The advanced estimates for real Gross Domestic Product (GDP)—the output of goods and services produced by labor and property located in the United States—show GDP growing 0.6 percent in the first quarter of 2008 (chart ). This is the same growth rate that was observed for the last quarter of 2007. These growth rates are considerably lower than the average 3 percent growth that the U.S. economy has experienced in the last five years. This significant drop in the growth rate of GDP is related to the turmoil observed in the housing and financial markets. Indeed, in the first quarter of 2008, investment in residential construction dropped 26.7 percent and subtracted 1.2 percentage points from the GDP growth rate. For the last eight quarters, residential construction alone has been subtracting around 1 percentage point from U.S. growth. This contraction in the housing markets led to significant drops in the value of homes and a devaluation of the net worth of households. That, combined with mounting anxiety over rising food and energy prices, has affected consumers’ moods and their willingness to spend. Indeed, in the first quarter of 2008, real personal consumption expenditures, which in recent years had grown at more than 3 percent a year, dropped to a mere 1 percent. With this environment it is understandable that businesses have been reluctant to invest, which explains the negative growth in business spending for structures, equipment, and software. The bright spot has been the external market. This quarter, exports of goods and services increased 5.5 percent, adding 0.67 percentage points to the GDP growth rate. The decline in the dollar against other major currencies has provided U.S. exporting firms with a competitive advantage in international markets, and exports are likely to remain an important contributor to economic growth. However, there is some concern that exterior demand may be faltering. The steady increase in the prices of energy, food, and other commodities is putting pressures on the budgets of consumers all over the world. Crude oil prices, which averaged $72.32 per barrel in 2007, are now trading at more than $130, with a clear tendency to increase in the coming months. To make things worse, the exchange rate for the dollar remains low, adding to the inflationary pressures in the economy, and the unemployment rate has been steadily increasing. Nevertheless, our model predicts that the U.S. economy will grow in 2008, despite a drop in real GDP in the second quarter of 2008. The model also predicts that the national unemployment rate will rise during 2008, reaching 5.5 percent by the end of the year.

With respect to the South Carolina economy, the growth expectation for 2008 is revised downward. Six months ago total employment was predicted to grow around 1 percent, but expectations are now much lower (chart). Unless there are significant improvements in the economy during the second half of the year, total employment is expected to increase only 0.2 percent, which translates into a net increase of 3,000 jobs. The downturn in construction has been much higher than anticipated (chart). Single-family housing permits had 20 consecutive months of year-to-year declines, and the largest declines were observed in the first three months of 2008 (chart ). Construction activity is forecast to rebound in the second quarter of 2009. As a consequence, there is likely to be a loss of 4,400 jobs in the construction sector in 2008, but that loss could be even larger. Other declines are expected, albeit smaller, in retail trade employment (-500), and professional and business services (-1,600). Despite the favorable environment for the export-oriented industries, declines are still forecast in manufacturing employment (-4,800). Growth is expected to come from the health sector (+5,900) and leisure and hospitality services (+2,100).

The state’s unemployment rate, which had dropped in recent months, is expected to rise again, reaching a peak of 6.5 percent during the late spring and summer (chart ). According to the model, the unemployment rate will average 6.2 percent in 2008, an 2008 income growth is expected to fall to 4.6 percent.