Good first quarter borrowed from future, says WFU economist

The 2.3 percent increase in growth in the first quarter of 1996 was higher than expected and a definite improvement over the small (0.5 percent) increase in the fourth quarter of 1995. The economy was boosted by a 3.6 percent increase in consumer spending, with purchases of cars, major appliances, furniture and other durables increasing 8 percent. Final sales of domestic product increased 3.7 percent, reflecting a long-awaited decline in business inventories.

The bad news, said Shoesmith, is that we are borrowing from the future. “Since late 1993, consumers have been on a credit binge,” he said. “Consumers have piled up debt at an unprecedented rate over the past two years, which means that last year’s modest growth, as well as much of the growth in the first quarter, has literally been borrowed from the future, most likely 1997.”

The idea scenario from this point, said Shoesmith, would be for consumers to use credit less and to pay for purchases primarily from gains in income. “Whether or not that will happen is impossible to predict,” he said, “but increases in production and employment should support consumer spending and keep the economy moving at a healthy pace this year, leaving concerns for a serious slowdown or possible recession until 1997.”

Shoesmith forecasts 2.2 percent real growth in the gross domestic product this year and next and expects inflation to be essentially flat through 1997. “Along with steady inflation, both short-term and long-term interest rates should remain relatively stable over the next several quarters,” he said. Growth in business investment, which declined from 10.1 percent in 1994 to 6.1 percent in 1995, is expected to show a 5.5 percent increase this year, followed by 3.5 percent in 1997.

Real personal income has climbed steadily over the last two years, Shoesmith reported. Last year’s increase of 3.6 percent can be attributed largely to increases of 5 to 5.5 percent in interest and dividend income. Excluding interest and dividends, the rate of growth was closer to 3 percent. The forecast shows real income increasing by 2.7 percent this year and by 2 percent in 1997.

Job gains (non-farm) are expected to continue this year at a modest rate, similar to the 1.7 percent increase in the first quarter, before slowing next year. Job growth for 1997 is expected to be closer to 1.2 percent, given the situation with consumer debt.

In the Southeast, revised employment statistics for 1995 (showing 87,300 more jobs created than earlier reports) indicate that job growth for the eight-state Southeastern region increased 3.2 percent for 1995, compared to a 2.3 percent increase for the nation.

the first quarter of 1996 is a different story, said Shoesmith. Job growth declined in the Southeast declined from 2.9 percent in the fourth quarter of 1995 to 1.5 percent in the first quarter of 1996. This compares to a slight increase at the national level, from 1.4 percent in the fourth quarter to 1.7 percent in the first quarter. If the Southeast and the nation are converging in terms of job growth, it is a much more recent development than earlier reported.

For North Carolina, the revised data show an increase of 2.9 percent in nonfarm employment for 1995, compared to 2.1 percent reported earlier. Manufacturing employment in North Carolina declined sharply during 1995 and the decline has continued this year. This decline led to a weak first quarter with only 0.6 percent real job growth, despite a 5.9 percent gain in service employment in the fields of finance, insurance and real estate.

The forecast for North Carolina shows a recovery to 2 percent job growth later this year and through 1997. “Given the weak first quarter, however, job growth is expected to be only 1.4 percent for this year, followed by 1.9 percent in 1997,” said Shoesmith. Unemployment is expected to remain in the 4.6 to 4.7 percent range through 1997, remaining roughly 1 percent below the national rate.

The revised employment data show that the decline in job growth between 1994 and 1995 was not nearly as abrupt in the major metropolitan areas of North Carolina–Charlotte, the Triad, and the Triangle–as reported earlier. Charlotte’s employment showed a sharp 6.1 percent increase in the first quarter; but this followed an increase of only 0.7 percent in the fourth quarter of last year. The forecast shows job growth in Charlotte averaging approximately 3 percent through 1997. In the Triad (Winston-Salem, Greensboro, High Point), the forecast indicates overall job growth of 2.3 percent this year, followed by 2.1 percent next year. In the Triangle (Raleigh, Durham and Chapel Hill), 2.7 percent job growth is expected this year, followed by 3.2 percent in 1997.

Unemployment is expected to remain low in all three metropolitan N.C. areas, with jobless rates of 3.5 to 3.8 percent in Charlotte and the Triad. In the Triangle, unemployment is expected to remain below 3 percent.