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Thursday, January 26, 2012

Economic Forecasting Team Presents 2012 Regional and National Forecasts

Old Dominion University's Economic Forecasting Team is forecasting economic growth in Hampton Roads to be slower than the national average in 2012.

The team, composed of College of Business and Public Administration faculty members Vinod Agarwal, professor of economics, Mohammad Najand, professor of finance, and Gary Wagner, professor of economics, presented its annual report Wednesday, Jan. 25, at the Norfolk Waterside Marriott.

The annual report, which is widely respected as an accurate harbinger of the year ahead for the region, forecasts regional economic growth of 1.97 percent, compared with national real Gross Domestic Product (GDP) growth of 2.4 percent.

For information about the Economic Forecasting Team and its projects, see http://bpa.odu.edu/forecasting/.

The team's 2012 forecasts are as follows. All forecasted changes are relative to the calendar year 2011.

2012 ANNUAL ECONOMIC FORECAST FOR HAMPTON ROADS MSA

The Hampton Roads MSA (formally the Virginia Beach-Norfolk-Newport News MSA) includes Currituck County, Gloucester County, Isle of Wight County, James City County, Mathews County, York County, Chesapeake, Hampton, Newport News, Norfolk, Poquoson, Portsmouth, Surry County, Suffolk, Virginia Beach and Williamsburg.

Real Gross Regional Product (+1.97%)

The Hampton Roads MSA is expected to experience more rapid economic growth in 2012 than the region experienced in 2011. However, we anticipate that regional growth in 2012 will be slower than our historical annual average of 3.2 percent and slower than that of the nation.

The debt-ceiling crisis in the U.S. and the sovereign debt crisis in Eurozone created both anxiety and uncertainty in the world economy. In addition, during 2011 the Department of Commerce revised the National Income and Product Accounts for 2004 through 2010 that resulted in much smaller growth in Real Gross Domestic Product (GDP) especially for the years 2008 through 2010 than previously estimated. Moreover, the national economy, as measured by GDP, expanded at a rate of 0.4 percent in the first quarter of 2011, 1.3 percent in the second quarter and 1.8 percent in the third quarter. It is expected that growth in GDP during the fourth quarter of 2011 will exceed 2.5 percent, which indicates that the national economy continues to improve.

Slower than expected growth in the national economy during the first half of 2011 prompted the Old Dominion University Economic Forecasting Project to revise its forecast of GDP for the year from 3.4 percent to 2 percent. Projected growth in the region's Real Gross Regional Product (GRP) for 2011 was subsequently revised downward from 3.1 percent to 1.9 percent. Civilian non-farm employment was also revised downward and projected to increase in 2011 by only 1,900 jobs, or by 0.26 percent.

The region's economy as measured by Gross Regional Product expanded at a rate of 1.3 percent in 2011; however, this growth was not accompanied by employment growth. As in the past, Department of Defense spending continues to provide stability in Hampton Roads economic growth. However, for the first time since 2000, military spending within the region for 2012 is expected to remain about the same as observed for 2011. Additionally, residual problems from the recession, particularly in the residential housing market, will act as a drag on regional growth in 2012.

Rising demand in the national economy will be a major factor affecting regional growth. The anticipated extension of the temporary payroll tax reduction will continue to provide a boost to the national and local economies. Other important changes in 2012 that are likely to raise regional income in Hampton Roads include increases in port activity, the health care industry and tourism spending. Compared to past economic downturns, the region's recovery process will be unusual in the sense that, despite rising income and expenditures, employment growth in Hampton Roads is expected to proceed at a relatively slow pace. As far as jobs are concerned, local firms, like their counterparts in other areas of the country, appear to have learned to do more with less.

Employment (Non-Agricultural Civilian Employment +0.9 percent) and Unemployment Rate (Civilian Labor Force 6.2 percent)

Annual civilian employment is expected to increase by about 6,600 jobs during 2012. Employment growth is likely to be concentrated in firms providing professional and business services, education, leisure and hospitality, and health care services.

