N.C. economy won't regain 'solid footing' until 2009, NCSU professor predicts

Raleigh, N.C. — North Carolina’s economy won’t be back on “solid footing” until sometime in 2009, predicts North Carolina State University economist Michael Walden.

In his “North Carolina Economic Outlook” report , Walden says the housing market holds the key to economic revival – and he doesn’t see home sales, prices and availability reaching some sort of balance for several months to come.

While noting that the state and the nation are not in a recession, Walden also observed that growth is minuscule.

“For the economy to recover to solid footing, the current imbalances in the housing market must be corrected,” Walden wrote. “This means the excess inventory of homes for sale must be reduced and prices must be stabilized. Nationally, there have been some movements in this direction, with sales increasing slightly, inventories declining some, and price declines slowing. But there’s a long way to go, and it appears it will be well into 2009 before the housing market begins to make a positive contribution to economic growth. As a result, home prices will continue to soften.”

One effect of the housing market is in new home permits. Walden predicts a 35 percent drop in permits for 2008 from 2007. And last year permits were down 18 percent from 2006.

He does predict a 10 percent surge in permitting for 2009, signaling what he called “the end of the housing bust.”

“Clearly the current economic slowdown is being driven by the collapse in the residential housing market and the reductions in wealth caused by falling housing prices,” Walden said. “Nationally, household wealth has already fallen for two consecutive quarters (fourth quarter of 2007 and first quarter of 2008), with a further drop in the second quarter of 2008 expected. Aggregate household wealth losses will approach $3 trillion by the end of the second quarter.”

North Carolina’s housing market has not suffered as much as most areas of the country, Walden pointed out. But real estate in general has produced a drag on the economy that isn’t disappearing anytime soon.

“[M]ost national forecasts suggest a sluggish economic growth path for the rest of 2008 and well in to 2009,” he said. “Economic growth in the second half of 2008 will hover near zero, with growth heading back into positive territory in 2009 and making modest improvement during that year. Consequently, the national unemployment rate will continue to rise in 2008 and 2009, with perhaps a slight decline only occurring at the end of 2009.”

Jobs, sales, wages all dip

In North Carolina, Walden predicts across-the-board dips in several categories from 2007:

• Employment down 0.5 % after 1.4% growth in 2007; in 2009, 0.3 percent growth

• Retail sales down 4.5 percent after a 1.1 percent increase in 2007; in 2009, 3 percent growth

• Real wages down 2 percent from a 1.1 percent growth rate in 2007; in 2009, 0.5 percent growth

“There will be a very modest increase in employment – mainly in the second half – but not enough to prevent the average unemployment rate for the year from rising a further 0.6 percentage points,” Walden wrote. “Real retail sales and real wages will both have modest increases. But the most notable change will be in housing permits which, after two years of declines, will register a 10% gain. This will signal the end of the housing bust!”

Retail sales reflected the slowdown, dropping 3.9 percent in January-April from the same period in 2007, Walden said. While higher than the national drop (2.8 percent), he noted the falloff was less than during the same months in the 2001 recession.

‘Sub-par’ 2008 for Triangle

Walden also noted that the Triangle economy will be “sub-par” for 2008.

“Although the Research Triangle economy is considered “recession-proof” by many observers, the region’s recent performance shows it is also susceptible to economic slowdowns,” he said. “By ‘Triangle standards,’ economic activity in 2007 was modest. Job growth and real wage grown were under 2 percent and there was virtually no decline in the average unemployment rate. The most robust number was the 11.4 percent increase in real retail sales. On the negative side, the region experienced a very unusual double-digit drop in housing permits.

“The sub-par performance of the Triangle will continue for 2008,” he added. “The economic slowdown will be evident in three areas: a major jump in the regional unemployment rate, a reduction in real retail sales, and a 30 percent drop in housing permits. However, a positive – although not outstanding – performance will return in 2009. Employment will rise just shy of 1 percent, real retail sales and real wages per employee will again grow, and housing permits will rise at a double-digit rate. Still, averaged over the entire year, the unemployment rate will be up in 2009 compared to 2008.”