Quarterly outlook

In the "Quarterly Outlook"
column that appeared in the
April-June 2008 issue, it was incorrectly stated that a group of academic economists at the Bureau of Economic Analysis decides whether the country has fallen into recession or not. It is, of course, the National Bureau of Economic Research (NBER) that makes this determination.

The latest numbers released from the Bureau of Economic Analysis (BEA) indicate that the U.S. economy remains sluggish but is still expanding. Advance estimates for real Gross Domestic Product—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, the same growth rate observed for the last quarter of 2007. These rates are considerably lower than the average 3 percent growth that the U.S. economy has experienced during the past five years.

The weak performance of the U.S. economy can mostly be blamed on the fallout from the ongoing crisis in the housing and credit 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 about one percentage point from U.S. growth.

This contraction in the housing market 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 the mood of consumers 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.

The reluctance of consumers to spend their money has affected the sale of durable goods, particularly the acquisition of new motor vehicles. In 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.

A Bright Spot

The bright spot has been the external market. During the first quarter of 2008, exports of goods and services increased 5.5 percent, adding 0.67 percent to the GDP growth rate. The decline in the dollar against other major currencies has provided U.S. export firms with a competitive advantage in international markets, and exports are likely to remain an important contributor to economic growth.

There is some concern, however, that exterior demand may be faltering. The steady increase in the prices of energy, food, and other commodities is putting pressure on consumer budgets all over the world. Crude oil prices, which averaged $72.32 per barrel in 2007, recently traded at more than $139 and will likely increase in the coming months.

To make matters worse, the low exchange rate for the dollar is adding to inflationary pressures in the economy. The April 2008 Consumer Price Index indicates that the inflation rate was 3.9 percent; it is expected, however, that this will increase in the coming months.

As mentioned earlier, most of the slowdown in economic activity is linked to the contraction in the housing market. A look at the total number of building permits—the best indicator of trends in residential construction activity—shows that the problem is not likely to go away anytime soon.

In April 2008, building permits fell 34.3 percent from one year earlier, and the readings for April and May are the two lowest values on record since 1991. Unfortunately, we have also started seeing some of the weakness in the housing sector being transmitted to the labor market. Payroll employment has been falling since the beginning of the year, and the unemployment rate is now clearly in an upward trajectory.

There is some hope that the economic stimulus plan approved by the Congress and the President will stimulate consumer spending and lead to a rebound in domestic output. We will soon see if the taxpayer rebates that began arriving in May can put the economy back onto an expansion track.

S.C. Mirroring National Trends

The South Carolina economy has mirrored many of the recent national trends. Like the rest of the nation, the housing market in South Carolina is also undergoing a substantial correction.

We have now experienced the 20th consecutive month of year-to-year declines in single-family housing permits. The data for the first quarter of 2008 also show that nonresidential construction has dropped 27 percent compared to the same period last year.

In addition, after demonstrating extraordinary resilience, the labor market is finally showing some signs of weakness. Initial claims for unemployment insurance are on the rise and the unemployment rate is again approaching 6 percent.

More problematic is the fact that the economy has not managed to add jobs since the summer of 2007. Conditions are not likely to improve in the short term, and we are predicting that in 2008, job growth in the state will be flat.

But the Palmetto State economy may be better prepared than most states to weather this storm. The record-low dollar is helping exports, and South Carolina is one of the state economies that most depends on world markets. (South Carolina has the highest overall share of export-supported jobs (9 percent) in the 50 states, and more than one-fourth of all manufacturing workers in South Carolina depend on exports for their jobs.) Nevertheless, in the near future, South Carolina will be faced with the challenge of finding other sources of growth that could compensate for the loss of activity and jobs in the construction sector. o