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ODU Economic Forecasting Team Presents 2010 Regional and National Economic Forecasts at Annual Conference

  • Vinod Agarwal
  • Gil Yochum
  • Mohammad Najand

Old Dominion University's Economic Forecasting Team made its annual presentation of the regional and national economic forecasts on Wednesday, Jan. 27. The forecasts were developed by professors Gilbert Yochum, Vinod Agarwal and Mohammad Najand and presented as part of the Economics Club of Hampton Roads speaker series.

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

The team's 2010 forecasts are as follows:

2010 ANNUAL ECONOMIC FORECAST FOR HAMPTON ROADS MSA

(All forecasted changes are relative to calendar year 2009)

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 (+2.4 Percent)

Hampton Roads economic growth in 2010 is expected to turn positive but finish considerably lower than that of the region's 3.3 percent average annual growth over the past 45 years. The region's 2010 growth rate is anticipated to be lower than that of the nation.

Rising demand in the national economy will be a major factor affecting regional growth. The important changes in Hampton Roads economic activity in 2010 that are likely to raise regional income are expected increases in: income for uniformed military personnel, the military housing allowance, defense procurement, port activity and tourism spending.

Employment (Non-Agricultural Civilian Employment -0.2 Percent) and Unemployment Rate (Civilian Labor Force 6.8 Percent)

Annual civilian employment is expected to fall by about 1,500 jobs between 2009 and 2010. We anticipate employment growth in the second half of the year but those additional jobs will not offset the job losses expected in the first half of 2010. Employment growth is likely to be concentrated in firms providing professional and business services, education and health care services.

The region's unemployment rate is expected to remain at 6.8 percent.

Retail Sales (Taxable Sales +1.9 Percent)

As is the case nationally, households in Hampton Roads have likely adjusted their spending patterns to reflect reduced household wealth, reduced cash-outs from houses and increased uncertainty in the labor market. Growing regional economic activity and household income in 2010 are expected to result in positive but relatively small growth in taxable sales.

Tourism (Hotel Room Revenue +1.2 Percent)

We anticipate a better year for the Hampton Roads tourist industry than that experienced in 2009. Positive growth in the national economy, particularly in Hampton Roads' main tourist market states, will contribute to higher tourism revenues. The number of Canadian visitors is also expected to increase due to rising Canadian income and an appreciating Canadian dollar.

Port (General Cargo Tonnage +6.3 Percent)

With the recovery of the global as well as the national economy, global trade is expected to increase. We expect to see the volume of tonnage, both exports and imports, appreciably increase starting in the middle of the first quarter of 2010. Norfolk Southern's new Heartland Corridor is expected to become fully operational in the middle of 2010. This corridor will decrease intermodal travel distance from the port to Chicago by approximately 250 miles, making the port of Hampton Roads more competitive when vying for Midwest cargo. The initial effect of the opening will be felt in 2010, but its initial impact on port cargo is expected to be relatively small when compared with subsequent years as shipping lines begin to adjust their scheduling to take full advantage of reduced shipping costs.

Housing (Value of Single Family Housing Permits +7.4 Percent)

The residential construction industry in Hampton Roads should experience positive growth in 2010. Several factors, most significantly falling new home prices, should help prompt this growth. For example, the median price for newly constructed homes in 2009 declined by 18.95 percent relative to its peak in 2006. New construction residential home prices are expected to continue to fall in 2010, particularly in the $300,000 and higher price range. We anticipate that builders will take advantage of the extension of the first-time home buyers tax credit as well the tax benefits made available to existing homeowners. However, we do not expect its effect on sales volume to be as pronounced as that observed during the original first-time home buyer tax credit, which expired on Nov. 30, 2009, for several reasons. First, a significant proportion of the pool of first-time home buyers took advantage of the original tax credit. Second, the current pool of existing home buyers, in order to take advantage of the tax credit, will have to make two transactions; they will need to sell or rent their existing home and buy a new home.

In the resale market, appreciation in the price of existing single-family homes is likely to be negative. Distressed sales are expected to continue to play an important role in the determination of selling prices for existing homes in 2010. We expect a decline in the price of existing single-family homes, particularly in the $300,000 to $600,000 price range.

2010 ANNUAL NATIONAL ECONOMIC FORECAST

(All forecasted changes are relative to calendar year 2009)

Real GDP (2.8 Percent)

The U.S. economy has entered the recovery stage from its most recent recession. Economic growth is projected to increase in 2010, although the level of national output is not expected to approach anywhere near its existing potential.

