Virginia Government Finance Officers’ Association Economic Update With Application Toward Local Revenues The National and Regional Economies— National growth has slowed but remains strong Productivity growth very important to long-term growth Fed is at the end of the tightening cycle Risks: housing, oil prices, dollar State growth has slowed but remains positive Varies around the state Housing activity is slowing Slower price appreciation impacts revenues from assessments Slower housing sales impacts recordation taxes Slower retail sales impacts growth of local 1% Counties and cities see revenue growth but not as much as last year Education is important for regional growth 1
Real GDP Slows in Second Quarter Quarterly Annualized Percent Change 10 8 6 4 2 0 -2 -4 1990 1992 1994 1996 1998 2000 2002 2004 2006 Data through 2nd Quarter 2006. Recessions are shaded. The Fed’s Goal: 3.0% - 3.5% Real GDP Growth? 3.0% - 3.5% Noninflationary Economic s e u r s s e Growth P r o n i a t f l n I Disinflation Unemployment Falls Capacity Utilization Rises Slower Deliveries 2
How Fast Can the Economy Grow? Annual Growth Rate Forecast 4.5 Labor Force 4.0 3.5 3.0 2.5 2.0 1.5 2.5 1.6 1.0 1.7 1.2 1.2 0.5 0.7 0.0 1982-1990 1951-1973 1974-1981 1991-1995 1995-2005 2006-2016 Source: CBO, January 2006. How Fast Can the Economy Grow? Annual Growth Rate Forecast Productivity + 3.8 4.0 Labor Force = Potential GDP 3.3 3.2 3.5 3.0 2.8 3.0 2.7 0.8 2.1 2.5 1.4 2.1 2.0 1.5 2.1 1.5 2.5 1.0 1.7 1.6 1.2 1.2 0.5 0.7 0.0 1951-1973 1974-1981 1982-1990 1991-1995 1996-2005 2006-2016 Source: CBO, January 2006. 3
Bernanke, April 27, 2006 Comments Joint Economic Committee, US Congress • ``Even if in the committee's judgment the risks to its objectives are not entirely balanced, at some point in the future the committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook,'' • ``A decision to take no action at a particular meeting does not preclude actions at subsequent meetings. .” • Future policy actions will be increasingly dependent on the evolution of the economic outlook, as reflected in the incoming data. Specifically, policy will respond to arriving information that affects the Committee's assessment of the medium-term risks to its objectives of price stability and maximum sustainable employment. Focusing on the medium-term forecast horizon is necessary because of the lags with which monetary policy affects the economy. St. Louis Fed President William Poole, Week of September 25, 2006 • “If inflation pressures are easing, even if only gradually, and there is a genuine prospect that inflation will return to the comfort zone, then I see no reason to accelerate the decline in inflation by maintaining a restrictive policy in the face of declining employment,” • “If it appears that the economy is falling below the baseline forecast path, then my bias will be in the direction of wanting to be sure that the data paint a consistent picture before I advocate a policy easing. But if the picture is consistent, and inflation risk is receding, then I will not hesitate to advocate policy easing.” • Poole will become a voting member of the Federal Open Market Committee (FOMC) next year and could take a voting slot at the next meeting if the Atlanta Federal Reserve does not have a new president in place. 4
Pace of Consumer Spending is Still Strong Retail Sales and Inventory Growth % Change From Year Ago 12 12 Retail Sales 10 10 8 8 6 6 4 4 2 2 0 0 Inventories -2 -2 -4 -4 1997 1999 2001 2003 2005 Retail data through August 2006. Recessions are shaded. Businesses are Confident But Hiring is Off (Payroll Average Monthly Gain of 145,000 Over 12 Months) Employment Growth Monthly Change in Thousands 700 500 300 100 -100 -300 -500 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Data through August 2006. Recessions are shaded. 5
Factory Usage is Rising Capacity Utilization Rate 95 90 85 Total 80 75 70 Computers, Communication Equipment, and Semiconductors 65 60 55 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Data through August 2006. Recessions are shaded. Factory Usage is Rising Capacity Utilization Rate 95 90 85 Total 80 75 70 65 60 55 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Data through August 2006. Recessions are shaded. 6
