Commentary: Numbers indicate full economic rebound

John Hopkins

Earlier in 2003, the national economy was showing sluggishness, making economists nervous about the potential for deflation, the continued lack of job creation, and even a double-dip recession.

However, with the release of strong gross domestic product statistics in October, those fears were allayed.

The gross domestic product had grown at an average annual rate of 7.2 percent in the third quarter of 2003, as a result of strength in personal consumption, business investment and exports. This growth was the fastest since the beginning of 1982, and followed the previous quarter's growth of 3.3 percent.

One month later, the Bureau of Economic Analysis released revised GDP numbers showing that preliminary growth was understated by a full percentage point - GDP had grown at an annual rate of 8.2 percent in the third quarter of 2003.

The broadest gauge of the national economy had declared an end to a stumbling recovery, indicating that a full rebound was in progress.

The lack of significant job growth despite growth in the overall economy is explainable. As businesses recognized the onset of recession through lack of demand for products and services, they acted by cutting costs.

Costs being a general term encompassing operations and labor, with labor being the easiest to cut so that productivity rises - the same level of production with fewer workers.

As productivity improves, businesses see improvement in profits. Revenues might be declining, but operating costs should be declining faster.

As profits improve, businesses must find uses for the new cash being generated. That cash initially goes to improving current operations - updating hardware and equipment - then to growth designated capital projects.

Throughout this process, businesses are reluctant to hire because of the need to sustain profits, along with the fact that hiring is expensive whereas capital investment can represent an immediate or short-term payoff.

However, as businesses start to invest in growth opportunities, there is a need to staff the new operations, leading to job growth.

Business investment

Perhaps the economic indicator being watched more than jobs as a sign of economic strength is business investment. Businesses have been cutting cost before the nation was even in recession and continued to do so throughout the previous years.

The mantra was to remove the excess that had accumulated during the flying '90s and improve the bottom line. As consumers continued to hold up the economy from a potentially worse slide, the focus became on business spending. When would businesses start to invest within themselves to generate expansion?

Data from the BEA indicate that businesses started to invest in the second quarter of 2003 and increased investment into the third quarter for the first time since the end of 2000, growing at average annual rates of 7.0 and 12.8 percent respectively.

After the past years of cost cutting and downsizing, businesses are finally seeing the payoff in strong profit growth. Profits increased $101.4 billion in the third quarter of 2003 according to the BEA, an increase of 9.9 percent from the previous quarter. That's down from the 10.3 percent profit growth of $95.7 billion in the second quarter.

Even the hard hit manufacturing industry is showing improvement with profits of $97.7 billion, the highest since the end of 2000.

Not wanting to be left behind by the economic recovery, the manufacturing industry is showing signs of not only sustained growth, but also ever increasing rates of growth. The Institutes for Supply Management's index of manufacturing activity increased in December to 66.2 from its November value of 62.8. The index is structured so that a reading above 50 indicates expansion, with higher values indicating higher rates of growth.

Economists were pleasantly surprised at the high index value, as they had been expecting the index to register at 61.

Manufacturers reported increases in new orders, production, and employment, while inventories and supplier deliveries continue to decline. Both new orders and production registered their eighth consecutive month of growth in December with index values of 77.6 and 73 respectively.

After ending a 37-month trend of employment contraction in November, manufacturing employment grew by 4.5 percentage points to 55.5 in December.

No doubt manufacturers feel that productivity levels are near maximized, and that growth requires increases in labor. Low inventories mean that manufacturers will be forced to continue to produce at high levels to replenish what was bought over the holidays and to continue to meet the ever-demanding consumer.

Weakening dollar

One of the factors that manufactures have been able to benefit from is the weakening American dollar. The dollar continues to decline in value.

Since the beginning of 2002, the dollar's value has trended weaker against the Canadian dollar, Japanese yen, and euro. December's dollar was the weakest it's been since August 1993 and September 2000 versus the Canadian dollar and Japanese yen respectively, and it's the lowest it's ever been against the euro.

Expectations are for a continuing weak dollar based on low interest rates, budget and trade deficits, terrorism threats, and now the news of the first case of Mad Cow disease in the United States.

Current policymakers have said they are unconcerned with the dollar's decline. U.S. producers benefit from a weaker dollar by making their exports less expensive in foreign markets and imported goods more expensive, and therefore, American goods more competitive overall.