The Hampton Roads economy created about 44,700 net new jobs during the period from 2001 to 2007, which is about 7,500 net new jobs annually. From 2007 to 2011, the recession and its aftermath have been responsible for the loss of an estimated total of 44,000 civilian jobs in Hampton Roads. Despite an increase in Real Gross Regional Product (GRP) in 2011, on a year-over-year comparative basis the region's economy lost about 2,200 jobs in 2011. As a result, the annual mean level of civilian employment in Hampton Roads in 2012 is expected to approach the level of employment in 2003, or about 738,000 jobs.

The region's unemployment rate is expected to fall from 7 percent in 2011 to 6.2 percent in 2012.

Retail Sales (Taxable Sales +3.8 percent)

Taxable sales include all retail sales except new automobile registrations. Compared to the pre-recession peak in 2007, retail sales in Hampton Roads fell by 8.6 percent during 2009 and continued to decline slightly, -0.2 percent, during 2010.

However, retail sales began to generally recover in January 2011. For the year as a whole, these sales increased by 3.3 percent compared to 2010 levels. In 2012, retail sales in the region are expected to grow at a 3.8 percent clip over the levels observed in 2011.

Based on national data, household consumption and saving patterns appear to have stabilized after going through a dramatic one-off proportional reallocation between the two that was prompted by changes in the availability of and requirements for obtaining credit. Growing regional economic activity, net worth of households and their personal disposable income in 2012 are expected to result in positive growth in taxable sales.

Tourism (Hotel Room Revenue +2.6 percent)

The recession has had a particularly negative effect on travel and tourism nationwide as businesses attempted to control costs and households adjusted to a significantly tighter credit market by curtailing travel. Hampton Roads' tourism industry also experienced tough years in 2008 and 2009. For instance, hotel revenue in Hampton Roads was 9.2 percent lower in 2009 compared to pre-recession revenue in 2007. The recovery has been slow with revenue growing 0.5 percent in 2010 and 1.9 percent in 2011. The hotel industry in the Williamsburg market continues to have serious problems in attracting tourists.

We anticipate a better year for the Hampton Roads tourism industry than that experienced in 2011. Positive growth in the national economy, particularly in Hampton Roads' main tourist market states, will contribute to higher tourism revenue.

Port (General Cargo Tonnage +2.9%)

As part of the down cycle in international trade created by the recent recession, the Port of Hampton Roads experienced a decline in general cargo tonnage of 16.4 percent in 2009 compared to 2008. Twenty-foot equivalent container Units (TEUs) declined by almost the same percentage. This decline was likely not a result of structural problems with the port but rather that the recent economic downturn was spread globally. The port saw a modest increase in both general cargo tonnage and TEUs during 2010 and 2011.

Simultaneous with the recovery of the global and national economies, global trade is expected to increase helping to boost general cargo tonnage at the region's port by an estimated 2.9 percent in 2011. The port is going through a transition as it prepares itself to improve its relative competitiveness, especially with other East Coast ports. Norfolk Southern's new Heartland Corridor, which became fully operational in September 2010, decreases intermodal travel distance from the port of Hampton Roads to Chicago by approximately 250 miles, making the region more competitive when vying for Midwest ocean cargo. The initial effect of the corridor's opening is likely to be relatively small when compared to subsequent years as shipping lines begin to adjust their scheduling to take full advantage of the reduced shipping time and cost-saving opportunity offered by this improvement in the port's rail infrastructure. Additionally, the leasing of the Portsmouth APM terminal by the Virginia Port Authority, which is roughly 10 percent more efficient in cargo movement than the older terminals, is apt to result in an increase in the port's competitive position, especially relative to its East Coast rivals. Finally, CSX Corp. recently began its on-dock rail services at the Portsmouth APM terminal. This new service should also lead to gains in efficiency in moving cargo to the Midwest.

Housing (Value of Single-Family Housing Permits -11.5%)

The residential construction industry in Hampton Roads is expected to continue to decline in 2012. The number of housing permits issued for 1-unit residential homes during the first six months in 2011 decreased by 9.3 percent compared to the first six months in 2010, and the value of these permits decreased by 8.3 percent. This decline was expected as we observed substantial growth in 2010 primarily due to the tax credit offered to both new and existing home buyers. This tax credit was available to buyers who signed a contract by the end of April 2010 and who completed their transaction by June 30, 2010. The decline in both numbers and the value of permits continued through the remainder of the year due to existing imbalance between supply of and demand for residential housing in Hampton Roads.

