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The U.S. Economy: Is this Really the New Normal? Thomas D. Simpson, Ph.D.

Recent Growth in Perspective • Despite a pickup in Q3, growth thus far in 2016 has been disappointing • Through Q3, real GDP has expanded at a 1-1/2% pace • Our ability to grow has dropped appreciably, too

Growth in Potential Output • Slowdown in labor and productivity have contributed to slowdown in growth in potential real GDP Growth in Potential GDP Period 1950-73 1974-90 1990-01 Current Growth in 4.0 3.2 3.3 1.8 potential Growth in 1.6 2.1 1.3 0.4 labor Growth in 2.4 1.1 2.0 1.4 productivity

Key to Productivity Growth is Investment • But growth in business investment has been negative, despite favorable conditions Growth in Real Business Fixed Investment 20 15 Percent 10 5 0 -5

Favorable Investment Climate • High investment returns Percent Source: FRB San Francisco • Continued favorable financing conditions

Forward Investment Indicators Remain Soft Orders for Nondefense Capital Goods 74 69 64 $ Billions 59 54 49 44

Household Spending a Plus • Attributable to continued job growth, solid wealth positions, and light debt-servicing burdens 90 Change in Real PCE 70 50 $ Billions 30 10 -10 -30

Outlook: Small Pickup Ahead • Consumption will continue to be the workhorse • To a lesser extent residential construction • Drag from business investment and exports will lessen • A small boost from budgets of federal and state and local governments • Growth in real GDP will average a little above Potential • Forecast: 2.1%

Slack Absorbed Slowly Unemployment Rate 11 10 9 Percent 8 7 6 5 4 • Growth a touch above potential, slack will diminish slowly • The measured unemployment rate, however, will stay around recent levels

Workers Returning Will Buoy Unemployment • Underlying trend decline in participation rate will continue to be interrupted by return of discouraged workers • This will keep the unemployment rate from falling Participation Rate 68 67 66 Percent 65 64 63 62

Remaining Slack Will Hold Inflation Low • Inflation will stay below Fed’s 2% target 12-Month Core PCE Inflation 5 4 Percent 3 Fed target 2 1 0

Fed Dilemma • Persistent shortfalls of inflation pose a conflict for the Fed • Continue to normalize the federal funds rate or hold off until inflation moves higher • Neutral level of the federal funds rate is around 3% • Considerably above current level • May be causing excesses to build

Excesses Most Evident in CRE Market Commercial Property Price Index Index (Year 2000=100) 200 150 100 50 Source: Moody’s

Inflation Expectations May Be Drifting Lower • Market-based measures are low and well below 2% 3.0 TIPS-Based Long Term Expectations 2.8 2.6 2.4 2.2 Fed target 2.0 1.8 1.6 1.4

The Fed’s Credibility is at Stake • Market does not buy into Fed’s prediction of year-end fed funds rate Expectations of Year-End Fed Funds Rate 2.0 1.5 Market 1.0 Fed 0.5 0.0 2016 2017 2018 • Confidence in the Fed is down • Loss of credibility undermines its effectiveness

Conclusions • The “new normal” is slower growth and lower interest rates • A revival in business investment is needed to break out of low productivity growth • Fed is trapped between the need to raise rates to curb inflated asset prices and concerns about low inflation becoming entrenched

The Regional Outlook: Sunny with a Chance of Showers* (* Some may be severe...) Adam T. Jones, PhD

Regional Perspective • High degree of uncertainty • Both political and economic • Slow national growth • Region will outperform

Southeastern US • Fed’s Beige Book • Overall – “modest” • Richmond • Growth slowed • Manufacturing and retail softened • Manufacturing sales down, expectations up • Real Estate increased moderately • Atlanta • Activity expanded at a modest pace • Some activity softened but expectations are positive

Growth History 8 6 Percent Growth 4 2 0 -2 -4 Wilmington MSA North Carolina US Source: Bureau of Economic Analysis

Labor Market 200 Number of workers and jobs 190 180 170 160 150 140 130 Labor Force Employment

Labor Market 200 Number of workers and jobs 190 180 170 160 150 140 130 Labor Force Employment LF Ext w. dem.

