Quarterly   outlook

The South Carolina and national economies continue to expand at a solid pace. Production is increasing, job levels are trending up while the unemployment rate is generally trending down, and inflation does not appear to be a significant problem—and the Federal Reserve is steadily raising interest rates to ensure that it stays that way. There do not appear to be substantial roadblocks for the economy over the short term. Many of the issues currently receiving a great deal of attention, including the federal budget deficit and the debates over the future of Social Security, are issues that can surely impact the economy over the longer term. However, for the remainder of 2005, the economic outlook is quite positive.

The U.S. Bureau of Economic Analysis recently released the first estimate of real gross domestic product (real GDP) for the fourth quarter of 2004. In the fourth quarter, real GDP is estimated to have grown at an annual rate of 3.1 percent. This pace is slower than the 4.0 percent growth in the third quarter and the slowest since the 1.9 percent growth rate in the first quarter of 2003. However, an economy growing at 3.1 percent is one that is generally viewed as growing at a solid and sustainable pace. As is often the case, the largest contributor to real GDP growth at the end of the year was personal consumption spending, followed by gross private domestic investment. Government spending also added to real GDP growth while negative net exports held back overall economic growth. The major price indexes suggest that there was some increase in inflationary pressures during the fourth quarter.

Overall, the U.S. economy grew 4.4 percent for all of 2004. This was the fastest rate of growth since the economy grew 4.5 percent in 1999. Since 1980, the national economy grew faster than 4.4 percent only four times: 1983 (4.5 percent), 1984 (7.2 percent), 1997 (4.5 percent), and 1999 (4.5 percent). Looking back over the last four years, 2004 saw the fastest rate of growth for personal consumption expenditures and gross private domestic investment, and the slowest rate of growth for government spending. That is, compared with recent years, not only did the U.S. economy grow more quickly, but it also was driven more by private spending (households and firms) and less by government spending.
The United States continues to see monthly job creation numbers generally coming in at the low end of expectations. While the nation is posting positive job growth, the pace remains below the average for an economic expansion. There are many factors at work here, including rapid productivity gains and global competition. In the last three years, productivity—output per worker hour—has advanced at a rate not seen since the period 1948-1951. However, productivity growth did slow down toward the end of 2004. A moderate slowing could allow for job growth to gain momentum in 2005.

For all of 2004, the U.S. economy saw nearly 1.5 million net new jobs, or total job growth of about 1.1 percent. This was the best labor market performance since 2000. Meanwhile, the national unemployment rate fell to 5.2 percent as of January 2005, the lowest it had been since September 2001. In South Carolina, preliminary data indicate the net addition of about 21,000 jobs in 2004 for a gain of about 1.2 percent. Again, this was the best year for job creation since the end of the previous expansion in 2000.

However, the state’s unemployment rate appears to have changed little in 2004. Again relying on preliminary data that will be revised shortly, South Carolina’s unemployment rate in December 2004 was 6.7 percent, exactly where it was in December 2003. There continues to be a fairly rapid expansion of the state’s labor force, that is, the number of people who are either working or actively seeking work. Indeed, the state’s labor force has generally been growing more quickly than the population overall, suggesting that South Carolina’s labor force participation rate has been rising. If this is the case, then this goes a long way toward explaining why South Carolina’s jobless rate has remained high even with improving job growth. As more people enter the labor force, the unemployment rate can rise.

The economic outlook for the rest of 2005 and into 2006 calls for further economic expansion. A modest slowdown in productivity growth is expected to be one factor in helping the national and state economies post faster job growth in 2005 than in 2004. For example, in South Carolina total employment grew 0.4 percent in 2003, 1.2 percent in 2004, and is currently expected to advance about 1.6 percent in 2005. A similar pattern is expected for the United States.

The Federal Reserve will continue raising short-term interest rates. At its meeting in early February, the Fed raised the target for the federal funds rate to 2.5 percent. As long as the economic data cooperate, the Fed is likely to continue raising rates one quarter point at a time until the Fed funds rate reaches roughly 3.5 percent. Despite the higher short-term rates, longer-term rates such as mortgage rates have remained very low. However, the outlook calls for long-term rates to begin to move upward as well, though the 30-year average conventional mortgage rate should still be only around 6.5 percent by the end of 2005.

Most indicators of South Carolina’s economic growth are expected to post gains in 2005 relative to 2004. Job growth, income growth, and tax revenue growth should all increase this year. Indeed, the most recent data on tax revenues for South Carolina suggest this is the case. For the first six months of the fiscal year (July through December), sales tax revenues were up 3.8 percent, individual income taxes were up 7.1 percent, the corporate income tax was up 23.3 percent, and total general fund revenue was ahead 6.0 percent. Revenue collections have been ahead of schedule, and the state’s Board of Economic Advisors recently raised its official estimate of revenues for the current and next fiscal years.

Overall, the national and state economies appear to be quite healthy, especially in terms of their short-term, business cycle performance. Of course, longer-term structural issues remain, including the challenges of fiscal responsibility and of raising per capita incomes. o