11

ECONOMIC OUTLOOK ECONOMIC OUTLOOK 2008: PAUSE OR DROP?2008: PAUSE OR DROP?

Dr. Mike WaldenDr. Mike WaldenNorth Carolina State North Carolina State

UniversityUniversity

22

Slower Growth Ahead Slower Growth Ahead (US Real Annualized GDP Growth Rate)(US Real Annualized GDP Growth Rate)

00.5

11.5

22.5

33.5

44.5

5

%

33

One Reason – Slower Corporate ProfitsOne Reason – Slower Corporate Profits(% change in real after-tax corporate profits)(% change in real after-tax corporate profits)

-20-15-10

-505

101520253035

%

1991 1993 1995 1997 1999 2001 2003 2005 2007

44

Job Growth Will SlowJob Growth Will Slow(annualized nonfarm payroll growth rate)(annualized nonfarm payroll growth rate)

0

0.5

1

1.5

2

2.5

%

2005,1

2005,4

2006,3

2007,2

2008,1

2008,4

55

And the Unemployment Rate WillAnd the Unemployment Rate Will Rise Rise(household unemployment rate)(household unemployment rate)

4

4.2

4.4

4.6

4.8

5

5.2

5.4

%

66

But the Consumer Hasn’t Fallen BehindBut the Consumer Hasn’t Fallen Behind(% change in real personal disposable income per capita)(% change in real personal disposable income per capita)

-1

0

1

2

3

4

5

%

77

Growth in Employee Costs Has Been ModestGrowth in Employee Costs Has Been Modest(annualized % increase in wages and benefits)(annualized % increase in wages and benefits)

-2

-1

0

1

2

3

4

5

6

7

%

wagesbenefits

88

Core Inflation Has Behaved !Core Inflation Has Behaved !(annualized % increase in CPI)(annualized % increase in CPI)

-3

-2

-1

0

1

2

3

4

5

6

7

%

Total Core

99

Behind Much of the Slowdown is Behind Much of the Slowdown is the Housing Marketthe Housing Market

1010

Interest Rates Have Moved the Housing MarketInterest Rates Have Moved the Housing Market(federal funds rate, % chg in starts, and % chg. in house price)(federal funds rate, % chg in starts, and % chg. in house price)

-25

-20

-15

-10

-5

0

5

10

15

2000

2001

2002

2003

2004

2005

2006

2007%

int. ratestartsprice

1111

Excess Supply Has SurgedExcess Supply Has SurgedExcess Supply Has SurgedExcess Supply Has Surged

2

4

6

8

10

12

1990

- Ja

n

1990

- Nov

1991

- Sep

1992

- Ju

l

1993

- M

ay

1994

- M

ar

1995

- Ja

n

1995

- Nov

1996

- Sep

1997

- Ju

l

1998

- M

ay

1999

- M

ar

2000

- Ja

n

2000

- Nov

2001

- Sep

2002

- Ju

l

2003

- M

ay

2004

- M

ar

2005

- Ja

n

2005

- Nov

2006

- Sep

2007

- Ju

l

Months Supply of Single Family Homes

1212

Subprime Mortgage Problems Have JumpedSubprime Mortgage Problems Have Jumped(percent of loans past due)(percent of loans past due)

9

10

11

12

13

14

15

16

%

2002 2003 2004 2005 2006 2007

1313

And There Are More Problems to ComeAnd There Are More Problems to Come(subprime loan balances with nearing reset dates)(subprime loan balances with nearing reset dates)

0

5

10

15

20

25

30

35

40

$bils.

2007,10 2008,3 2008,9 2009,2 2009,7 2009,12

1414

Gas Prices: As They Rise, Will Gas Prices: As They Rise, Will They Bring Us Down?They Bring Us Down?

1515

Gas Prices Are Also an Issue, But Maybe Not as Gas Prices Are Also an Issue, But Maybe Not as Much as Thought!Much as Thought!