Unemployment Rate 12 10 8 6 4 2 0 Three County Area United States

Hours and Earnings Growth 15.0 Growth Difference (Wilm. –US) 10.0 5.0 0.0 -5.0 -10.0 -15.0 Weekly Hours Average Earnings Source: Bureau of Labor Statistics

Consumption Growth 400 140 Taxable Sales Brunswick, Pender Sales 350 120 NHC Taxable Sales (3m MA, millions) (3m MA, millions) 300 100 250 80 200 60 150 40 100 20 50 0 0 New Hanover Brunswick Pender Source: NC Dept. of Revenue

Tourism Sector Med. HH Income Occupancy Taxes 1300 13 60 1100 11 Trailing Col. (000s) Collections (000s) 40 20 900 9 0 700 7 Debt Service as % DPI 500 5 13.5 300 3 11.5 9.5 Collections (SA) Trailing 12m collections Source: New Hanover County, BOG FRS, Census

Low Layoff Levels 40 1000 NC Initial Claims (000s) US Initial Claims (000s) 35 800 30 25 600 20 400 15 10 200 5 0 0 NC US Source: US Emp. And Training Admin.

Job Openings Remain Elevated 12 25 New Hanover Openings (000s) Bruns. & Pender Openings (00s) 10 20 8 15 6 10 4 5 2 0 0 New Hanover Pender Brunswick

Housing Market 300 1000 Sea. Adj. Home Prices 250 800 Home Sales 200 600 150 400 100 200 50 0 0 Sales Average Median Source: Wilm. Reg. Assoc. Realtors

Housing Market 300 1000 Sea. Adj. Home Prices 250 800 Home Sales 200 600 150 400 100 200 50 0 0 Sales Average Median Average Ext Median Ext Source: Wilm. Reg. Assoc. Realtors

Home Prices by Size 120 110 100 Index 90 80 70 Two Bedroom Three Bedroom Four Bedroom Source: Zillow.com

Foreclosures Stabilizing 200 Monthly Court Filings (SA) 150 100 50 0 Brunswick New Hanover Pender Source: Nccourts.org

Incorporations 250 Incorporations Per Month 200 (5 month MA, SA) 150 100 50 0 Brunswick New Hanover Pender Source: NC Secretary of State

Business Support Infrastructure Prof. & Bus. Serv. Employment 16 Thousands of Jobs 15 14 13 12 11 Wilmington MSA Source: Bureau of Labor Statistics

Business Expectations 60 50 40 30 20 10 0 Expectations Expectations MA

Business Support Infrastructure 450 ILM Activity Air Travel • Passenger traffic 400 Enplanements (000s) trend improving 350 • Larger Aircraft 300 • Load factors 250 increasing 200 150 è More choices for local firms Source: Federal Aviation Administration

Overview Households, Customers, and Consumers ▲ Home Values (Wealth) ▲ Sales Taxes ▲ Incomes ▲ Incomes (taxes) ► Business Expectations ▲ Room Occupancy Tax Business Support Local Business’ Infrastructure Output ▲ Prof. and Bus. Serv. Trend ▼ P&B Serv. Recent ▲ Airport Capacity

Sectoral Employment 100 Govt 90 Other Serv 80 Leisure and Hosp 70 Educ & Hlth 60 50 Prof & Bus Serv 40 Fin 30 Trade 20 Manuf 10 Const 0

Sectoral Growth Govt Oth Serv. Leis & Hosp Ed. & Hlth Prof & Bus Serv Finance Info TTU Manuf. Const. -10 -5 0 5 10 15 20 YoY (Aug 16) 2010-2015

Forecast 5 4 Percent Growth 3 2 1 0 Wilmington MSA North Carolina US

Chance of Showers • Policy Uncertainty • National election • HB2 • Special use permit • Real Estate • Additional shadow inventory • Commercial real estate heating up • Interest Rates • Increased income • Decreased wealth

Takeaways • Positioned for growth • Likely to exceed state and national growth • Risks to be monitored

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Panel: The Business of Healthcare Jack Barto Stephan Kutzer CEO and President CEO NHRMC Alcami

Thank you Check out professional development opportunities through the Swain Center: www.uncw.edu/swain Save the date for October 5 th 2017 for the next Economic Outlook Conference.