Factory Usage is Rising Capacity Utilization Rate 95 90 85 Total 80 75 70 Computers, Communication Equipment, and Semiconductors 65 60 55 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Data through August 2006. Recessions are shaded. Consumer Price Index (CPI) Consumer Price Index % Change From Year Ago 5.0 Total 4.0 3.0 2.0 Excluding Food & Energy 1.0 0.0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Data through August 2006. Recessions are shaded. 7
Looking Ahead: Real Gross Domestic Product Real GDP Annual Percentage Growth Rate 3.9 2004 3.2 2005 3.3 2006 alt. 3.4 2006 mst. 2.8 2007 alt. 3.2 2007 mst. 0.0 1.0 2.0 3.0 4.0 5.0 U.S. Forecast 8
U.S. Forecast What is the neutral fed funds rate? Risk to the Forecast: Foreign Investment Net Foreign Flow of Dollars into US Treasuries and Agencies, Millions of Dollars 600,000 Treasuries 500,000 400,000 300,000 200,000 100,000 0 -100,000 Agencies -200,000 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 Data through 4 th Quarter 2005. 9
Risk to the Forecast: Foreign Investment Net Foreign Flow of Dollars into US Treasuries and Agencies, Millions of Dollars 600,000 Treasuries 500,000 400,000 300,000 200,000 100,000 0 -100,000 Agencies -200,000 1990 1992 1994 1996 1998 2000 2002 2004 Data through 4 th Quarter 2005. Risk to the Forecast: Foreign Investment Net Foreign Flow of Dollars into US Treasuries and Agencies, Millions of Dollars 600,000 Treasuries 500,000 400,000 300,000 200,000 100,000 0 -100,000 Agencies -200,000 1990 1992 1994 1996 1998 2000 2002 2004 Data through 4 th Quarter 2005. 10
Summary: National Economy • Housing will slow further (Risk—faster- than-expected) • Consumer spending continues at a slower but moderate pace – Employment gains – Wage increases • Businesses continue to invest • Short-term rate hikes end • Risk: Oil price rises again Employment Growth By State, July 2006 Percentage Change From a Year Ago 6.0% 4.0% #26 Virginia, 1.4% 2.0% 0.0% 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 -2.0% #12 SC, 2.5% #16 NC, 2.1% #27 DE, 1.3% #30 TN, 1.2% -4.0% #36 MD, 1.0% -6.0% -8.0% -10.0% Nevada 5 .3 % Michigan -0 .1 % Utah 4 .7 % Louisiana -9 .0 % 11
Virginia Continues to Grow Faster than the National Average Employment Growth Percentage Change From a Year Ago 5.0 Benchmark 4.0 3.0 2.0 1.0 0.0 Virginia -1.0 United States -2.0 -3.0 Apr-91 Apr-93 Apr-95 Apr-97 Apr-99 Apr-01 Apr-03 Apr-05 Data through August 2006. Source: Chmura Economics & Analytics and Virginia Employment Commission. Employment Growth By Sector Percentage Change From a Year Ago 8.0 Virginia 6.0 5.1 4.4 US 4.0 2.8 2.9 2.9 2.7 2.2 2.2 1.6 1.5 1.3 1.6 1.4 2.0 1.3 1.1 0.7 0.9 0.6 0.2 0.1 -0.7 0.0 -0.2 -0.2 -0.7 -0.8 -2.0 -4.0 -3.2 Educ/Health Total Const Mfg TWU Wholesale Retail Info FIRE PBS Leisure Services Govt Other Data through August 2006. Source: Chmura Economics & Analytics and Virginia Employment Commission. 12
Employment Growth By Sector Percentage Change From a Year Ago 8.0 Virginia 6.0 5.1 4.4 US 4.0 2.8 2.9 2.9 2.7 2.2 2.2 1.6 1.5 1.3 1.6 1.4 2.0 1.3 1.1 0.7 0.9 0.6 0.2 0.1 -0.7 0.0 -0.2 -0.2 -0.8 -0.7 -2.0 -4.0 -3.2 Educ/Health Total Mfg TWU Retail Info PBS Const Wholesale FIRE Leisure Govt Services Other Data through August 2006. Source: Chmura Economics & Analytics and Virginia Employment Commission. Claims Rising Slightly Point Toward Slower Job Growth Virginia: Initial Unemployment Claims 6-Month Moving Average 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Jun-92 Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Data through July 2006. Source: Chmura Economics & Analytics and Virginia Employment Commission. 13
Slower Retail Sales Point to Slower Growth in Sales Tax Receipts Virginia: Retail Sales Percentage Change From a Year Ago, 6-Month Moving Average 14 12 10 8 6 4 2 0 -2 -4 -6 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Data through July 2006. Source: Chmura Economics & Analytics and Virginia Department of Taxation. Auto Registrations Back Near Record Levels Virginia: Auto Registrations Percentage Change From a Year Ago, 6-Month Moving Average 45,000 40,000 35,000 30,000 25,000 20,000 15,000 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Data through August 2006. Source: Chmura Economics & Analytics and Virginia Department of Taxation. 14
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