Furthermore, perhaps government officials are content with a weak dollar because it has not shown to affect consumer spending. In spite of ever increasing imports, consumers are not faced with higher prices that would curb their demand for goods.

Performance in the non-manufacturing industry slowed a bit in December. ISM reported its non-manufacturing business activity index was 58.6, down from November's index of 60.1.

The drop in the index means that business activity is still expanding, just at a slower rate than before. New orders picked up in December, climbing to 61.2 from 60.1.

The employment and supplier deliveries indexes slowed a bit to 54 and 52, indicating that service firms aren't hiring as much as they were in November and supply deliveries are taking longer.

Additionally, prices paid by service industry firms continue to rise, as does the backlog of orders. Indexes measuring prices and order backlogs increased 2 and 3 percentage points to values of 60.0 and 55.5 respectively.

Sales, sales, sales

After finishing off a record-setting year with existing home sales of 6.07 million, 2004 is projected to slow just a bit, but to still be at a strong pace according to the National Association of Realtors.

The 9.1 percent increase in sales from 2002 is the best on record.

The improving economy, including payroll increases, as well as household growth is expected to fuel home sales activity in 2004 despite a slight rise in mortgage rates. Following on the record low of 5.2 percent for the 30-year fixed mortgage in June, the rate is projected to rise to an average of 6.5.

Despite falling consumer confidence, retail sales over the holiday season ended on a strong note. Not wanting to let an early eastern snowstorm damper their holidays, shoppers ended the last week of the season by spending 24.6 percent more than they did over the same period in 2002 with most of the sales being registered on Dec. 24 and Dec. 26.

Sales for the month of December were the best in four years with same-store sales registering a 4 percent gain.

This was welcome news to retailers that had been disappointed with 2002's holiday season, and felt 2003's was going to be a repeat based on early sales data that was less than projected.

Auto sales in December were up from November, but just below sales of December of 2002.

The automobile industry is expected to continue with incentive programs to keep people in the show rooms. General Motors' newest strategy of giving away 1,000 new vehicles is designed to generate interest in its cars and forestall any slow down in sales.

Rebound

Indicating that jobs are still tough to find, consumers appear to believe the recent economic indicators that point to an improving labor market in 2004.

Their assessment of the current economic environment declined in December from one month ago, its first drop since September with the Conference Board's Consumer Confidence Index dropping from 92.5 to 91.3.

More people indicated that the labor market has worsened since November, and fewer respondents felt that the jobs picture was improving. However, 26.8 percent of those surveyed in December thought the labor market would improve in the first half of 2004, an increase from 24.5 percent indicating such in November.

The U.S. labor market appears to have started to rebound in the latter half of 2003. Since August, 328,000 payroll jobs have been added according to the Bureau of Labor Statistics. Even though the nation is still down almost 2.3 million jobs since the beginning of 2001, the strong economic indicators portend that the recent streak of job gains will carry into 2004 with momentum.

The four-week moving average of initial jobless claims, used to smooth the volatility of the weekly series, have been trending downward since the beginning of May, and are at their lowest since February 2001.

Economists, pleasantly surprised by the unanticipated levels of growth, explained that the economy had all of the ingredients for explosive growth. Consumers have continued to spend, despite high unemployment, an unstable global environment, and the continuing exposure of corporate malfeasance.

The housing market shows no signs of slowing down. Interest rates show no signs of going up. Finally, businesses are starting to spend. The only ingredient missing to make the rebound unanimous is job growth. But that is expected to come.

While economic measures suggested a rebound beginning in mid 2003, the term jobless recovery was being thrown around to account for the lack of job growth.

However, a recent Wall Street Journal survey of 54 economists concerning the outlook for the national economy in 2004 produced a consensus for a growing labor market.

The average unemployment rate predicted for November 2004 by the surveyed economists was 5.5 percent, below the current 5.9 percent unemployment rate, and representing an increase in payrolls of 1.5 million for the 12-month period.

Other survey results include the prediction that GDP will grow at an average annual rate of 4.3 percent, inflation will be minimal with a consumer price index of 2.0 percent, and corporate profits will grow by more than 15 percent.

Maryland

Throughout the last couple of years as the national and state economy has entered into recession and then sputtered until the recent evidence of recovery, Maryland's economy has been regarded to be in better shape for several reasons.

