.6 percent and by some estimates, roughly 6,000 jobs have been filled. While the summer months may be challenging, and here is much ground make-up, we are in a much better position today than a year ago.

April Leading Index
Charlotte’s leading economic index posted another solid gain in April, marking 13 consecutive months of increase. Increasing 0.8 percent, our leading index now stands at 103.6 (2004=100). Gains of this size are notable because the leading index is designed to predict the direction of our economy over the next six to nine months. Shown in Figure 1, the leading index peaked early in 2007, beginning its decent the following April. By December 2007, the leading index correctly anticipated the recession which began locally at the end of that year. After 23 months of decline, our leading index has registered positive movements each month since April 2009, foreshadowing the recession’s end. The fact that it has turned upward and now exceeds its own 12-month moving average, reaffirms our optimism. Over the last six months, our leading index is up 7.2 percent, a six month gain that has not been repeated 2Q83.

In April, the gain was fairly broad-based with three of five indicators making a positive contribution to the leading index. Figure 2 shows new vehicle registrations. Even though the raw data indicate a drop in new vehicle registrations, after smoothing and seasonal adjustment, new car sales were actually up 7.2 percent. Compared to the monthly average of 4Q09, the monthly average of the first four months in this year is up 18.6 percent.  As a measure of local consumer confidence, the new vehicle data suggest either some purchases were delayed by cautious consumers and/or at least some consumers are betting on improving conditions in the near-term. Both market segments appear to be cautious, however, as new car sales are generally below their monthly peak of about 5,000 in 2006.

Another component making a significant positive contribution to the leading index was first-time claims for unemployment, our measure of local labor market conditions. Seasonally adjusted data shown in Figure 3 reveal first-time claims for unemployment have been trending downward since November. In fact before data smoothing, first-time claims are down 12.8 percent so far this year when compared to 4Q09. Once again, unemployment data represent both good news and bad. On the good side, first-time claims appear to be moderating over the last several months. To be sure, some job growth is attributable to the hiring of Census takers. And, as the job market improves, we should expect to see some previously discouraged workers re-join the labor force. Similarly, the summer months tend to flood the labor market with students seeking jobs. So, in spite of job growth, the unemployment rate could actually rise in the summer months. Many expect the local unemployment rate to hover around April’s reading of 10.1 percent for most of the year in spite of improving job prospects. Unemployment is a lagging indicator and will be among the last big ticket indicators to improve.

In Figure 4, average workweek hours in regional manufacturing (our measure of local production) edged upward slightly in April (0.7 percent). Although manufacturing is a smaller part of the local economy than in years past, the measure reflects an overall volume of business activity in a sector that is famously cyclical. Typically, employers will extend work hours before expanding payroll employment, so even relatively small upticks are encouraging.  Also shown in Figure 4 is the US leading index which has increased in 12 of the last 13 months, though in April it declined slightly (0.1 percent). Since this time last year, the US leading index is up 10.5 percent.

 The only component to make a significant negative contribution to the leading index was new permits issued for residential construction (Figure 5). It’s no secret there is a long way to go before we see permitting activity of, say, 2006. Although sales of existing homes are up, due in part to the federal home buyer’s tax credit extension, sales prices have slipped 2.5 percent since this time last year. With a glut of supply and dampened demand, new construction has been especially hard hit. For the first four months of the year, new residential building permits have averaged only 250 per month, well-off the breakneck pace of nearly 1,000 per month four years ago.

Current Conditions
The April data comprising the coincident index were especially encouraging. After adjusting for seasonal fluctuations, about 3,000 jobs were added in April. Unfortunately, there have been delays in reporting retail sales, so September data continue to be the most current. However, as shown in Figure 6, our coincident index, a snapshot of current conditions, increased 0.6 percent in April and now stands at 104.6 (2004=100). Over the course of the year, the coincident index is still down 1.4 percent. Clearly, consumers are guarded about their spending and falling home prices mean equity-financed spending of the last several years has been severely curtailed. In fact, for the period ending in September 2009, retail sales are running about 15 percent below the first nine months of 2008. Employment in the county has been rising over the last few months, though it will take some time to regain the jobs lost since 2008.

