Economic Outlook - July 2008

The U.S. economy has softened, but there's no hard evidence it's in recession - defined by many economists as at least two straight quarters of decline in real gross domestic product. More than 50% of economists in a recent poll say it is or will be by the end of the year. Three-quarters of consumers say it already is. Mark Vitner, senior economist at Charlotte-based Wachovia, disagrees.

BNC: What do the numbers tell you?

Vitner: The economic indicators do not quite point to recession. They're still consistent with sluggish economic growth. You can't look at the numbers and say absolutely that we're heading for recession or we're absolutely going to avoid one, but it looks like we will narrowly avoid a recession in 2008. But for most consumers, it will feel like a recession.

Why is their perception at odds with the numbers?

If you were to look back over tie, consumers probably say the economy is in recession far more than it is, because they really don't make distinctions that economists do. They're not looking at the data. To economists, a recession means that the economy is actually contracting, nor merely weak.

How are we doing, compared with the rest of the nation?

North Carolina is clearly doing better.

Why do you say that?

We're adding jobs at a 1.5% annual rate. The unemployment rate is roughly even with the nation's, but our labor force is growing about twice as fast. We're continuing to see an increasing number of large capital-investment projects.

You said recently that the pain caused by the current economy will be more severe than 2001 and possibly 1991. Why?

Gross domestic product measures the production of goods and services in the economy. Consumptio nof goods and services is already contracting. But that doesn't make a recession. What's keeping the economy in positive territory is that exports are growing very rapidly. Essentially, exports of U.S. manufactured goods have risen more over the last 2 1/2 year than housing has fallen.

How does that compare with 2001?

In 2001, consumption of goods and services in the economy never declined. So the domestic economy is actually weaker today than it was in the 2001 recession, weaker than at any time since 1991. That's a big part of why consumers feel so bad. But year-to-year growth in GDP, which includes exports, is 2.5%, which is far stronger than the economy has ever been when we've gone into recession.

Is it a good idea to expect a recession anyway and move cautiously?

No. I think at the end of 2008 people are going to look back and say, 'Gosh, that year wasn't nearly as bad as I thought it was going to be.' And in 2009 folks are going to see that it turned out to be a whole lot stronger than they thought it was going to be. So if you batten down the hatches and wait for a recession, you're likely to miss some great opportunities to grow your business.

Will the federal tax rebates help stave off recession?

The timing of the rebates is incredibly fortuitous. They come at a time when the economy needs them the most. Consumers will spend virtually all of the tax rebate. There's little evidence to suggest otherwise. Even if they spend only half of it, it would still help keep the economy growing in the second and third quarters.

You recently said you would have done something else.

I would have created some opportunities for consumers to produce lasting benefits to the economy. One way would have been to give you a tax credit on top of the tax rebate if you spent it to weatherize your house and make it more energy efficient. It would provide some permanent relief from higher energy costs and help a part of the economy that's weak right now - building products. So the extra spending would not fuel inflation. It would impact a part of the economy that has excess capacity.

What impact will rising fuel prices have?

We're spending a record proportion of our take-home pay on necessities, meaning we have less money left to spend on other goods and services. So consumers are cutting back on discretionary purchases. Ironically, it's helping GDP because most of those discretionary items are imported. So our trade deficit is narrowing.

Didn't many economists fail to predict the 2001 recession?

Well, we wouldn't have had a recession if it weren't for 9/11. Unless you could have predicted the 9/11 attack and the way it played out, you wouldn't have predicted a recession. So I don't think you can peg that on the leading indicators.

Some say a drop in corporate spending on information technology was to blame.

We had a very shallow decline in the economy, but it hadn't declined enough to qualify for a recession. When the 9/11 attacks occurred, it caused consumer spending and corporate spending to contract so steeply in September and October that it pushed us into recession. Even though the contraction started in March, the call on a recession is made after the fact, so they can go back to when economic activity began to decline. But economic activity can decline without being a recession. So without the 9/11 attacks, ther would not have been a recession.

Will North Carolina continue to outperform the nation?

There's a good chance it will. North Carolina has seen very strong population growth. Part of that is a diversion of traffic from Florida. Many who would have moved to Florida are moving to North Carolna. Many Floridians are moving to North Carolina. The surge in population is fueling demand for business and professional services and is helping absorb any slack there was in the housing market.

 

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