As job losses were being driven from the manufacturing industry, Maryland's low presence of manufacturing jobs with respect to the nation (manufacturing jobs in Maryland account for just over 6 percent of total jobs while the ratio is over 11 percent in the nation) helped to shield it from the economic damage being inflicted upon the nation.

Maryland has a high presence of jobs in the health services and education services industries, which are driven by demographics and relatively immune from economic cycles.

Finally, the increase in government spending, particularly defense related spending, has benefited the many companies that contract with the federal government.

Where are the jobs?

While the nation has begun to display monthly job growth, the last couple months of employment data show Maryland heading in the opposite direction.

According the most recent monthly release from the Bureau of Labor Statistics, Maryland registered one of the sharpest monthly declines in non-farm payroll employment in the nation.

In November, Maryland shed roughly 9,500 jobs, the fifth largest employment decline in the nation, following a loss of 8,200 jobs in October and representing the third consecutive monthly decline in employment.

In percentage terms, Maryland shed 0.4 percent of its job base over this period, ranking fourth in terms of worst job losses. The state had 3,800 fewer jobs compared to November of 2002, its first annual decline since March 2003.

It should be noted that these statistics are produced from a sample of firms in the state and are subject to future revision, but the chance of a significant revision that would improve the jobs picture is not likely.

From a labor force perspective, the picture is a little brighter. Recent statistics from the BLS show that Maryland is faring better.

Although the unemployment rate for the state was the same in November at 4.2 percent as it was in November of 2002, the components of the unemployment rate have improved. 21,726 more residents have jobs over the last year, a 0.8 percent increase, while at the same time the number of residents unemployed declined by 1,116, a drop of 0.9 percent.

The improvement in resident employment versus the decline in at- work employment supports the claim of Maryland's high quality labor force.

According to the most recent unemployment insurance employment and wage data, the largest 25 industries in Maryland generated 26,669 new jobs, a 1.4 percent gain, in the second quarter of 2003 from the second quarter of 2002.

Accounting for almost 80 percent of all employment in Maryland, it is obvious that jobs are being created in industries that possess scale. These are also the industries that one should expect to be employment gain leaders in the future: government, business services, health services and education services.

The largest manufacturing industry - computer and electronic product manufacturing - lost 3,366 jobs, a 12 percent decline, during this one-year time period. That is representative of the struggle that Maryland's manufacturing industry, as well as the nation's, is currently facing.

However, the news is not all bad for manufacturers. A survey released by the departments of Business and Economic Development, and Labor, Licensing and Regulation reports that Maryland manufacturers expected to increase employment by 500 jobs during the last half of 2003.

While 500 jobs represent a small gain, it is anything but insignificant.

During the one-year period ending in the second quarter of 2003, only three of 21 manufacturing industries reported job gains totaling 617 jobs, while the remaining sectors lost a total of more than 10,000 jobs.

Some bright spots

Maryland's real estate market had another great year. Sales of existing homes in 2003 should gain about 8 percent from 2002.

Up to November, there were only two months that did not exceed prior year sales. As sales continue to go up, the decline in inventories of homes available for sale is slowing.

After falling at annual rates averaging greater than 20 percent in 2002, the average annual rate is expected to decline by 6.4 percent in 2003, which would be the lowest rate of inventory contraction since 1997.

Home price appreciation is expected to increase by an average of 13.8 percent in 2003, which would break the record set in 2002 of 13.3 percent. August established a high, with the average price of existing homes sold being almost $246,000.

Welcome news for the state of Maryland comes in the form of an expected uptick in tax revenues over the current and upcoming fiscal years.

While the roughly $10 billion in tax revenues officials expect to accumulate in fiscal year 2003 is up significantly from the nearly $9.3 billion collected in fiscal year 2002, officials anticipate the state will continue to face a deficit of roughly $700 million in fiscal year 2005.

The bump in tax revenues has been attributed, in part, to robust sales tax activity, which has been aided by both recent federal tax cuts as well as the surge in spending that precipitated and followed Hurricane Isabel.

Maryland's Eastern Shore received a boost by the news of broadband Internet service being offered. Previously thought of being unattainable to rural and sparse locations, federal loans have enabled Verizon to offer the high-speed access, which is intended to spur economic development through attracting more companies and homebuyers.

The news has not been all good with the recent closure of the Tyson poultry plant in Worcester County. The loss of the county's largest private employer represents a loss of 650 jobs, although some farmers are looking to contract with other companies.