One way to view the current local economic situation is to compare trends in Charlotte’s coincident index with its own 12-month moving average (also shown in Figure 6).  As a general rule, the local economy is expanding when the coincident index is above its 12-month trend line.  Conversely, growth is slowing when the coincident index falls below the 12-month trend.  Figure 6 shows that the coincident index fell below its 12-month average in July 2008 though they are currently about equal. If the leading index trends continue, the coincidence index, and by implication employment and/or retail sales, should continue to improve.

Outlook
While there is still plenty to worry about, Charlotte’s near-term outlook looks brighter now than it has in nearly two years. Our leading index is up 11.8 percent over the year, job growth is resuming. The housing market and new construction will probably struggle for the rest of the year.  For a variety of reasons, however, we expect the recovery to be a gradual one.
First, we should be cautious about interpreting our leading index.

Because several of the indicators that comprise the index fell to very low levels over the past two years (i.e. residential building permits and new vehicle registrations) most any positive movement in them will produce a seemingly large percentage change in the overall index. So, while the recovery is underway, it might not be as brisk this time around as our leading index seems to suggest.

Second, while some consumers are coming back to the market, they will do so cautiously. Much of the home equity-financed consumption of the past is gone. One recent report suggests that as many as 25 percent of all US homeowners are now “under water.” Further, unemployment will continue to be a significant concern for the balance of the year.

Third, some of the recent surge in employment is attributable to the federal government. Census workers, most of whom will not be kept on after July, have boosted local employment levels. And, of course, the federal stimulus package is probably responsible for some of our recent growth. Neither form of government investment will last forever.

Still, there are reasons for optimism. Nationally, business investment is up beyond levels needed to replenish inventories. Further, a recent survey of Charlotte area employers conducted by The Employers Association revealed that about half of the respondents have recently begun to fill vacant positions and 47 percent have added new jobs.

According to our indices, the economic picture for many residents and the region as a whole should look a little brighter soon. Figure 7 shows recent trends in both the leading and coincident indices. Of special importance is the upward trajectory of the leading index because it indicates where the coincident index (jobs and retail sales) is headed in the next six to nine months. Immediately evident is that the leading index has turned sharply upward in the last 13 months which should spell good news for employment and retail sales for the balance of the year.

So, once again, Charlotte’s leading economic index has hit the mark, correctly predicting improved business conditions that started 1Q10. Given current trends in the leading index, we should expect improvements in employment and/or retail sales, albeit modest.  In each of the past 13 months, our leading index has increased markedly. True, there is a lot of ground to make up. However, after 22 months of decline, our leading index has turned solidly upward, increasing 6.8 percent over the last six months. With these data and trends in the leading index, we expect Charlotte’s economy to grow at an annual rate of about 3.0 percent in the second half of the year.
 

~ Harrison S. Campbell, Jr., Associate Professor of Geography
University of North Carolina at Charlotte

Appendix Data

Revisions to the Charlotte Business Growth Index

The June 2009 release of the Charlotte Business Growth Index reflects several revisions to its leading index, an update of its coincident index, new trend adjustments and a re-basing of the indices. Consequently, prior releases of the index, though very similar in trend and turning points, are not directly comparable to releases prior to June. A full monthly history of the revised leading and coincident indices, dating back to 1981, is available here.

Revisions and updates include the following changes:
The coincident index now includes Taxable Retail Sales rather than Gross Retail Sales, the latter of which was discontinued by the North Carolina Department of Revenue at the end of FY 2005. Taxable Retail Sales, dating back to June 2005 are now used in the coincident index.

The leading index now incorporates First-Time Claims for Unemployment Insurance (UI Claims). Historical data starting in July 1996 have been incorporated. UI Claims replace help-wanted linage from the Charlotte Observer. This change was made because of the long-term downward trend in help-wanted classified ads associated with on-line job advertising.

Beginning in January 2008, the North Carolina Employment Security Commission stopped reporting Average Workweek Hours in Manufacturing by metro area. However, they continue to report statewide workweek hours by industry and hope to resume reporting metro-level data in the future. Since January 2008, we have estimated metro-level data. The June 2009 release of the index includes a refined estimate of Charlotte metro area workweek hours.

Even with the above changes made, the basic trends and business cycle turning points are remarkably similar, though not exactly the same. To accommodate the above changes, new long-term trend adjustments have been incorporated.

Finally, the index has been re-based so that 2004=100 making it more consistent with other data sources. Earlier releases of the index used 1996 as the base year. At the same time, taxable retail sales are also expressed in terms of 2004 price levels.