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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 potential

4.0 3.2 3.3 1.8

Growth in labor

1.6 2.1 1.3 0.4

Growth in productivity

2.4 1.1 2.0 1.4

Key to Productivity Growth is Investment

• But growth in business investment has been negative, despite

favorable conditions

• 5

5 10 15 20 Percent Growth in Real Business Fixed Investment

Favorable Investment Climate

• High investment returns
• Continued favorable financing conditions

Source: FRB San Francisco

Percent

Forward Investment Indicators Remain Soft

44 49 54 59 64 69 74 $ Billions Orders for Nondefense Capital Goods

Household Spending a Plus

• Attributable to continued job growth, solid wealth

positions, and light debt-servicing burdens

Change in Real PCE

• 30
• 10

10 30 50 70 90 $ Billions

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

4 5 6 7 8 9 10 11 Percent Unemployment Rate

• 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

62 63 64 65 66 67 68 Percent Participation Rate

Remaining Slack Will Hold Inflation Low

1 2 3 4 5 Percent 12-Month Core PCE Inflation

• Inflation will stay below Fed’s 2% target

Fed target

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

50 100 150 200 Index (Year 2000=100) Commercial Property Price Index

Source: Moody’s

Inflation Expectations May Be Drifting Lower

• Market-based measures are low and well below 2%

1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 TIPS-Based Long Term Expectations

Fed target

The Fed’s Credibility is at Stake

• Market does not buy into Fed’s prediction of year-end fed funds rate
• Confidence in the Fed is down
• Loss of credibility undermines its effectiveness

0.0 0.5 1.0 1.5 2.0 2016 2017 2018 Expectations of Year-End Fed Funds Rate

Market Fed

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

• 4
• 2

2 4 6 8 Percent Growth Wilmington MSA North Carolina US

Source: Bureau of Economic Analysis

Labor Market

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

Labor Market

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

Unemployment Rate

2 4 6 8 10 12 Three County Area United States

Hours and Earnings Growth

• 15.0
• 10.0
• 5.0

0.0 5.0 10.0 15.0 Growth Difference (Wilm. –US) Weekly Hours Average Earnings

Source: Bureau of Labor Statistics

Consumption Growth

20 40 60 80 100 120 140 50 100 150 200 250 300 350 400 Brunswick, Pender Sales (3m MA, millions) NHC Taxable Sales (3m MA, millions) Taxable Sales New Hanover Brunswick Pender

Source: NC Dept. of Revenue

Tourism Sector

3 5 7 9 11 13 300 500 700 900 1100 1300 Trailing Col. (000s) Collections (000s) Occupancy Taxes Collections (SA) Trailing 12m collections

Source: New Hanover County, BOG FRS, Census

20 40 60

• Med. HH Income

9.5 11.5 13.5

Debt Service as % DPI

Low Layoff Levels

200 400 600 800 1000 5 10 15 20 25 30 35 40 US Initial Claims (000s) NC Initial Claims (000s) NC US

Source: US Emp. And Training Admin.

Job Openings Remain Elevated

5 10 15 20 25 2 4 6 8 10 12

• Bruns. & Pender Openings (00s)

New Hanover Openings (000s) New Hanover Pender Brunswick

Housing Market

200 400 600 800 1000 50 100 150 200 250 300 Home Sales

• Sea. Adj. Home Prices

Sales Average Median

Source: Wilm. Reg. Assoc. Realtors

Housing Market

200 400 600 800 1000 50 100 150 200 250 300 Home Sales

• Sea. Adj. Home Prices

Sales Average Median Average Ext Median Ext

Source: Wilm. Reg. Assoc. Realtors

Home Prices by Size

70 80 90 100 110 120 Index Two Bedroom Three Bedroom Four Bedroom

Source: Zillow.com

Foreclosures Stabilizing

50 100 150 200 Monthly Court Filings (SA) Brunswick New Hanover Pender

Source: Nccourts.org

Incorporations

50 100 150 200 250 Incorporations Per Month (5 month MA, SA) Brunswick New Hanover Pender

Source: NC Secretary of State

Business Support Infrastructure

11 12 13 14 15 16 Thousands of Jobs

• Prof. & Bus. Serv. Employment

Wilmington MSA

Source: Bureau of Labor Statistics

Business Expectations

10 20 30 40 50 60 Expectations Expectations MA

• Passenger traffic

trend improving

• Larger Aircraft
• Load factors

increasing èMore choices for local firms

150 200 250 300 350 400 450 Enplanements (000s) ILM Activity

Source: Federal Aviation Administration

Business Support Infrastructure

Air Travel

Overview

Households, Customers, and Consumers Business Support Infrastructure Local Business’ Output

▲Sales Taxes ▲ Incomes (taxes) ▲ Room Occupancy Tax ▲Home Values (Wealth) ▲ Incomes ► Business Expectations ▲ Prof. and Bus. Serv. Trend ▼ P&B Serv. Recent ▲ Airport Capacity

Sectoral Employment

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

Sectoral Growth

• 10
• 5

5 10 15 20 Const. Manuf. TTU Info Finance Prof & Bus Serv

• Ed. & Hlth

Leis & Hosp Oth Serv. Govt YoY (Aug 16) 2010-2015

Forecast

1 2 3 4 5 Percent Growth 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 CEO and President NHRMC Stephan Kutzer CEO Alcami

Thank you

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