The Hampton Roads housing market in 2011 continues to be in the process of a wrenching adjustment that features falling prices and homeowner's equity, rising foreclosures and excessive housing inventory. Although mortgage interest rates are at their lowest levels in 50 years and household income in the region is recovering, the lack of substantial employment growth, relatively tight home loan requirements, and large number of foreclosures will likely depress prices in the Hampton Roads residential real estate market at least through the first six months of 2012. Fortunately, the region's unsold inventory of houses has continued to decline for almost every month in 2011. Measures of supply and demand indicate that, while excess supply still exists in the local housing market, it will take approximately seven months to clear the existing inventory based on the current absorption rate. The normal time period to clear the existing inventory is five to six months.

2011 ANNUAL NATIONAL ECONOMIC FORECAST

Real GDP (2.4%)

The U.S. economy continues its recovery from the recent recession and the latest economic data paint a brighter picture of U.S. economic growth. Consumer confidence is rising as U.S. domestic risks have diminished somewhat, and growth momentum has picked up modestly. Consumers seem to be willing to spend and businesses are more willing to hire. Economic growth is projected to increase in 2012 to average around 2.4 percent. This level of growth is below what is needed to close the gap between potential level of output and the actual level. With the creation of 2.5 million jobs, employment is likely to grow at a faster pace in 2012. However, the level of employment will remain considerably below its 2008 peak.

In 2011, global and national events created economic uncertainty that had a significant impact on the recovery. Congressional gridlock on budgetary issues, including the debt ceiling, added to economic uncertainty and stock market volatility during 2011. Further, the ongoing European sovereign debt crisis has adversely affected the U.S. economy. The latest data seem to indicate that business and consumer lending is easing, which should help to boost aggregate demand for goods and services and lead to a higher level of employment.

Fiscal policy in 2012 is expected to become tighter despite the standoff over deficit reduction in the U.S. Congress. The tightening of fiscal policy is already happening. Federal government purchases will contract over the next several years, acting as a major drag on growth.

Payroll Employment (2 percent)

2012 employment is expected to increase as the job market has been gaining strength going into 2012. There are signs that December 2011 employment might show even a little more improvement over a solid job growth in November 2011. Manufacturing gains remain lackluster and gains in construction still await signs of recovery in the housing market. Despite fairly strong employment growth that is expected to approach 2.5 million jobs, total employment will only approach levels seen in the early part of the decade.

Unemployment Rate (7.9 percent)

The unemployment rate is expected to be lower than 2011, but will still remain high. The return to the labor force of workers previously discouraged in their job search and now encouraged by an increase in job opportunities, combined with new entrants to the labor force, will keep the unemployment rate near 7.9 percent.

Consumer Price Index-U (2.3 percent)

During the coming year, commodity prices are likely to get pulled down by weaker global demand and pushed up by limited excess capacity and continuing robust growth from China and India. The biggest demand side risk is a significant growth slowdown in China. Rising output will place some upward price pressure on the CPI. However, production is expected to remain below the economy's output capacity. The considerable difference between potential and actual output, rising productivity, falling per unit labor costs, and historically low industrial capacity utilization are expected to hold inflation risks to a minimum. The inflation picture in 2012 will be quite benign.

Three-Month Treasury Bill Rate (Year Avg. .5 percent)

Given that inflation continues to be relatively low during early 2011, the Federal Reserve Board is expected to maintain its efforts at keeping short-term rates low in order to protect bank profitability and ensure ready liquidity in the financial system.

10-Year Treasury Note Rate (Year Avg. 1.9 percent)

The Federal Reserve launched a policy of buying long-term treasury securities and selling short-term securities in September 2011 in order to push down long-term interest rates. This maneuver is known as "operation twist," which will continue through June 2012. This policy, along with sovereign-debt crisis in the Eurozone, pushed long-term rates to very low historical levels. We expect that the rates on these securities will continue to be at very low levels.

30-Year Conventional Mortgage Rate (Year Avg. 3.8 percent)

Long-term mortgage rates will follow and be affected by many of the same market factors as those influencing the 10-year T-Note rate. We expect the risk premium for mortgages to remain near its current level of roughly 2 percent.

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