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2009 economic forecast

OLD DOMINION UNIVERSITY

January 14, 2009

(All forecasted changes are relative to calendar year 2008)

Real GDP (-1.8%)

U.S. annual economic growth is projected to decline in 2009 for the first time since 1991. The current recession, which began in December, 2007, is expected in 2009 to evolve into the longest lasting economic downturn since 1933 and the most severe decrease in annual output since the post war economic adjustment of 1946.

The 2009 national forecast is really a story about continued economic adjustment to the credit crisis created by declining house values. We expect relatively dramatic household budget rebalancing throughout 2009 as households react to declining wealth, tighter credit conditions and the prospect of continuing job losses. Despite the record level retained earnings of non-financial corporations in 2008, credit availability problems and consequent high risk premiums for investment grade corporate bond rates are expected to play havoc with business investment decisions and result in a decline in 2009 capital spending as cash flush businesses focus more on solvency than investment spending. Exports have been a bright spot in the economy through the third quarter of 2008, however, credit and income problems, especially in Europe and Japan, are expected to reduce both the value and volume of U.S. exports in 2009.

The proposed 2009-2010 federal government economic rescue plan of roughly $800 billion is expected to be phased-in with increments of about $400 billion in each year. However, there will be a significant lag between the time the proposed spending bill is passed and its economic effect. The 2009 impact of the spending is likely to be concentrated in the latter half of the year. Further, a significant part of the spending intended to aid state government is expected to offset some of the prospective cuts in state government spending rather than add incremental purchasing power and a portion of the payroll tax credits to households is likely to be used to repair household balance sheets.

Given the virtual collapse in 2008 of roughly 40 percent of the volume of the nation's annual credit market, problems in these markets are likely to continue through 2009 and beyond. The Federal Reserve has attempted to jury rig at least a portion of the lending power of the vanished securities market, most recently through its new TALF and mortgage security purchases, and the Treasury has tried to recapitalize lending institutions in order to repair and expand the leverage base of banks. However, the restoration of private sector credit market is likely to extend over a number of years.

Consumer Price Index-U (-.5%)

Assuming average 2009 oil prices, based on the U.S. Department of energy forecast of $54.40 per barrel in 2008, the CPI is expected to decline slightly from its 2008 level. The decline is expected to be heavily concentrated in the first two quarters of 2009. The lagged affect of lower 2008 energy prices on the CPI, especially the steep decline in the fourth quarter of 2008 is likely to continue to work its way through the economy's relative price structure until the end of the second quarter of 2009. Given the anticipated and significant decline in economy-wide demand, the rate of CPI decline would be larger if not for an anticipated increase in food prices.

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

The Federal Reserve Board is expected to find itself in a particularly difficult position in 2009. The prospect of price deflation creates a pressing need to insure liquidity in the face of a decline in economy-wide demand and credit market problems. Low short term interest rates carry with them their own problems especially for money market mutual funds, however, the Fed has little choice but to maintain rock bottom short term rates in its attempt to avoid deflationary conditions.

Prime Rate (Year Avg. 3.25%)

As with other short-term rates, the prime rate will follow the course of the bill rate as risk premium spreads return to more normal levels.

Ten-Year Treasury Bond Rate (Year Avg. 2.7%)

The long Treasury bond rate has experienced a significant decline over the past year and has reached historic 50 year lows. The decline has been primarily the result of a "flight to safety" as risk premiums for private securities increased due to the considerable increase in uncertainty in the bond market; uncertainty that resulted from mortgage defaults and increased expectations of recession in 2009. First half rates are likely to linger around a range of 2.1 to 2.4 percent with the current rate of anticipated deflation. This market bears close watching by investors as it will quickly appear oversold at any hint of inflation. In the second half rates are expected to rise above 3 percent, and may increase significantly, as the expected rate of economic growth increases.

30-Year Conventional Mortgage Rate (Year Avg. 5.0%)

Long-term mortgage rates will follow and be affected by many of the same market factors as those influencing the ten-year T-Bond rate. However, the conventional mortgage rate over the first half of 2009 should reach 50 year lows of around 4.4 to 4.7 percent as the Federal Reserve provides a significant increase in demand to the market with a projected $500 billion purchase of Fannie Mae and Freddie Mac mortgage securities and continues with its quantitative easing of credit through credit facility purchases of mortgage backed securities. The second half is likely to see rates move higher as economic expansion resumes and the first half price deflation wanes.