(price per gallon, nominal and real $2000)(price per gallon, nominal and real $2000)

0

0.5

1

1.5

2

2.5

3

$ nom.real

1616

We’re Using Energy More EfficientlyWe’re Using Energy More Efficiently(thous. Of btus per real $ of output)(thous. Of btus per real $ of output)

02468

101214161820

1970 1975 1980 1985 1990 1995 2000 2005

1717

As a Result, the Pinch of Gas Prices Has Been As a Result, the Pinch of Gas Prices Has Been DulledDulled

(gas and oil spending as a % of total spending)(gas and oil spending as a % of total spending)

0

0.5

1

1.5

2

2.5

3

3.5

4

1990 1992 1994 1996 1998 2000 2002 2004 2006

%

1818

Another Issue – The Trade Deficit Another Issue – The Trade Deficit and the Dollarand the Dollar

1919

There Is a LinkThere Is a Link(trade deficit % of GDP on left scale and dollar exchange rate against major (trade deficit % of GDP on left scale and dollar exchange rate against major

currencies on right scale)currencies on right scale)

0

1

2

3

4

5

6

7

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

50

60

70

80

90

100

110

120

deficit

exch rt.

2020

PolicyPolicy

2121

We’re Living with Past Policy DecisionsWe’re Living with Past Policy Decisions(% growth in adjusted monetary base)(% growth in adjusted monetary base)

0

2

4

6

8

10

12

1991 1993 1995 1997 1999 2001 2003 2005 2007

2222

Relative Federal Deficits Have DroppedRelative Federal Deficits Have Dropped(deficit as % of GDP)(deficit as % of GDP)

0

0.5

1

1.5

2

2.5

3

3.5

%

2003 2004 2005 2006 2007

2323

After a Run-up, Interest Rates Have After a Run-up, Interest Rates Have Drifted LowerDrifted Lower

0

1

2

3

4

5

6

7

2000 2002 2004 2006 2008

fed fundsT-bond

2424

NORTH CAROLINANORTH CAROLINA

2525

NC vs. US and Southeast GSP

100102104106108110112114116118120

2000 2001 2002 2003 2004 2005 2006

Ind

ex

NCUSSE

2626

NC, US, and Southeast Unemployment Rate

33.5

44.5

55.5

66.5

7

2000 2001 2002 2003 2004 2005 2006

%

NCUSSE

2727

But Recently, Employment Growth Has Slowed

0

1

2

3

4

5

%

200620072008

2828

Housing Price Boom Was More ModestHousing Price Boom Was More Modest in NC in NC(national and NC house price appreciation rates)(national and NC house price appreciation rates)

0

2

4

6

8

10

12

14

2000 2001 2002 2003 2004 2005 2006 2007

%

USNC

2929

So “Crash” Was Delayed and MilderSo “Crash” Was Delayed and Milder(% change in US and NC housing starts)(% change in US and NC housing starts)

-30

-25

-20

-15

-10

-5

0

5

10

15

20

2000 2001 2002 2003 2004 2005 2006 2007%

USNC

3030

As Always, NC Regional Growth VariesAs Always, NC Regional Growth Varies(% change in employment, 2007 and forecasted 2008)(% change in employment, 2007 and forecasted 2008)

-0.5

0

0.5

1

1.5

2

2.5

%

20072008

3131

5

10

15

20

25

30

35

%

The Two Ends of the Occupational Structure Are Growing in NC

(% change in occupational categories)

20002005

3232

The “Returns to Education” Have Increased in NCThe “Returns to Education” Have Increased in NC(% change in hourly wage, after inflation, 2000-2005)(% change in hourly wage, after inflation, 2000-2005)

-10

-8

-6

-4

-2

0

2

4

%

Col Grad Some Col HS Grad HS Drop

3333

Final CommentsFinal Comments

• No “official” recession, but will look and No “official” recession, but will look and feel like onefeel like one

• Housing market is calling the shots nowHousing market is calling the shots now• Fed will choose growth over inflationFed will choose growth over inflation• 2008 will be a year to “hold back” – 2008 will be a year to “hold back” –

economy and election uncertaintyeconomy and election uncertainty• Challenge for NC: spreading the Challenge for NC: spreading the

prosperityprosperity