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.

What’s This? Growth?
Released January 25, 2010

Fueled by solid retail sales and the addition of 1,500 jobs in November, Charlotte’s coincident economic index posted its first gain in 18 months. Its seemingly modest gain of 0.2 percent is significant because it is the first mark of “normal” growth since the recession began two years ago and is consistent with our predictions based on leading index trends that started last Charlotte’s leading economic index increased too, suggesting better times ahead. While data on holiday retail sales are not yet available and local unemployment rates are likely to increase, we suspect that job growth will resume in 1Q10 even if the recovery is slow. These results are based on recent index revisions that we believe better reflect the economic condition of the area.

November Leading Index
For November, the gain was not as broad-based as in prior months; two of five components increased, two declined, and one was basically unchanged. Figure 2 shows new vehicle registrations (our measure of local consumer confidence) over the last year. Although the raw data below show the number of new vehicles declining by about 1,000 over the month, data smoothing that accounts for sales in the past three months made a positive contribution (0.4 percent) to the leading index. No doubt, the “cash for clunkers” program boosted August sales (which were reported in September) but October sales were reasonably healthy, greater than most months during the year. Just the same, is also true that new vehicle registrations are well off their peak of about 5,000 monthly in 2006.

The other component making a significant positive contribution to the leading index was first-time claims for unemployment, our measure of local labor market conditions (Figure 3). The raw data appear fairly flat since September, but like new vehicles registrations, data smoothing reveals a 3.5 percent decline in November’s first-time claims. In fact, first-time claims for unemployment have declined about 25 percent since August, though year-to-date figures are up 47 percent over November 2008. Fewer claims for unemployment are obviously a good labor market sign, though we should expect these numbers to increase in the short-run as temporary holiday employment comes to an end. For this and other reasons (see below), it is unlikely that improving job growth will translate directly to lower unemployment rates over the next few months. Although November-to-November unemployment grew from 7.5 percent to 11.0, it was unchanged from this October. For many, the recession will not feel like it’s over until unemployment returns to more normal levels. Unfortunately, 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 up only slightly in November (0.04 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 also increased in each of the last eight months.

Residential building permits (Figure 5) fell again in November, 5.5 percent. While average home prices have begun to rebound, the volume of sales is obviously down and thus the number building permits continues to sag as the market tries to clear inventory. In spite of its September jump, the housing sector has a long way to go before resuming the 800-900 permits issued monthly early in the decade (in 2006, it was not common for more than 1,000 residential permits to be issued in a single month) . The only good news for the leading index is that new building permits have fallen so low there is little room for change except to go up. 

Current Conditions
The big news for November was that both employment and retail sales grew, pushing the coincident index upward for the first time in 18 months. Yes, it is premature to suggest that this trend will continue in the very short run because the holiday retail sales data will probably be disappointing and first time claims for unemployment will probably increase in December and January. However, as shown in Figure 6, our coincident index, a snapshot of current conditions, increased 0.2 percent and now stands at 103.8 (2004=100). Over the course of the year, the coincident index has fallen 4.4 percent with the biggest decline coming from falling retail sales (current through September). Clearly, consumers are guarded about their spending and falling home prices mean equity-financed spending of the last several years has been severely curtailed. Employment in the county rose 0.4 percent in November with and goods production and services accounting for the lion’s share.

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. If the leading index hits its mark the coincidence index, and by implication employment and/or retail sales, should improve early next year.

Outlook
After months of speculation, we can be confident that economic recovery is near. While the recovery will not be even and smooth across all regions and all sectors, there are good signs locally that the worst is behind us. Unemployment is nudging downward, area home prices have increased slightly, and the Chamber’s new and expanded business report looks promising. To be sure, there is still plenty to worry about: We have not seen the last of home foreclosures; equity-financed consumer spending has slowed; credit markets, especially to businesses, are still very tight; and there is concern about the commercial real estate market. So, we should not expect the pace of recovery to be rapid. Indeed, as a lagging indicator, the unemployment picture will not look good for months to come. Further, in the months to come, we need to be cautious about interpreting our leading index. Because building permits are at historical lows, any increase in the broader economy will produce large percentage gains in the number of building permits issued and thus possibly inflate leading index gains.

Further, with unemployment at 11 percent, consumer confidence is very low and the unemployment situation is not likely to improve very quickly. In fact, unemployment will probably rise in the months to for at least two reasons: (1) with the holidays behind us, many temporary workers now find themselves without work and (2) as the economy improves some discouraged workers will again join the labor force seeking employment expanding labor force but not necessarily employment. So, for those of us who worry about the economy, there is plenty to think about.

But, according to our indices, the economic picture for most residents should improve soon as our recession comes to an end. 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 eight months. While any single month change might not mean much in terms of future growth for the region, the eight-month upward trend should spell good news for the local economy. Why? Because three “rules of thumb” have proven to be durable signs of economic turning points: (1) monthly changes of 0.5 percent or more; (2) a pattern of consistent change, either up or down, lasting four or more months; and (3) a 2 percent change in the six-month moving average of the leading index. All three of these “rules” have been satisfied and, even though November might be only one observation, local economic conditions improved slightly.

If Charlotte’s leading economic index hits the mark again, we should see signs that the recession is coming to an end, with generally improving economic conditions in 1Q10. That means by March 2010 (once the holiday turmoil has past) both employment and/or retail sales should start growing again. In each of the past eight 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 4.3 percent since last May. With these data and trends in the leading index, the six-month-ahead forecast for the Charlotte area remains at 2.8 percent.

~ 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.