The 2010 national forecast is really a story about continued economic adjustment to the credit crisis, originally set in motion by declining house values. We expect that household budget rebalancing, a prominent feature of household spending behavior throughout 2009, will come to an end in 2010 as the household saving rate stabilizes at roughly 4.5 percent and households adapt to a more restricted credit environment. Although economy-wide job growth is expected to resume in the first quarter of 2010 and extend through the year, its rate of increase is likely to be modest, resulting in a dampened degree of rebound in household income and spending relative to that normally experienced in post-war U.S. recessions.

For larger firms, relatively high rates of retained earnings expected for already cash-rich nonfinancial corporations, along with a stabilized bond market for investment-grade corporate bonds, will help offset the existing tight credit conditions that resulted from a tightening of bank credit standards throughout 2009. This unfortunately will not be true for smaller firms, which will suffer disproportionally from existing tight bank-lending standards because of their limited access to other credit markets. Inventory building by firms that work to restore inventory balance is likely to provide a strong positive thrust to output.

The export/import balance was a bright spot for the economy in 2009. In 2010 exports are likely to experience relatively strong growth. However, higher energy costs and a recovering domestic economy are expected to result in an increase in the value of imports, offsetting any potential for a positive export shock to the economy.

The federal government economic stimulus plan, as well as more traditional fiscal business cycle stabilizers such as unemployment compensation, are likely to provide continued impetus for aggregate demand growth through the early part of 2010.

This year's economic recovery will be noted for the continued deleveraging of banks, as the banking system slowly heals by unwinding its negative positions and making provision for its avalanche of loan write-downs through 2010 and beyond. The Federal Reserve will attempt to protect bank profits to speed this healing process along. Growth in bank lending is expected to be negative through at least the first half of 2010 as banks implement higher lending standards and hoard reserves in order to increase their capital ratios. Tightened lending standards and the resulting lack of bank credit is likely to be a key reason why GDP does not grow at the relatively rapid rate usually experienced at the end of past recessions.

Payroll Employment (-0.4 Percent)

2010 employment is expected to fall when compared on an annual basis with 2009. However, we expect that monthly employment will begin to rise during the first quarter of 2010 and will continue to increase through the remainder of the year. It is anticipated that between the fourth quarter 2009 employment low and the fourth quarter of 2010, the economy will create roughly 1,000,000 new jobs. Despite the new job creation relative to the employment low, the rate of monthly and quarterly employment increase in 2010 will be lower than the rate of its decline in 2009, causing a decline in employment level when comparing 2009 and 2010 on an annual basis. The lack of ready credit availability to small businesses, which are normally responsible for more than two-thirds of the jobs created in the U.S. economy, is likely to play a key role in holding back the rate of employment growth.

Unemployment Rate (10.1 Percent)

The unemployment rate is likely to increase between 2009 and 2010 because job growth is not expected to offset the number of new entrants into the labor force.

Consumer Price Index-U (2.4 Percent)

Assuming the U.S. Department of Energy's oil price forecast of $79.83 per barrel, the CPI is expected to increase at an accelerated rate from its 2009 level. Rising output will place some upward price pressure on the CPI; however, production is expected to fall considerably below the economy's output capacity. There has been, and will continue to be, some upside risk of price inflation created by the unusually large monetary base supported by the Federal Reserve. Despite this relatively large monetary base, 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.

Three-Month Treasury Bill Rate (Year Avg. 0.4 Percent)

Assuming that inflation continues to be relatively muted during early 2010, the Federal Reserve Board is expected to begin to raise the federal funds rate near the last quarter of 2010 as bank profitability continues to help strengthen bank balance sheets, and concern over deflation and the premature removal of credit props gives way to concern over inflation.

Prime Rate (Year Avg. 3.6 Percent)

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

Ten-Year Treasury Bond Rate (Year Avg. 4.1 Percent)

During much of 2009, the long-term Treasury bond rate achieved historical lows as investors sought safety from default. This "search for safety" process, which began to reverse itself in late 2009, will continue in 2010. Further, economic growth will put upward pressure on these rates. An important note of caution is necessary here. Given the exceedingly large current monetary base, this market bears close watching by investors because it will quickly appear oversold at any hint of serious inflation.

30-Year Conventional Mortgage Rate (Year Avg. 5.5 Percent)

Long-term mortgage rates will follow and be affected by many of the same market factors as those influencing the 10-year T-bond rate. Further, the conventional mortgage rate over the first quarter of 2010 will be influenced by continued Federal Reserve intervention in the mortgage market. Mortgage rates during this period are likely to hover around 5 percent. The Fed is scheduled to cease its mortgage market intervention in March. This forecast is predicated on cessation of that intervention. However, it is likely that continued price declines in the housing market, combined with the importance of stabilizing house prices, combined with the lack of a residential housing securities market, will compel the Fed to continue its support of the residential mortgage market.

This article was posted on: January 27, 2010

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