January 14, 2009

2009 ANNUAL ECONOMIC FORECAST FOR HAMPTON ROADS MSA

(All forecasted changes are relative to calendar year 2008)

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, Surry County, York County, Chesapeake, Hampton, Newport News, Norfolk, Poquoson, Portsmouth, Suffolk, Virginia Beach and Williamsburg.

Real Gross Regional Product (+0.6%)

Hampton Roads economic growth in 2009 is expected fall below that of 2008 and to be considerably lower than that of the region's 3.3 percent average annual growth over the past 45 years. The region's 2009 growth rate is anticipated to exceed that of the nation and the Commonwealth of Virginia. While the national economy is expected to continue to be in a recession, the Hampton Roads economy should have a positive, though small, growth in both real gross regional product and employment. We do not expect a recession in Hampton Roads in 2009.

The Hampton Roads economy is not immune to events affecting the national economy. A combination of factors will be responsible for a much lower rate of 2009 regional economic growth. Due to the interrelation between the national and Hampton Roads economies, the anticipated year-over-year slowdown in national growth will spread to Hampton Roads as well, especially with respect to residential housing construction, port activity and tourism which are all expected to seriously dampen growth in 2009.

Offsetting these dampening influences on the regional economy in 2009 is anticipated growth in defense spending. Rising income for uniformed military personnel, locally outsourced defense contracts and an increase in goods spending should all provide a buffer for regional economic activity. Defense spending within the region is expected to increase by 4 to 5 percent.

Employment (Non-Agricultural Civilian Employment +0.2%) and Unemployment Rate (Civilian Labor Force 5.6%)

We expect that about 1,600 new jobs will be created in the region in 2009. Cargo tonnage, tourism revenues, new residential construction, and a slower growth in commercial construction are all likely to act as a drag on employment growth in 2009. Employment growth is likely to be concentrated in firms providing professional and business services, and health care services.

The region's unemployment rate is expected to rise to 5.6 percent.

Retail Sales (Taxable Sales -3.1%)

Declining household spending, business investment and slower growth in state and local government spending will act either directly or indirectly as a drag on taxable sales. A reduction in household wealth due to declining value of their homes and financial assets is also expected to contribute to declining taxable sales.

Tourism (Hotel Room Revenue - 2.7%)

We do not anticipate a good year for the Hampton Roads tourist industry. Negative growth in the national economy and a reduction in the wealth of households will contribute to lower tourism revenues. The number of Canadian visitors is also expected to decline due to slower economic growth in Provinces of Montreal and Quebec.

Port (General Cargo Tonnage -4.3%)

Cargo volumes are expected to decline significantly in the first half of the year due to the national recession and a slowdown in global economic growth. Cargo volume is not expected to increase until retail sales begin to increase. However, somewhat offsetting the global economic slowdown is likely gain in cargo tonnage from an increase in vessel calls from CMA CGM and Maersk. These firms are set to launch a new service to the port, called the "Columbus Loop Service." The port is expected to be the last East Coast port on the new route to locations including the Mediterranean, Asia and the Pacific Northwest. Large container ships, with a capacity of 6,500 20-foot equivalent units, are scheduled to call on the port on a regular basis. Additionally, Maersk announced its intention to leave the port of Charleston by 2010. A staged decline of cargo to Charleston may lead to at least some increased cargo coming to Hampton Roads in 2009.

Housing (Value of Single Family Housing Permits -21.4%)

The residential construction industry in Hampton Roads will continue to experience a significant downturn. We anticipate that this industry shake-out and a reduction of unsold inventory will continue into 2009. The median price for newly constructed homes in 2008 has fallen by 10.6 percent relative to 2007. New construction residential median home price is expected to continue to decline in 2009.

Appreciation in the price of existing single-family homes is likely to be negative. We expect a decline in the price of existing single-family homes particularly in the $250,000 to $600,000 price range. The median price for existing single family homes in 2008 decreased by 1.8 percent relative to 2007.

The latest data on residential sales and on the active listings of unsold homes indicate that at the current pace of residential sales, it will take approximately 10 to 11 months to exhaust the active residential listings of real estate agents. Continued significant reduction in new residential construction in 2009 will help cushion the expected decline in residential prices in 2009. Closing cost assistance, builder interest rate buy-downs and broker commission assistance will continue to be featured in both the region's existing and new construction housing market in 2009.

This article was posted on: January 14, 2009

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