A further blow came with the announced closure of the ConAgra hot dog processing plant in Queen Anne's County representing a loss of 100 jobs.

The outlook for Western Maryland brightened with the news that Volvo would be staying in Hagerstown and investing $150 million to upgrade its plant.

Farther out, good news is coming from the campus of Garrett Community College where the county's business incubator is located. At the end of its first year, the incubator had reach 50 percent capacity, ahead of the 39 percent goal.

However, while some areas of the state are benefiting from federal defense dollars, Frostburg has been a casualty. Northrop Grumman closed a call center, laying off 88 jobs as a result of the loss of a federal contract.

Garrett County is also the beneficiary of a venture to create an adventure sports complex, similar to Lake Tahoe. Nine million dollars from federal, state and local government sources ensures that groundbreaking will occur in the spring.

When the full complex is completed, which is expected to take as long as four to eight years, projections are that 941 jobs will have been created, as well as the enormous impacts brought by events and tourists.

To the state's health

Closer to the Baltimore-Washington region, the outlook for the biotech industry keeps getting stronger and its economic impact to the region more pronounced.

Fort Detrick is slated to receive $88 million from the Homeland Security bill to construct a research facility to develop drugs to counteract potential biological and chemical attacks.

Construction of the National Biodefense Analysis and Countermeasures Center at Fort Detrick is expected to begin in early 2004.

Ground breaking has started for the planned biotech park in East Baltimore. The $800 million plan is slated to not only develop a biotech facility next to the Johns Hopkins medical campus, but to spur redevelopment within the area.

More recently, groundbreaking signified the start of the $300 million University of Maryland, Baltimore BioPark complex on the west side of the city.

Baltimore's, as well as the state's, investment into creating world-class biotech facilities could have an enormous payoff.

The demand for these technologies is two-fold. Not only is there a need to develop technology to react to and counter act potential biological terrorist attacks, but also recent non-terrorism events are demonstrating a need for attention. This winter's severe flu season, the outbreak of SARS and recent hepatitis incidents are just a few examples of the enormous demand that exists.

Furthermore, the creation of these institutions will help to improve the region's transformation of institutional research to public and private application.

In spite of the assertion that Maryland's low manufacturing presence relative to the nation's has been a benefit during the economic downturn, manufacturing still represents an important part of overall economic health.

Recent plant closures and layoffs show that Maryland continues to be vulnerable to an ailing industry. The loss of the Black & Decker plant in Easton, the continuing layoffs at Bethlehem Steel, and the uncertainty of the future of GM's Broening Highway van assembly plant represent past and future weaknesses to Maryland's economy.

It's not the jobs and the wages that are lost, but the impact is felt through to supply and service firms that rely on the industry presence.

There are some bright spots for manufacturing that should not be overlooked. Maybe the brightest is the Allison Transmission plant in Baltimore County. Regarded as one of the most technologically advanced plants in the nation, the GM plant has been able to lessen the loss of jobs at Broening Highway by transferring some of those jobs just up the street.

Furthermore, anecdotal evidence suggests that smaller, specialty or niche manufacturing companies are experiencing increased national and international demand for their products with a weak dollar making exports cheaper to foreign buyers.

Maryland outlook

Maryland is well positioned to benefit from the national economic rebound.

Continued federal spending, especially in defense related fields, a high-quality labor force and low presence of manufacturing represent advantages to Maryland's economy.

Although, mortgage rates are predicted to slightly rise in 2004, the housing market is still projected to continue at a strong pace, bring with it the durable goods spending required to furnish a new home.

Employment in Maryland is projected to grow by 1.6 percent in 2004. This would be the fastest rate of average job growth in the state since 2000.

The industries that are expected to contribute the most to Maryland's job growth over the next four quarters include health care and social assistance; government; professional, scientific and technical services; and accommodation and food services.

The industries that are expected to continue to lose jobs are manufacturing and information.

Personal income growth is forecasted to rise by 3.9 percent in 2003 coming off a dismal year in 2002 of 2.8 percent growth.

The growth in corporate profits is expected to not only translate into increasing payrolls, but also to increasing paychecks.

However, the tremendous wage growth experienced during the late 1990s is not expected to be repeated.

John Hopkins is associate director of Applied Economics & Human Services at RESI Research & Consulting.

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